John Afriyie, a research analyst, fell prey to the temptation that thousands of research analysts are exposed to. He learnt, through his employer, an unnamed investment firm, that a company called Apollo Global Management would acquire another company called The ADT Corporation.
It was quite obvious that the stock price of ADT Corporation would sky-rocket when the news was made public. So, John Afriyie bought a massive chunk of ADT call options. In order to avoid detection, Afriyie bought the said options in his mother’s brokerage account.
The ADT deal was announced on February 16. As predicted, the ADT stock price soared. Afriyie sold all of the ADT options in his mother’s account and pocketed massive profits of $1.5 million (Rs. 9 crore).
Unfortunately for Afriyie, the sleuths of the The Securities and Exchange Commission (SEC) detected the insider trading transactions. Now, Afriyie is facing serious criminal charges. His mother is also liable to return all the profits that were made from the ADT transaction.
The SEC did not reveal how they trapped Afriyie. However, prima facie, what must have given the game away is the sudden surge in volume of transactions in an otherwise dormant account.
My guess is that Afriyie’s mum’s account must have been a dormant account. If there is a sudden surge in volume and that too with respect to a stock that has announced an important corporate action, it is obvious that alarm bells will start clanging in the offices of SEC.
It must be noted that the Indian counterparts of the SEC, namely SEBI, are equally adept at ferreting out insider trading deals.
One recent example is that of Palred Technologies, a stock that was the erstwhile favourite of Porinju Veliyath. In excellent investigative work, SEBI’s sleuths uncovered evidence that showed that Palem Srikanth Reddy, the CMD, and Ameen Khwaja, the CEO, had allegedly indulged in the nefarious practice of insider trading.
Of course, Porinju Veliyath made 500% gains from Palred Technologies though other investors who sought to clone his activities lost the shirts off their backs.
The SEC sent the grim warning that insider trading by using relatives as a front will not work. It said “Insider traders should have learned by now that trying to hide their illegal activity in a relative’s account ultimately won’t work”. It added “On behalf of the millions of traders in our markets who play by the rules, we will continue to detect and expose those who don’t.”
The SEC also gave examples of similar cases in the past where it has thwarted the efforts of insider traders to avoid detection by trading in a relative’s brokerage account.
Of course, the warnings by SEC and SEBI are unlikely to deter the hard-boiled Indian operators. These operators are adept at the art of insider trading. They set up a web of companies with a maze of holdings and cross-holdings. The structure of the buying and selling companies are so complex and the funding arrangements are so obtuse that no authority can unravel the truth no matter how hard it tries!