Risk & Compliance

Fraud Analyst Found Liable for Insider Trading

A jury finds the proprietary sales data that a former Capital One employee used to trade in retail stocks was "material."
Matthew HellerJanuary 13, 2016

A former Capital One Financial analyst has been found liable for insider trading in a case that hinged on whether the non-public sales data he used to trade in retail stocks was “material.”

A Philadelphia jury agreed with the U.S. Securities and Exchange Commission that Nan Huang enjoyed a “significant advantage” over the investing public even though he claimed Capital One’s internal database contained aggregate credit card sales data representing no more than between 1% and 3% percent of total sales at the companies in which he invested.

Huang earned nearly $1.5 million from the trades in shares of consumer retail companies ahead of sales and earnings reports.

“Obviously, we are disappointed in the verdict,” his lawyer, Gregory Morvillo, told Reuters. “We have a fundamental disagreement with the SEC as to materiality, not just as applicable to the facts in this case, but as a matter of law.”

SEC lawyer David Axelrod argued the sales data met the definition of materiality because, in part, Huang used it to make “calculations that allowed him to project and predict” broader sales patterns for the companies in which he invested.

The SEC sued Huang and a former colleague, Bonan Huang, in January 2015, alleging they made hundreds, if not thousands, of keyword searches on the Capital One database for sales data on at least 170 publicly traded companies. The Huangs, who are both Chinese nationals, investigated potential credit card frauds for Capital One.

The Huangs’ trading returns — as much as 13,000% — dwarfed those of typical investors and were “significantly better” than many hedge fund managers, SEC lawyer Christopher Kelly told the jury.

Nan Huang claimed the data he obtained was not material when compared to the “total mix” of information available to the investing public. “The SEC says that size doesn’t matter,” Morvillo argued. “Our position is that size may be the most important thing in this case.”

Bonan Huang agreed last month to a $4.7 million settlement with the SEC.