Jury Convicts in Big Data Insider Trading Trial


The US Securities and Exchange Commission won a jury verdict in a ‘big data’ insider trading case involving proprietary credit card transaction data.  The defendants, who worked as data analysts for Capital One Financial Corp, made $2.8 million on a $147,300 investment, a return of about 1,800 percent, according to the SEC complaint.

Jury verdict

A federal jury in Philadelphia agreed with the SEC that the credit card information used by defendant Nan Huang to trade in shares of consumer retail companies ahead of earnings reports was “material.” The other defendant, Bonan Huang, settled with the SEC last month, agreeing to more than $4.7 million in penalties and other payments without admitting or denying the allegations.

Both defendants, who are not related, are Chinese nationals and fled to China after Capital One fired them last year, where they remain.

Profitable big data

The SEC accused the Huangs of making searches on Capital One’s proprietary database of credit card transactions relating to least 170 publicly traded companies from November 2013 to January 2015. The defendants used put or call options to trade retail stocks immediately before earnings releases.

In one example cited in the SEC complaint, after analyzing transactions involving outdoor goods retailer Cabela’s Inc. Nan Huang purchased in February 2014 put option contracts on Cabela’s stock for $51,890. Cabela’s stock was trading around $70 at the time. A day later, Cabela’s announced a 10 percent decrease in sales and its stock fell 8 percent to $64.26. Huang sold his options for $107,950 making a 108 percent return on his one-day investment, according to the complaint.

In April 2014, the pair made $142,000 after Coach Inc. announced lower than expected sales. In June 2014, they made more than $377,000 in one day after trading a positive surprise in Chipotle Mexican Grill Inc.’s earnings.

The SEC’s case

The SEC argued that the Huangs violated Capital One’s code of conduct and other rules the company established to regulate its employees’ use of proprietary data, and thereby breached a fiduciary duty to Capital One.

Bonan Huang settled, but Nan Huang went to court. His lawyers did not contest the breach of fiduciary duty, but tried to argue that the data was not material. The jury found otherwise, and Huang was convicted of violating Exchange Act Section 10(b). Penalties are pending.

Our Take

We have been arguing for years that the main insider trading risk for research firms is breaching a fiduciary duty. If a research analyst induces an employee of a publicly traded stock to break an obligation to keep information confidential, that information should be viewed as material non-public information.   Materiality is easy for prosecutors to establish since any prosecution is ex-post, and prosecutors can pick the favorable trades, ignoring all the ones that didn’t work.

For research firms using big data, there are subtleties in determining whether data potentially breaches a fiduciary duty. Transactional data that originates from retailers could cause issues if the data is used to trade against the retailer’s stock. Datasets need to be explicitly licensed. It gets murky if a data vendor obtains the data from retailers: are the retailers comfortable with the data being used by the investing community?

The other takeaway from this case is that there is alpha in credit card transaction data, or at least there was as recently as 2014. We have been hearing that credit card transaction data is passé, but perhaps that verdict, unlike in SEC v. Huang, is premature.


About Author

Sandy Bragg is a principal at Integrity Research Associates. He has over thirty years experience as an investment research professional. Prior to joining Integrity in 2006, he was an Executive Managing Director at Standard & Poors, managing S&P’s equity research business and fund information properties. Sandy has an MBA from New York University and BA from Williams College. Email: Sanford.Bragg@integrity-research.com

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