The DOJ, SEC, Insider Trading, and Data Analysis

A year ago, the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) heralded data analytics in announcing parallel insider trading actions against a senior executive at a pharmaceutical company (Viatris Inc.), formerly known as Mylan N.V. (“Mylan”). The SEC asserted that “efforts to conceal the scheme through secure messaging apps and foreign cash payments were unavailing, as this case highlights the agency’s ability to use sophisticated data analysis to detect suspicious trading patterns and identify the traders behind them.”

Last year’s case was against the alleged tippee, this year’s against the purported tipper.  On November 10, 2022, the SEC and DOJ brought actions against the alleged tipper premised on many of the same underlying facts as the previous case. Neither action reveals on its face whether the second case is the product of traditional investigative techniques, cooperation, or additional date analysis. Here are the facts as alleged.

The individual most recently charged—Ramkumar Rayapureddy—oversaw Mylan’s Information Technology (“IT”) operations as Mylan’s “Chief Information Officer,” during the relevant period. DOJ and the SEC allege Rayapureddy gave material nonpublic information about Mylan to Dayakar Mallu, who also worked in Mylan’s IT department and who traded securities based on this information. Three separate tips are alleged.

The first alleged tip involved Mylan’s announcement of an FDA approval in September 2017. According to DOJ and the SEC, “expecting the announcement to have a positive impact on Mylan’s stock price,” Rayapureddy informed Mallu during a telephone call that Mylan was going to publically announce that it received FDA approval for a generic version of a multiple sclerosis drug. That same day, Mallu allegedly purchased approximately 1,000 Mylan call option contracts.

Second, both agencies allege that Rayapureddy informed Mallu that Mylan would announce financial results that were lower than the market expected for the fourth quarter and full year of 2018. Rayapureddy used “a secure messaging and calling application” to make this tip, according to the SEC complaint. Mallu allegedly closed his existing put option contracts before the announcement, avoiding approximately $700,000 in losses.

Third, the agencies allege that Rayapureddy kept Mallu apprised of a possible merger with one of Pfizer’s businesses in mid-2019. In particular, Rayapureddy allegedly tipped Mallu information about the timing of the transaction and stated his belief that the transaction would be well received by the market. Based on this information, Mallu allegedly purchased over 13,000 call options in Mylan and made over $7 million in gains as a result of these insider transactions. DOJ and the SEC also allege that Mallu shared a portion of these profits with Rayapureddy by making cash payments to Rayapureddy and individuals designated by Rayapureddy in India.

DOJ charged Rayapureddy with conspiracy to commit securities fraud and three counts of securities fraud. Rayapureddy pled not guilty, according to the court docket. The SEC also alleges Rayapureddy violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. DOJ and the SEC charged Mallu in September 2021. Mallu pled guilty to conspiracy to commit securities fraud, as well as aiding the preparation of a false tax return.

This past summer the SEC charged nine individuals in connection with three distinct alleged insider-trading schemes all based on its use of “data analysis tools to detect suspicious trading patterns.” The SEC has a special unit, the Market Abuse Unit’s Analysis and Detection Center. While not new, the unit is demonstrably active. The government is likely to continue relying on data analytics to investigate and charge insider-trading enforcement actions.

Leave a Reply

Your email address will not be published. Required fields are marked *