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Is an Educated Guess Material Nonpublic Information?

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April 24, 2018 | Barbara Baksa

Is an Educated Guess Material Nonpublic Information?

Last year, a Special Committee of the Board of Directors of Equifax announced that it had found no cases of insider trading among executives. But the SEC isn’t giving up quite so easily; it has filed a compliant against a lower ranking executive (not covered in the Special Committee’s report).

Does an Educated Guess Equal Material Nonpublic Information?

The SEC’s claim is interesting because the individual in this case (the CIO of a business unit) had not been officially informed of the security breach at the time of his trade. Instead, the SEC alleges that he deduced that there had been a major breach because of a project he was asked to support. 

Here’s the sequence of events, according to the SEC complaint:

  • The business unit CIO is told about a “VERY large breach opportunity” that his team will need to work on for a client. He is initially reluctant to allocate his team to the project and doesn’t appear to take the request seriously.
  • He then has a conversation with Equifax’s global CIO, after which he sends a text to one of his direct reports stating “On the phone with [global CIO]. Sounds bad. We may be the one breached … Starting to put 2 and 2 together.”  
  • As the CIO gets more involved with the project, he receives more information indicating that a very significant breach has occurred and send more texts that indicate that he understands the seriousness of the situation for Equifax.
  • The CIO conducts an internet search to research the impact of a smaller breach on a competitor’s stock price.
  • Within an hour of conducting his internet search, the CIO exercises and sells all of his vested stock options. At this time, he has still been told only that the breach is at a client company, not at Equifax.
  • The CIO is told that Equifax was the company breached two days after his exercise. At this time, he was also informed that this information was confidential and that he could not trade in Equifax’s securities.

The SEC’s position is that even though the CIO had not been told that Equifax was breached, he had figured this out (and I can see how the internet searches might support this position); thus, he held material nonpublic information when he exercised his option.

Insider Trading Doesn’t Pay

The CIO realized $950,000 on the option exercise and the SEC estimates the loss he avoided at $117,000—that’s just 12% of his proceeds.  But he’s now likely to lose a lot more—even if the SEC doesn’t prevail, he’s going to have to spend a lot of money on lawyer fees to fight the claim. And if the SEC prevails or if he settles, there will be penalties. He also lost out on a promotion to global CIO and was forced to resign (the trade violated Equifax’s insider trading compliance policy).


We don’t know all of the implications because the complaint hasn’t been resolved yet. But the complaint speaks to the importance of educating employees on insider trading laws, to protect both the company and employees. A couple of key takeaways:

  • Just because employees haven’t been told something doesn’t mean they can’t figure it out
  • Just because the company is in an open window period doesn’t mean it’s okay trade
  • The SEC sees your employees’ text messages and internet searches

- Barbara

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