Two Former Capital One Employess Who Traded On Customer Data, Consent to Preliminary Injunction

Insider trading cases are built on two basic theories. Under the traditional, classic model, a corporate insider uses material, non-public information obtained from his or her employer to trade in shares of the company – inside information is used for a personal rather than a corporate benefit. Alternatively, under the misappropriation theory, material information about a firm is entrusted to a corporate outsider. That person wrongfully uses the information to trade in the securities of the firm, thereby converting information entrusted for a specific purpose to their personal benefit.

SEC v. Huang, Civil Action No. 15-cv-269 (E.D. Pa. Filed Jan. 22, 2015) fits within the misappropriation theory but is based on a strikingly different fact pattern than the typical case. The action is names as defendants Bonan Huang and Nan Huang, both employees of Capital One Financial Corporation. From about November 2013 through January 2015 the two defendants are alleged to have misappropriated material inside information from their employer and used that information not to trade in the shares of Capital One but those of retail establishments reflected in the credit card statements of Capital One card holders. The scheme generated over $2.8 million in trading profits in one of their accounts.

During the period the defendants were employed as data analysts by Capital One. Their task was to analyze transactions for possible fraudulent credit card activity. As such the pair had access to the customer data held by the financial institution. That included details on numerous consumer purchase transactions.

Using that access, the two defendants conducted thousands of searches of customer data, analyzing those retail transactions. The defendants accessed data regarding transactions at over 140 retail establishments that accepted Capital One credit cards. Prior to an earnings announcement by a retail store the defendants would retrieve data about a particular store from the charge accounts of Capital One card holders and analyze the sales trends. Trades were then placed in the securities of the company. This permitted the two defendants to successfully trade in the shares of the company in violation of the specific policies of their employer. The complaint provides three examples of unidentified stores in which the two defendants traded. A temporary freeze order was entered at the time the complaint was filed earlier this year. See Lit. Rel. No. 23179 (Jan. 22, 2015).

Subsequently, the two defendants consented to the entry of a preliminary injunction. That order essentially extends the initial temporary order. See Lit. Rel. No. 23216 (March 10, 2015).

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