On June 6, 2013, the Securities and Exchange Commission (SEC) announced [http://www.sec.gov/news/press/2013/2013-102.htm] that it secured an emergency order freezing over $3 million in profits of a trader based in Bangkok, Thailand. The trader is suspected of trading on insider information about the multi-billion dollar acquisition by China-based Shuanghui International Holdings of Smithfield Foods. The speed of the SEC’s investigation is extraordinary and appears to establish its template for future global insider trading investigations, as we predicted back in April.

While the SEC has taken the fast lead on this case, as most experienced defense lawyers will know, the DOJ is surely lurking closely near. We should expect to see criminal action in this case.

The nature of the allegations levied by the SEC reveal an astonishingly brazen and foolish conduct and it also reveals extraordinary coordination among regulators that is nothing short of impressive.

According to public filings, the regulators were tipped off to the conduct of Badin Rungruangnavarat due to his extraordinary trading. The SEC has alleged that Badin, “… purchased thousands of Smithfield ‘out-of-the-money’ call options and single-stock futures, as well as Smithfield stock, shortly before the public announcement that Shuanghui International Holdings Ltd. (‘Shuanghui’) had agreed to acquire Smithfield. The Defendant's well-timed trades yielded unrealized gains of more than $3.2 million. He reaped a return on investment of more than 3,400% in a span of eight days.”

Badin allegedly opened an account in the U.S. at Interactive Brokers on May 10, funded the account and began trading from May 21 to May 28, 2013. The SEC further alleged that on “May 29, 2013, Smithfield publicly announced that Shuanghui, a Chinese company, had agreed to acquire Smithfield for $4.7 billion, which would represent the largest ever acquisition of a U.S. company by a Chinese buyer. In the days leading up to the acquisition announcement, Defendant purchased such a large amount of Smithfield call options and single stock futures contracts that he essentially cornered the market in those securities. Following the announcement, Smithfield stock opened at $32.39, an increase of $6.42 (or 24.7%) from its previous day 's close.”

The defendant’s trading was brazen and not difficult to spot. He purchased thousands of options and futures contracts, expecting the stock price to go up. According to the SEC complaint, “[h]is 1,300 July 29 call options contracts represented 83.12% of the total cleared volume of Smithfield options for that week (May 21 -May 28), and 78.08% for the entire month of May. With respect to the July 30 calls, his 1,700 contracts represented 99.59% of Smithfield's total cleared volume between May 21 and May 28, and 95.99% of Smithfield's cleared volume for May… Rungruangnavarat's futures purchases represented an even greater percentage of the market. Indeed, from May 21 to May 28, his purchases of Smithfield futures represented 100% of the total cleared volume for Smithfield July and September single-stock futures on the OneChicago exchange. As of May 29, Rungruangnavarat's purchases of Smithfield futures were 100% of the open interest (i.e., the total number of open positions in the market that are yet to be closed) on OneChicago in those expirations.”

The SEC investigation also revealed the use of social media to connect the defendant to possible sources of the insider information. Specifically, the SEC alleged that, “[a]mong other possible sources, Rungruangnavarat has a Facebook friend who is a former employee of the company where Rungruangnavarat works, and who is an associate director at the Thai investment bank that advised [a rival bidder to Shuanghui International Holdings] on its contemplated Smithfield bid.”

Finally, reading between the lines, it appears that the Options Regulatory Surveillance Authority (ORSA) caught the unusual trading by the defendant and referred the matter to the SEC’s Chicago Office, who is headed up by my old SEC boss, Merri Jo Gillette, an exceptional public servant. If my assessment is accurate, it reflects a well-coordinated regulatory action in nearly real time.

This SEC action means that if a duty of trust or confidence is created, you cannot trade on material, nonpublic information. The SEC and other regulators are watching the markets closely and they now have a clear template on how to catch foreign traders. Foreign traders need to have a firm handle on U.S. laws when executing trades here in the U.S.