Big Data Catches Insider Trading

A subpoena from the Securities and Exchange Commission led to the downfall of a prominent CPA.

A senior auditor at KPMG, Scott London, had been passing secrets about public audit clients (e.g., Herbalife) to his friend, a small, non-professional investor, Bryan Shaw.  Mr. London thought the two of them would never get caught because Shaw was investing such small amounts of money.  London thought the authorities were able to pursue only the big, professional inside traders.

Mr. London was wrong.

Automated Monitoring Probably Flagged Account

The authorities (SEC, FINRA, Shaw’s brokerage and/or options regulators) spotted unusual trading activity in Shaw’s relatively-small retail investment account.  The brokerage suspended Shaw’s account.  Then the SEC sent a civil subpoena to Shaw, asking him to explain his activity.

Mr. London thought the authorities could not prove anything.  He thought the brokerage would just give Shaw his money and stop doing business with him.

London was wrong.

Subpoena Requires Truth

A subpoena is a legal demand for
Administrative Demand for Evidence
information that the recipient (Mr. Shaw) cannot ignore.

The subpoena frightened Shaw.  Shaw could go to jail if he was caught lying in reply to the subpoena.

Shaw hired a lawyer.

The lawyer probably told Shaw:

1.  You are in deep trouble.  The government is coming after you, and you will be punished.

2.  Modern electronic records, like your online trading records, the records on your computer(s) and all of your detailed cell phone activity (calls, dates, times, geolocation, text messages) are available to the government to rat you out.*

3. The only way to get leniency from the government (i.e., reduced punishment) is to cooperate with the government and help it catch a bigger fish.  The bigger fish would be London.

Sting Operation

Mr. Shaw told the government the truth.  Shaw agreed to help the government catch his friend, Mr. London.

Shaw participated in a classic sting operation.  He made a telephone call to London, recorded by the government, discussing insider trading.  He arranged a meeting with Mr. London in a parking lot, where he would deliver cash to London in exchange for insider information.

At the meeting, Shaw wore a secret recording device.

Yesterday’s Wall Street Journal features an FBI photo of Mr. Shaw handing an envelope of cash to Mr. London in a parking lot.

Big Data + Subpoena + EDiscovery + Incentives = Big Fish

Mr. London will likely go to jail.

Mr. Shaw will likely get reduced punishment.

–Benjamin Wright

*Note:  Such detailed records did not exist a few years ago when CPA London formed his opinion that the authorities could not pursue small-caliber inside traders.  London's studied opinion has been rendered obsolete by modern eDiscovery.