On March 14, 2018, the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) announced parallel criminal and civil charges against Jun Ying, the former Chief Information Officer of Equifax’s United States Information Systems, for selling his shares of Equifax stock before Equifax publicly announced that it had suffered an immense data breach. These charges come in the wake of recent SEC guidance on ensuring corporate insiders do not trade in securities while in possession of material nonpublic information about cybersecurity incidents.
Equifax learned in late July 2017 that it had been subject to cyber-intrusions that resulted in a critical data breach of its information technology systems. In response, Equifax created two action teams to investigate and respond to the breach. One team had direct knowledge that Equifax was the victim of a large data breach, while the other was told that a client had been the victim of a large data breach. Equifax instituted a trading blackout period to prevent employees from trading shares of Equifax only for employees on the action team that knew Equifax was the victim of a breach.
The DOJ and SEC complaints alleged that Mr. Ying learned of the breach on Friday, August 25, 2017, when he received an email requesting assistance with ongoing breach remediation efforts. This communication did not specify that Equifax itself was the victim of the data breach. Later that evening, as he learned more details, Mr. Ying deduced that Equifax was likely the victim of the data breach.
On Monday morning, August 28, Mr. Ying researched the impact that a 2015 data breach had on stock prices of Experian, another credit bureau. Searches revealed that Experian’s stock price dropped 4% following the public announcement of the 2015 data breach. Within an hour of these searches, Mr. Ying accessed his stock plan, exercised all of his vested options, and sold all of his shares of Equifax for over $950,000. Mr. Ying would have lost over $117,000 had he waited to sell his shares until after the public announcement of the breach on September 7, 2017.
These charges illustrate the importance of companies adopting and enforcing robust and comprehensive policies and procedures to prevent corporate insiders from trading securities based on material nonpublic information. Companies that have experienced a data breach should take measures to ensure that corporate insiders who know, or are likely to know, of a breach, cannot trade on such information.
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