Conviction Based on Conviction: What Trade Size and Timing Can Reveal About Insider Trading

Introduction

While abuses in the the prediction markets such as Polymarket and Kalshi have garnered recent headlines[1] for alleged violations of CFTC insider trading regulations, the SEC (and often the Department of Justice (“DOJ”)) have been consistently bringing old fashioned Securities Exchange Act of 1934 (“Exchange Act”) Section 10(b) and Rule 10b-5 cases for purported securities law insider trading violations.This article is a brief update on some of those developments, particularly from a compliance perspective.

SEC v. Gavin Wolfe et al.

The SEC recently filed fraud charges in the U.S. District Court for the Southern District of New York against Gavin Wolfe and Jason Satsky, two former Wall Street investment bankers, for allegedly engaging in insider trading of South Jersey Industries, Inc. (“SJI”) stock in advance of its February 24, 2022 announcement that it had agreed to be acquired by JP Morgan backed Infrastructure Investments Fund (“IIF”), a private investment fund.

As alleged in the SEC’s complaint, Satsky was the Co-Head of the Americas Power and Renewable Energy & Utility Investment Banking Group at BofA Securities (“BOA”) that advised SJI on the acquisition and served as the lead banker on the transaction. According to the complaint, Satsky tipped his long-time business colleague and close friend, Wolfe, material nonpublic information (“MNPI”) regarding the potential acquisition. As alleged, Wolfe bought over 2.2 million shares of SJI stock on the basis of the information he received from Satsky and made $18.5 million when the stock price rose 40% after the acquisition announcement. Wolfe allegedly also tipped others who traded SJI stock, generating $515,000 in trading profits.

Wolfe and Satsky are charged with violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The complaint seeks permanent injunctions, civil monetary penalties and officer-and-director bars against Wolfe and Satsky, disgorgement and prejudgment interest against Wolfe, and a conduct-based injunction against Satsky. The complaint names the eight entities through which Wolfe allegedly traded—Evergreen Capital, L.P., Evergreen Financial LLC, Empire Property Management LLC, GAW Holdings, LLC, SA 1055 LLC, SA 1057 LLC, SA 1082 LLC, and SA 1083 LLC—as Relief Defendants, and seeks disgorgement and prejudgment interest against them.

On September 29, 2021, the SJI CEO called Satsky directly to hire BOA to assist SJI with a sale of the company.By October 29, BOA finalized and sent SJI a list of four potential merger partners, including IIF, followed by a call on November 5.Also on November 5, Satsky and his BOA team scheduled and began preparing for a dinner with IIF principals which took place on November 15. 

At 9:30 p.m. on November 9, Satsky and Wolfe attended a nationally televised college basketball game at Madison Square Garden together. Minutes after the game, Wolfe created a calendar entry for himself that read, in part, “SJi” -- the NYSE ticker symbol for the company. He scheduled the entry for 9:15 a.m. that morning, November 10, just a few hours away. Wolfe also transferred $2.2 million to a trading account and directed his investment manager to begin buying SJI stock.The next day he made his first ever purchase of SJI stock, 100,000 shares. By December 1, he had purchased over 2.2 million shares of SJI at a cost of over $53 million.These purchases were spread across the accounts of the eight Relief Defendants using multiple broker dealers.Before Wolfe commenced trading in SJI, his investment portfolio was worth $260 million.

Wolfe used encrypted messaging applications, including Wickr and WhatsApp to communicate his trading orders to his investment manager.Those texts can be deleted by the sender or recipient and cannot be retrieved once deleted.Wolfe used the code word “weather” to signal to the investment manager when to switch communications to Wickr.

The $53 million purchase of SJI was over 3x larger than the largest sum Wolfe had ever invested in a single publicly-traded stock in the span of one month.Previously, his largest positions had ranged from $2.4 million to $16.6 million. The SEC’s theory is that the timing and circumstances of Wolfe’s trading demonstrate that Wolfe acted on MNPI he received from Satsky.

Close Personal Relationship

Satsky and Wolfe had a close personal friendship and were business colleagues for over two decades.[2]They had worked together at BOA starting in 2012. In the fall of 2021 alone they shared nearly 300 text messages and spoke on the phone about twenty times. They did favors for each other.Wolfe, for example, assisted Satsky’s son with college admissions by writing a recommendation and phoning a college endowment officer to express his support for Satsky’s son’s college admission.

Duty of Confidentiality

Satsky possessed SJI MNPI from September 29, 2021 and he had a duty to keep that information confidential that arose from BOA’s (i) insider trading policy, (ii) information wall policy, (iii) code of conduct and its (iv) engagement letter with SJI.As a former BOA employee and investment banker, Wolfe was similarly aware of Satsky’s duty of confidentiality to BOA and its clients.Both men had also received extensive training on insider trading policies.

Compliance Considerations

From a compliance perspective, this case presents at least three considerations of note:

First, Wolfe’s trading is aberrational: His SJI trade is over three times his next largest position and he built it in only three weeks—that suggests conviction bordering on certainty.Compliance departments that monitor the average size of employee trades would likely take note of Wolfe’s $53 million position because it is much larger than any of his previous trades and certainly much larger than his average trade.Perhaps the frequency of communications between Wolfe and Satsky, if monitored, would also raise an eyebrow, particularly given that Satsky, an investment banker, is known to frequently possess MNPI.

High Conviction Trading

What is missing in this case, but frequently appears in others, is the use of the short-dated call option, as a way for a trader to express high conviction about the direction of a stock investment as well as the timing of the expected catalyst. When a buyer purchases a call option on a stock, they have the opportunity, but not the obligation, to buy that stock for a specific price called the “strike price” for a predetermined period of time, which ends on a specific date, the expiration date.Options are purchased in the form of a contract. Each contract represents the right to purchase 100 shares of the underlying stock. If the underlying stock is trading below the strike price it is “out of the money.”The option contract becomes valuable once the underlying stock trades above the strike price before the option expires.If the expected event does not happen before the expiration date the option will typically expire worthless.

U.S. v. O’Hagan

By way of example, in a 1997 landmark Supreme Court decision in which the court adopted the “misappropriation theory” of insider trading, James O’Hagan, a partner at the law firm of Dorsey & Whitney, learned that his firm was representing Grand Metropolitan PLC regarding a potential tender offer for Pillsbury Company’s common stock.[3] When the tender offer was publicly announced, less than a month later, Pillsbury stock skyrocketed and O’Hagan made a profit of $4.3 million. O’Hagan was the single largest holder of Pillsbury call options with 2500 contracts.That is conviction! To be sure, regulators such as FINRA, the SEC and the DOJ will always take notice of and be suspicious of such trades just prior to a public announcement.

SEC v. Nicolo Nourafchan et al.

In a more recent example, an alleged insider trading ring led by Nicolo Nourafchan and Robert Yadgarov made liberal use of call options for multiple companies that typically expired in one to two months.The SEC’s complaint highlights several examples of M&A lawyers at large firms misappropriating and tipping confidential information from their employer with respect to acquisitions of public companies such as: Momenta Pharmaceuticals, Inc., SailPoint Technologies Holdings, Inc., iRobot Corp. and Momentive Global, Inc.There is also a companion criminal case against the insider trading ring (available here).

SEC v. Michael Christensen

In another example, the SEC filed a complaint against Michael Christensen for allegedly purchasing short-dated call options and stock of PetIQ prior to the August 7, 2024 announcement that PetIQ would be acquired by a private equity firm. Michael’s brother, a PetIQ executive, texted him on August 4, 2024: “Watch for the headlines Wednesday morning.” Christensen understood this text to be MNPI about PetIQ.Christensen pled guilty to criminal insider trading charges on September 25, 2026.[4]

Code Words 

A second consideration for compliance professionals monitoring archived business communications is the frequent use of code words in insider trading cases. For example, Wolfe would use the code word “weather” in his communications with his investment manager to signal switching to Tickr, a means of communication that can be irretrievably deleted.

In the Nourafchan case, cited above, the insider trading ring used many common phrases such as “when will the flight take off?” to ask about the timing of a public announcement. Call me for some “learning.” Learning is code for MNPI.The insider trading ring devised its own code of common words in an attempt to conceal the true purpose of their communications which was illegal insider trading.And in Christensen, we saw the seemingly innocent phrase: “Watch for the headlines Wednesday morning” just prior to a stock moving public announcement as a means of communicating MNPI.

Compliance personnel monitoring archived business communications need to be vigilant for patterns of common word usage that might suggest the use of a code.

Let’s Go Offline

A third consideration is to be on the lookout when conducting email/instant message reviews for any suggestion that a conversation should be switched from an archived platform to one that is not. Let’s take this conversation “offline.” Or perhaps, let’s switch to WhatsApp or Wickr. Let’s meet in person.

Finally, perhaps a combination of all the factors discussed, together with the dates of corporate announcements, could be aggregated: size and timing of trades; suspicious and frequent communications and a corporate event or announcement that increases (or decreases for short traders) the value of the position.

Orical LLC has significant experience in designing and administering compliance programs and monitoring and reviewing archived business communications.In addition, we assist many investment advisers with management of MNPI as required by Section 204A of the Investment Advisers Act. 

[1] A federal financial regulator is reportedly looking at trades by a former Congressman in a Kalshi account.Kalshi has also recently suspended or banned several political candidates for betting on (i) their own races or (ii) whether they would attend the State of the Union, for example. Separately, a soldier was charged criminally for trading on Polymarket about the U.S. military operation to capture Nicolas Maduro, an operation the soldier allegedly had a hand in planning and executing.

[2] Following Dirks v. SEC, courts often infer an improper personal benefit to a corporate insider that passes along inside information to a “trading relative or friend.” This concept was further solidified in Salman v. U.S., where an investment banker provided tips to his brother.

[3] In 1980, the Supreme Court determined that Vincent Chiarella was not a corporate insider and therefore not guilty of insider trading under the “classical theory.” Chiarella was an employee of a financial printer, Pandick Press. He broke the code on draft public announcements Pandick was printing that allowed him to identify companies that were subject to impending corporate takeovers. Chiarella purchased the stock of the targets before the public announcement but he was not an officer or director of any of the targets. Therefore, he did not owe a duty of confidentiality to any target company and was not guilty of insider trading.In the “classical” insider trading theory a corporate insider owes a duty to the corporation’s shareholders.There was a seismic change in the law in 1997 when the O’Hagan Court embraced a new “misappropriation” theory that involves a duty to the source of the inside information. Based on this theory, one does not need to be a corporate insider; rather, one must have a duty of confidentiality to the source of the information—such as O’Hagan to Dorsey & Whitney. O’Hagan served 18 months in prison.

[4] See also, SEC Lit. Rel. No. 26650 for the use of call options associated with the acquisition of Meritor, Inc. by Cummins, Inc. The case originated from the SEC Market Abuse Unit’s Analysis and Detection Center, which uses data analysis tools to detect suspicious trading patterns.