A recent SEC charge for insider trading
I am a big fan and a subscriber of SEC notices that it sends out whenever it brings charges against companies and individuals for violations of the security laws. As someone who is interested in the financial markets, I find it fascinating to observe what schemes the other participants are running and what they are getting charged with.
One recent charge released on June 13th, 2022 felt very close to me personally and can be found here: https://www.sec.gov/news/press-release/2022-105 — SEC Charges Former Employee of Online Gambling Company with Insider Trading.
First, the accused is a software engineer, like myself. Seems to have a similar type of work experience. Not to mention that he worked for Penn Gaming, a company I have followed for a while now.
Here is the gist of the charge. Penn National Gaming subsidiary’s employee, David Roda, a software engineer, decided to profit from the insider information. It seems that he became aware that Penn was getting ready to acquire another publically traded company, and he proceeded to purchase out-of-the-money call options for that company.
If you know that the company’s stock price will go up in the future, you can buy that company’s stock today and sell it when it goes up, for a profit. But what you can also do is buy call options. To make huge, hundreds of percentage point returns, you use options. The risk with options is that they have time expiration as well as certain other requirements to become profitable. But in David’s case, you pretty much know that those requirements will be met because you have the insider info. And sure enough, that’s what happened.
After Penn announced the acquisition, the target company’s stock went up 80% and it sounds like he made $500,000+ in profit. Of course, he was caught, lost his job, and has to return the profits and then some. Interestingly, his LinkedIn profile is available where you can see his Penn experience: https://www.linkedin.com/in/davidcroda/
Also, it appears that he could not keep the information just to himself, he also disclosed the news to his friend who made a much smaller sum, $5000+, in profits.
I can pretty much guess what happened here and how they got caught. First, let’s look at the Score Media’s chart, the company that got acquired, right before the acquisition and afterward:
It was trading in the mid $19s. And then boom up to $40. with a tight run-up a few days before that. Since David bought out-of-the-money options, they must have been quite cheap and he had to buy quite a few of them which most likely generated an “unusual options activity” alert. It’s rare for smaller companies to see numerous out-of-the-money option purchases. Whoever saw such activity brought this up to SEC and then SEC takes over from there. They can obtain every single option purchaser record, who the person is, and do their investigation. Their job becomes very easy when the person on the record works for the company doing the acquisition. And then most likely that person is not a frequent option buyer. Connect the dots, contact the person for an interview and ask to explain the purchase, and off it goes.
It’s unfortunate to see people get tempted by easy money. Hopefully, it’s a lesson they will carry with them into the future. If you are a small fish and never trade stocks, just don’t attempt to cash in. It’s just not worth it. Even if you don't personally do it and tip off your friend or your relative, etc. you could very well be caught.
