A senior executive at Alliance Fiber Optic Products agreed to settle charges that he made nearly $200,000 in illicit profits by trading on inside information in advance of three disappointing earnings announcements by the company, the Securities and Exchange Commission announced on July 24.
According to the SEC, the case resulted from the SEC Market Abuse Unit’s Analysis and Detection Center, which uses data analysis tools to detect suspicious patterns—such as improbably successful trading in advance of earnings announcements over time. Enhanced detection capabilities enabled SEC enforcement staff to identify the unusual trading activity.
The SEC order found that Yao Li, as vice president of technology at Alliance Fiber Optic Products (AFOP), learned during regular meetings with AFOP’s senior executives that the company was likely going to miss its revenue guidance in three different quarters during 2014 and 2015. According to the SEC’s order, Li traded on this inside information by short selling AFOP shares for profits as well as selling AFOP shares he already owned to avoid losses before these announcements.
According to the SEC order, AFOP specifically prohibited its employees from engaging in short selling. A short sale is a type of trade used to profit when a trader expects a stock’s price to decline.
“Our agency’s ever-evolving data analytics enabled us to detect Li’s otherwise inconspicuous trading as an overall pattern to profit off multiple earnings announcements,” said Jina Choi, director of the SEC’s San Francisco Regional Office.
Without admitting or denying the SEC’s findings, Li agreed to cease and desist from further violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and he must pay disgorgement of $196,203, prejudgment interest of $23,062, and a $196,203 penalty for a total of $415,468. Li also agreed to be prohibited from acting as an officer or director of a public company for a period of five years.