On September 21, 2020, the SEC announced charges against Yinghang "James" Yang, a senior index manager at a well-recognized index provider, for perpetrating an insider-trading scheme. Yuanbiao Chen, Yang's friend, was named a co-defendant.

The SEC alleged that between June and October of 2019, Yang, while serving on an index committee, purchased options of publicly traded companies before the public announcement of additions or deletions of these companies to the indices that Yang's employer maintained. To conceal these trading activities from his employer's supervision, Yang conducted all the trades in Chen's brokerage account. Chen opened the brokerage account about one month before these trades and misrepresented his trading experience to the brokerage firm in order to obtain options trading authorization. The SEC also alleged that many orders to purchase options were immediately preceded by logins to Chen's brokerage account by IP addresses assigned to Yang's employer. The brokerage account was also accessed by IP addresses assigned to Yang's home and Chen's restaurant.

The SEC alleged that Yang and Chen generated about $900,000 in profits through the insider trading scheme. The Department of Justice also brought criminal charges against Yang.

We usually hear about insider trading cases where unusual options activities happen before a major M&A announcement. This case, however, is possibly the first time that the SEC brought a case against an employee of an index provider, and it serves as a reminder that material non-public information is not limited to information obtained from an issuer, dealer or other distribution participant. Given that trades of this type turned out to be profitable, this case also sheds some light on the potential impact of additions or deletions of a stock to an index and their effects. As more and more investment decisions involve indices and other data aggregates, market-moving information providers may need to implement and enhance the scrutiny of their employees' conduct and the effectiveness of internal information walls that prevent such information from being misused.

Originally published in REVERSEinquiries: Volume 3, Issue 9.
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