For decades, insider trading investigations relied heavily on whistleblowers, referrals from regulatory organizations, and obvious patterns of suspicious, red-flag activity. Today, the landscape has radically changed. The U.S. Securities and Exchange Commission (SEC) now utilizes advanced market surveillance technology to identify highly suspicious trading patterns across millions of transactions — including a sophisticated analytical platform known as ARTEMIS.
If you are contacted by the SEC or FBI inquiring about your trading in a particular security, it is critical to understand that modern insider trading investigations are heavily data-driven, aggressive, and often have commenced long before a target ever realizes they are under scrutiny.
What Is the SEC’s ARTEMIS System?
ARTEMIS — short for Advanced Relational Trading Enforcement Metrics Investigation System — is a proprietary SEC analytical platform designed to identify potentially suspicious securities trading activity indicative of possible illegal insider trading. ARTEMIS has been described as being capable of analyzing billions of equity (stock and options) trades to detect patterns typically associated with market abuse.
Unlike traditional SEC investigations of the past that focused on a single trade, isolated event or individual, ARTEMIS is believed to analyze:
- Repeated profitable trading ahead of market-moving announcements
- Trading relationships among multiple accounts
- Timing correlations between traders
- Unusual options activity
- Patterns spanning multiple issuers and time periods
- Connections between individuals, entities, and accounts
Bottom line: securities regulators are no longer just looking at a particular trade; rather, they are looking for behavioral patterns on a macro basis.
How Insider Trading Investigations Often Begin
Many people naturally assume insider trading cases begin with a tip from a co-worker or a disgruntled employee. While still true, regulators increasingly rely on surveillance systems and analytics based on big data to identify trades and/or trading patterns that statistically appear abnormal and thus suspicious.
Common triggers include:
Unusual Trading Before Major Announcements
Trades occurring shortly before:
- Mergers and acquisitions
- Earnings announcements
- FDA test results and approvals
- Government contracts
- Major litigation developments
- Bankruptcy filings
can, and often does, generate regulatory attention, especially when profits made on those news events are substantial.
Suspicious Options Trading Activity
Options trading is heavily scrutinized because relatively small dollar investments can generate outsized returns, particularly if very short-term duration, out-of-the money options are purchased. Large or highly profitable options trades ahead of corporate events frequently trigger NASDAQ inquiries and/or SEC investigations.
Repeat Trading Success – Too Good To Be True
The SEC will typically closely look to determine whether a trader repeatedly appears on the profitable side of market-moving events over time. According to public reporting, SEC analytical systems are designed to identify repeat, suspicious, profitable patterns across multiple securities and accounts.
The Stakes Are Extremely High – Don’t Underestimate the Significance of a SEC Subpoena
An insider trading investigation can quickly escalate from an informal inquiry to a formal, non-public investigation ultimately leading to:
- A SEC civil enforcement actions
- A parallel criminal investigation by federal prosecutors
- Asset freezes
- Trading suspensions
- Reputational damage
- Civil penalties
- Return of profits plus interest
- Revocation of professional licensing consequences, and
- Court injunctions
How a Former SEC Prosecutor Can Best Defend You
An experienced SEC insider trading defense attorney, especially one who previously worked at the SEC, can help:
- evaluate the scope and nature of the investigation,
- communicate with the SEC on your behalf,
- protect privileged information, including attorney-client communications
- prepare you for testimony,
- challenge assumptions the SEC’s theory of prosecution,
- respond to subpoenas, and
- develop a proactive defense strategy designed to avoid charges being filed.
Sophisticated Surveillance Requires a Sophisticated Defense
The SEC’s use of advanced analytical systems, like ARTEMIS, illustrates the leap in the technological advances made by the SEC in its securities enforcement through the reliance on data science, trading analytics, and algorithmic detection methods.
However, and critically, data alone does not and cannot prove illegal insider trading. In fact, many SEC investigations involve legitimate trading activity that may initially be misinterpreted as suspicious, but after investigation is ultimately determined to be perfectly legal. Thus, a strong insider trading defense requires understanding of both:
- the legal standards governing insider trading,
- case law interpreting the law on insider trading, and
- how the SEC and DOJ build such cases using trading data and circumstantial evidence in order to effectively defeat them.
Contact an SEC Insider Trading Defense Attorney
If you have received:
- an SEC subpoena
- a call from the SEC
- a visit from FBI agents, or
- a grand jury subpoena
You should seek experienced SEC defense counsel immediately.
Early intervention can be critical in protecting your rights, your reputation, and avoid being charged with insider trading.
