19 December 2019: The US Securities and Exchange Commission has charged an IT administrator and four friends with insider trading after they were found to have consistently traded on confidential earnings information about a Silicon Valley cloud-computing company.
The SEC’s complaint alleges that a former IT administrator at Palo Alto Networks Inc, Janardhan Nellore, used his IT skills and work contacts to uncover sensitive, non-public information about his company. He then traded Palo Alto’s securities on the basis of that information. Further, he would also tip off four friends, who also traded on the information. They too have been charged by the SEC.
Of particular interest in this case is the methods used by the five accused to avoid detection. The defendants opted to use the word ‘baby’ in electronic communications when discussing the company’s stock. In some instances they would use phrases such as “exit baby” or “enter few baby”. They also tailored their cash withdrawals so as to avoid reporting requirements and bank scrutiny.
Inevitably, the group were caught out by data-analysis tools, which detected the unusual language use and suspicious trading patterns. Director of SEC’s San Francisco Regional Office, Erin Schneider, pointed out that “this case highlights our use of enhanced data analysis tools to spot suspicious trading patterns and identify the traders behind them.”
The US Attorney’s Office for the Northern District of California has since announced that it will bring criminal charges against Nellore, who attempted to flee the country with his family once the investigation began.
The case raises an interesting point about who the compliance teams should be monitoring within a company. Traditionally, IT teams may fall out of scope for scrutiny, despite often being privy to highly sensitive information. There is certainly a case to say that all employees should be subject to the same level of scrutiny and monitoring, as often it may be those that you least expect who are cheating the system. Take a look at the case of Fabiana Abdel-Malek, for instance, a senior compliance officer at UBS who was sentenced to three years imprisonment for insider trading. Cases like this are becoming more and more common, it is likely that the regulators will sharpen their focus on firms that let individuals fall under the radar.