Financial Crime: What’s In Your Data?

Financial Crime

The Huang’s

Meet the Huang’s…Bonan and Nan. According to legal documents they are former Capital One employees. What makes this alleged financial crime story more interesting is that they are reported to have been data analysts whose primary employment function was to investigate fraudulent credit card activity. Things that make you go hmmm…

The Huang’s beat the odds…well, sort of. The pair of former Cap One employees stand accused by the SEC of committing a financial crime (SEC v. Huang, 15-cv-00269, U.S. District Court, Eastern District of Pennsylvania) using (insider-proprietary) consumer spending trend information (sales data), gained exclusively through their employment with Cap One, to ascertain what American’s “appetites” were at companies like Chipotle.

More specifically, were individual retailers sales going up or going down?

Hey Hey Hey Burrito Lady

Sounds innocent enough, employee’s looking in a credit card company’s database to see how many “beef burritos” are sold at a restaurant chain around the country on a daily basis.

Everyone has a theme song, I’m wondering if this was theirs?

Hey hey hey burrito lady
You drive me crazy
Burrito lady…

There’s only one thing left for me to say
I gotta get back to chee – pot – lay

And go back to chee-pot-lay they did! Hence, the financial crime allegation.

According to the SEC, the financial crime here is that the Huang’s allegedly gathered information gained on all retail purchases. Then, they performed analytics on the data to ascertain whether Chipotle was profitable or not. This supposedly provided them with the ability to purchase stock options at the optimal time.

Insider Information – Query The Database

If you want to know what was in the Huang’s wallets…. greenbacks. Lots and lots of greenbacks.

The SEC states that the pair, armed with Cap One’s proprietary information on cardholders spending habits, promptly bought call options on the stock in profitable companies (buy low, sell high) and “put options” in companies that were performing at levels less than the market expectations.

Once earnings announcements were made, the SEC claims that the pair would exercise the options and then “back the truck up to the bank” with their profits. Capitalism at it’s finest…

It’s one thing to get a hot tip on a horse running in the 7th race at Del Mar. That’s easy…

But the Huang’s are believed to have run hundreds, or thousands, of sophisticated retail sales queries against Cap One’s data searching for trend information they could use to beat the stock market based on various retailers performance (over or under). “Hedging your bet” so to speak and that’s where the alleged financial crime comes in.

If you want to know how successful they were at it, the Huang’s didn’t just beat the market…they beat the living tar out of it!

Financial Crime: The SEC Complaint

As often happens when people are alleged to have manipulated the stock trading system, the SEC got involved.

From the SEC Complaint:

“From January 2012 to January 2015, defendants Bonan Huang and Nan Huang deposited a total of $147,300 into their six OptionsHouse accounts. During this time period they transferred approximately $1,763,500 out of these six accounts.

As of January 15, 2015, the total balance in the six accounts was approximately $1,063,000. Accordingly, Bonan Huang and Nan Huang made approximately $2,826,500 trading options during this period in their OptionsHouse account. This represents a three-year return of approximately 1,819%.”

There aren’t too many savvy investors,or stock research firms, who can claim that kind of investing success in the marketplace.

I’m not condoning what they did but, if what the SEC alleges is correct, it appears the Huang’s put a serious amount of due diligence into their data research/analytics and their profits definitely reflected that. Hence, the financial crime basis for the lawsuit.

A Twist On Insider Information

In the classic “insider information” stock crime, an employee (often a C-level executive) connected to a company passes on financial performance information to another individual who either invests on the inside news or passes it on to another individual who invests on the news.

However, in this case, if what the SEC alleges is true, no one at the companies that the Huang’s researched using Cap One’s proprietary information gave them any information on quarterly earnings or company performance they could use to their advantage.

This might actually be considered “3rd party” insider information as the Huang’s allegedly gathered the insider information through data reported by Merchants back to Cap One.

The usage likely not only violated company confidentiality, ethics and data security practices but undoubtedly the data usage agreements that merchants signed with Cap One. The merchant lawsuits are likely already lining up…

This type of insider information approach is definitely different from the traditional manner in which the crime’s committed but it’s definitely inappropriate usage of insider information (material/proprietary/non-public) nonetheless!

The Last Word

Financial Crime: most companies worry more about revenue loss than data security. This case proves that strategy’s a mistake, a very BIG mistake.

As we’ve said many times before in the Fraud Solutions Blog: Data is power!

So, let me ask you this: What’s in your data?

Those are our insights. What are yours?

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