New­est weapon in US hunt for in­sider traders pay­ing off

Kuwait Times - - ANALYSIS -

When plumber Gary Pusey pleaded guilty in May to in­sider trad­ing, it was a vic­tory not just for New York prose­cu­tors but for a lit­tle-known squad in­side the US Se­cu­ri­ties and Ex­change Com­mis­sion that uses data anal­y­sis to spot un­usual trad­ing pat­terns. Formed in 2010, the Anal­y­sis and De­tec­tion Cen­ter of the SEC’s Mar­ket Abuse Unit culls through bil­lions of rows of trad­ing data go­ing back 15 years to iden­tify in­di­vid­u­als who have made re­peated, well-timed trades ahead of cor­po­rate news.

The new strat­egy is start­ing to show re­sults, en­abling the SEC to launch nine in­sider trad­ing cases, around 7 per­cent of cases the agency brought since 2014 against peo­ple who trade on con­fi­den­tial cor­po­rate in­for­ma­tion. It sig­nals a shift in how the agency ini­ti­ates in­sider trad­ing probes, which more of­ten are launched based on re­fer­rals from Wall Street’s self-reg­u­la­tor Fi­nan­cial In­dus­try Reg­u­la­tory Author­ity, or an in­for­mant’s tip.

“It’s es­sen­tially the new fron­tier,” said An­drew Ceres­ney, the SEC’s en­force­ment di­rec­tor. “We have tremen­dous amounts of data avail­able to use, and we’ve been de­vel­op­ing tools to take ad­van­tage of that.” That data was key to spot­ting trades by Pusey ahead of at least 10 deals from 2014 to 2015 in­volv­ing Bar­clays Plc, where his friend Steven McClatchey worked. The SEC has also used data min­ing in a high-pro­file probe of traders who it says made more than $100 mil­lion us­ing in­for­ma­tion ob­tained by Ukrainian hack­ers.

Oth­ers charged in­clude for­mer em­ploy­ees of law firm Wil­son Son­sini Goodrich & Rosati and in­vest­ment bank Gold­man Sachs Group Inc.. In Au­gust, for­mer Perella Wein­berg Part­ners banker Sean Ste­wart was con­victed in a case cred­ited to the SEC unit. He de­nies wrong­do­ing and is ex­pected to ap­peal.

10 Bil­lion Rows of Trad­ing Data

The cases have come at a time when other US and Euro­pean reg­u­la­tors have in­creas­ingly looked to find ways to take ad­van­tage Big Data in or­der to strengthen their en­force­ment op­er­a­tions and mar­ket sur­veil­lance. The United King­dom’s Fi­nan­cial Con­duct Author­ity has in re­cent years taken steps to de­velop tech­nol­ogy to an­a­lyze large amounts of data to pur­sue mar­ket abuse cases. For the SEC, the six-year data-push has had the ben­e­fit of giv­ing it some ex­tra au­ton­omy in pur­su­ing in­sider trad­ing probes be­yond the in­quiries and re­fer­rals that self-reg­u­la­tory or­ga­ni­za­tions like FINRA pro­duce for the agency.

“Why wait to do a re­fer­ral when you could do it proac­tively?” said Daniel Hawke, a for­mer chief of the SEC’s Mar­ket Abuse Unit now at the law firm Arnold & Porter. The SEC does not have a di­rect feed of the mar­kets’ trad­ing data. In­stead, it mines 10 bil­lion rows of “blue sheet” data of trades ex­e­cuted by bro­ker­ages that the agency gath­ered in var­i­ous in­ves­ti­ga­tions.

An­a­lysts use a home-grown pro­gram called Artemis to an­a­lyze pat­terns and re­la­tion­ships among mul­ti­ple traders. Joseph San­sone, a co-chief of the Mar­ket Abuse Unit, said the SEC in par­tic­u­lar mines data to iden­tify in­di­vid­u­als who re­peat­edly buy stock ahead of merg­ers, en­abling the agency to fo­cus on re­peat of­fend­ers. “The abil­ity to see pat­tern of mul­ti­ple trades over a mat­ter of months or years gives us con­fi­dence to in­vest re­sources into in­ves­ti­ga­tions,” he said.

The SEC also uses soft­ware from pri­vately-held Palan­tir Tech­nolo­gies, which iden­ti­fies links be­tween in­di­vid­u­als and en­ti­ties by con­nect­ing pieces of in­for­ma­tion from mul­ti­ple data sources. In 2015, the agency awarded a $90 mil­lion, five-year con­tract to Palan­tir.

Plumber’s Scheme

In Pusey’s case, the SEC said that the data unit “de­tected an il­licit pat­tern of trad­ing” by the plumber, who suc­cess­fully traded ahead of merg­ers in­volv­ing com­pa­nies that in­cluded En­tropic Com­mu­ni­ca­tions Inc and CVS Health Corp. In all of the deals, the tar­get or ac­quirer were rep­re­sented by Bar­clays. The SEC re­ferred the case to fed­eral prose­cu­tors in Man­hat­tan and the Fed­eral Bureau of In­ves­ti­ga­tion.

In Dec 2015, Pusey, 47, be­gan ac­tively co­op­er­at­ing with them, pro­vid­ing “de­tailed in­for­ma­tion” about his source, ac­cord­ing to court pa­pers. In May, the FBI ar­rested that source, McClatchey, a close friend of Pusey’s who worked as a di­rec­tor at Bar­clays. McClatchey, 58, pleaded guilty in July to tip­ping Pusey in ex­change for money. He agreed to not ap­peal any sen­tence of five years in prison or less and to for­feit $76,000.

Both men are set to be sen­tenced later this year. Lawyers for the de­fen­dants did not re­spond to re­quests for com­ment. To be sure, even with data min­ing, tra­di­tional in­ves­tiga­tive tech­niques like en­list­ing co­op­er­a­tors and is­su­ing sub­poe­nas for doc­u­ments re­main key to build­ing out a case. The SEC has in the past ac­knowl­edged that it faces a chal­lenge to keep up with tech­no­log­i­cal ad­vances in the se­cu­ri­ties mar­kets it reg­u­lates, where spend­ing by a num­ber fi­nan­cial firms can sur­pass the agency’s own ex­pen­di­tures. —Reuters

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