Money Stuff: Insider Trading on SEC Filings

The essential fact of insider trading is that there is a gap between when the insiders of a company know something and when it becomes public. The chief financial officer will get the draft earnings release, and she will circulate it among the executive team, and they will fine-tune the language, and there will be a delay of hours or days in which they know the earnings but the market doesn’t. Or two companies will start negotiating a merger, and due diligence and negotiations will take weeks before the deal is finalized and announced. And during those delays, various people — executives, advisers, others — will know the news, and if they trade on it (1) they can make money and (2) that’s illegal insider trading.

But there is another form of insider trading that relies on a different gap, the gap between when the company starts making information public and when it finishes. When the earnings are finalized, when the merger agreement is signed — or often when they are just close enough — the company will fire up the computer systems that it uses to make information public. It will get ready to publish the information on its website. It will get ready to put out a press release on the newswires. It will get ready to file the information with the US Securities and Exchange Commission, whose Electronic Data Gathering, Analysis and Retrieval system (Edgar) collects and publishes information from US public companies. These processes are not instantaneous. You don’t just write the press release in your phone’s Notes app and then send it simultaneously to your website and the newswire and Edgar. Each of them has its own somewhat temperamental interface, and you have to format your news for each of them. That takes time and specialized skills, and when the CFO says “let’s push the button on earnings,” there will be some interlude where the CFO knows the earnings, and the various filing specialists know the earnings, and the market doesn’t.

With absolute best practices, that interlude will be (1) short and (2) not during market hours. But not everyone is perfect all of the time, and, with the move toward 24-hour trading, “not during market hours” doesn’t mean as much as it used to.

And so we have discussed people getting information from companies’ websites before it was fully public. And there is a famous case in which hackers got access to three newswires’ servers and saw hundreds of thousands of earnings releases before they were public, with long enough lead time to trade (profitably) on them.

Edgar, too, has been hacked. In 2017, the SEC announced that “a software vulnerability in the test filing component of our EDGAR system … was exploited and resulted in access to nonpublic information.” “Test filing” means: You want to be able to publish your earnings release at exactly 4:15 p.m. on Wednesday, you know that Edgar is sometimes temperamental, so at 2 p.m. on Tuesday you upload the earnings release to the test system to make sure it is properly formatted before actually publishing it on Wednesday. If someone hacks into the test filing, they can see your numbers early. [1] In 2019, several traders were charged with trading on that test-filing information. [2]

And in 2021, the SEC charged several people with hacking into the computer systems of Edgarizing companies. “Edgarizing” is the process of taking information from the company and putting it into the right format for Edgar, and is complicated enough that lots of companies outsource it to specialized Edgarizing companies. And you can hack those companies and get filings early enough to trade on them.

Earlier this month, Bloomberg’s Liam Vaughan described Edgar:

The SEC’s Electronic Data Gathering, Analysis and Retrieval system—Edgar—is both a marvel of information technology and a wheezing Frankenstein’s monster. Created in 1993 as a way for companies to make filings online and for investors to search them, Edgar processes 3,000 new filings and millions of downloads a day, using cobbled-together code, outdated software and a row of dusty servers installed in a basement in Virginia.

By 2016, there was consensus that the system needed to be replaced, a plan referred to internally as the Big Bang. “The challenge was how do you make this massive change when we’re flying a jumbo jet across the sky that can’t stop without disrupting the markets,” recalls Rick Heroux, the SEC official who was responsible for the planned modernization. “There was always a reason to put it off.”

We talked about that modernization project a few weeks ago. I quoted some amendments to the Edgar manual “removing sentences such as: ‘The SEC accepts electronic submissions through the Internet,’ [and] ‘The EDGAR system is comprised of a number of large computers that receive filings submitted by entities.’” Because Edgar is from 1993, and it still feels like it is from the dawn of the internet.

The point is that (1) Edgar is quite temperamental, so (2) companies tend to put their information on Edgar pretty far in advance of when it will become public, and (3) they tend to bring in specialized outsiders to do that, so (4) there is a big gap and a lot of opportunity for hacking. 

I say “hacking,” but there are other vulnerabilities. For instance, the people who work in the Edgar mines themselves might face temptations. Bloomberg’s Patricia Hurtado reported this weekend:

Two men who worked for a private business that provides services for companies filing to the Securities and Exchange Commission’s EDGAR system, were charged with insider trading after allegedly pocketing $1 million by stealing non-public information obtained through their jobs.

Justin Chen and Jun Zhen, both of Brooklyn, New York, were charged with obtaining non-public information about companies like Purple Innovation Inc., Ondas Holdings Inc., SigmaTron International Inc., and Signing Day Sports Inc. through their work, according to Brooklyn US Attorney Joseph Nocella.

Prosecutors say that between March and June 2025 the pair engaged in a scheme to obtain information about the companies, which announced they had entered into merger agreements “that resulted in significant increases in the share price of each company’s stock.” ...

Chen worked as an operator and assistant manager at EdgarAgents.com while Zhen worked as an operator and typeset manager, prosecutors said. The two had access to the company announcements before they were filed.

Sure. Vaughn writes that, in the investigation of the 2017 hack, “attorneys at the SEC’s enforcement division struggled to believe the agency was a target: The SEC scrupulously avoids retaining price-sensitive information, they insisted.” If you are an SEC lawyer — if you look at this system from a reasonable level of abstraction — then the way Edgar works is (1) a company sends its material nonpublic information to Edgar and (2) Edgar immediately makes it public. Information passes through the system for an infinitesimal time; the filing system does not hold on to a bunch of secret corporate information in its servers. Edgar is a publication interface, not a database of company secrets.

But of course if you are an Edgar typesetter, you do not look at this system from that level of abstraction. You deal with the actual system, which operates at a not-at-all-infinitesimal time scale. You are like “man, this stuff sure takes a long time to typeset.” And there are trades there.

One theme around here is that the big multistrategy hedge funds — Citadel, Millennium, Point72, Balyasny, etc. — are slowly becoming what the big investment banks were 20 years ago. Before 2008, firms like Goldman Sachs Group [3]  (1) helped customers trade stocks and bonds, (2) invested money for clients in stocks and bonds, and (3) did a lot of complicated trades that sort of sat in between flow trading and investing. Index funds had to buy and sell big piles of stocks whenever the index rebalanced, and the investment banks would help them do that. Shareholders of merger targets wanted to cash in before their deals closed, and Goldman’s famous risk arbitrage desk would help them do that. There were basis trades and deal-contingent hedges. Sometimes risky companies needed to borrow money in structured ways to do complicated things, and Goldman’s also-famous special situations group would lend them the money. All sorts of complicated bespoke services that Goldman could provide to the market, not because it got paid a fee but because those services carried an expected return as compensation for their risk, and Goldman was happy to take that risk to earn that return.

And then 2008 happened, all the big investment banks either became or were acquired by regulated banks, and that whole genre of trade largely withered away. This weekend, the Wall Street Journal’s Miriam Gottfried profiled Alan Waxman, the chief executive officer of private credit firm Sixth Street, who previously ran the special situations group at Goldman:

At the height of the financial crisis in 2008, Goldman became a bank holding company, making it eligible for emergency government loans but subjecting it to stricter regulation. 

The next day Waxman decided to leave. He and his partners launched what eventually became Sixth Street, with the goal of replicating the flexibility of investing from Goldman’s balance sheet.

That sort of trade worked at Goldman, until one day in 2008 it didn’t, so it immediately started cropping up elsewhere. The basis trades and index-rebalancing trades and risk-arbitrage trades and even deal-contingent hedges are now often done by hedge funds, and those hedge funds — which are lightly regulated, highly leveraged and financed in the capital markets, not with deposits — look a bit like the independent investment banks did 20 years ago.

If you’re in the general-purpose business of finding new risk premia to collect in financial markets, at some point you will have the same realization that Goldman had with SSG, which is “people want to borrow money, we have money, rigid old-school banks won’t lend to them, but we can, and we’ll get paid a lot.” Gottfried writes:

Waxman started as a junior analyst at Goldman in 1998. He worked in the special situations unit, which invested the firm’s own money in areas such as corporate equity and debt, real estate and infrastructure.

Early on, he was sent to review a portfolio of loans Goldman wanted to buy. The loans, to radio and television companies, were made by a nonbank lender. Waxman noticed the lender could charge hefty interest rates making loans banks wouldn’t because it was willing to account for the value of the borrowers’ underlying assets, not just its cash flows.

“By looking at things differently than a strict bank, we were able to get comfortable with making loans to these businesses,” Waxman says. “I thought: Why can’t this be applied across other industries?”

Nowadays that is called “private credit.” It is much more industrialized than it was in the 1990s, but even now, if you run a big multistrategy hedge fund, you will occasionally have similar realizations. And so the Financial Times reports:

Big hedge funds are pushing into private credit as they seek to establish themselves as diversified financial institutions, with Millennium Management, Point72 and Third Point all looking to launch new funds and strategies. ...

“Hedge funds are in the asset gathering business,” said one leading banker to hedge funds. “The boom in private credit has really attracted their attention.”

Yes, it is hard to run a general-purpose financial services firm and not have a pot of money to lend to companies when the price is right.

We talked on Thursday about SpaceX forwards. Specifically, a company called Republic “plans to use blockchain technology to sell investors exposure to SpaceX,” not in the form of SpaceX shares, or even shares in a vehicle that owns SpaceX shares, but rather in the form of a cash-settled instrument that will pay investors the value of SpaceX shares when SpaceX eventually goes public or is acquired. Republic variously calls this instrument a “note” or a “token,” but I said it is functionally a cash-settled forward on SpaceX shares. There are a lot of slightly different terms for the same underlying economics. The point is that Republic sells you a thing for $1 now, and at some future date it pays you back $0.50 if SpaceX is down 50%, $1 if SpaceX is flat, $3 if SpaceX is up 200%, etc.

I wrote that “this is an obvious solution to a real problem,” the problem being that a lot of retail investors want SpaceX shares and can’t get them. But there are some legal complications. The Wall Street Journal reported:

Republic CEO Kendrick Nguyen said he’s confident in the tokens’ legality, but added that it’s possible regulators might take a different view. 

Republic says it is able to offer the tokens in part because of a provision in the 2012 JOBS Act that lets private U.S. companies issue securities and raise up to $5 million a year from retail investors. Republic says it would be the issuing company, and the tokens are essentially a note that assures token holders will be paid any increase in the price of SpaceX’s common stock if it goes public or is purchased.

Republic has a license through the Securities and Exchange Commission that allows it to use this Regulation Crowdfunding exemption to sell tokenized securities to retail investors. Nguyen said Republic won’t need permission from the companies whose tokens it is selling because the tokens represent securities sold by Republic. 

That is: Republic’s theory is that these tokens (1) are securities, (2) issued by Republic, and (3) sold to US retail investors pursuant to an exemption from US securities registration requirements.

But several readers emailed me to object that these are securities-based swaps. There is a particular regulatory regime for “securities-based swaps,” derivatives contracts representing individual stocks. [4]  In general, they can only be sold:

1. to “eligible contract participants” (meaning roughly people or institutions with more than $5 million of assets [5] ), or
2. if they are sold to retail investors, only if they are registered with the US Securities and Exchange Commission and traded on a national securities exchange. [6]

(One sort of securities-based swap is what is known as “contracts for differences,” or CFDs, which are notorious in other countries as retail gambling instruments. A crude summary of the securities-based swaps rule is “CFDs are illegal in the US.”)

Republic seems to be offering its tokens to retail investors (so not just eligible contract participants), and they do not seem to be registered with the SEC or listed on an exchange, so if they are securities-based swaps, that’s a problem.

Are they? I don’t know, and nothing here is legal advice (especially not for Republic!), but my guess is no. If you read Republic’s disclosures, it seems that the tokens are themselves securities, notes of Republic; you could think of them as being like structured notes issued by Republic, and “structured notes themselves are securities and do not qualify as ‘swaps’ or ‘security-based swaps.’” In the general case, selling synthetic forwards on private-company stock seems like a security-based swap, but selling synthetic forwards on private-company stock in the form of a note should be fine, as long as the note sales comply with securities laws. [7]

However! There is an important precedent, or at least a funny one. In 2015, a company called Sand Hill Exchange launched an exchange that allowed people to trade futures on private-company stocks, futures that would settle for cash when those companies went public. That’s essentially the same product as the Republic tokens, and, as with Republic, there was a lot of blockchain talk. This was a fairly early (2015!) application of the theory that, if you put something on the blockchain, it somehow is exempt from securities laws. As FT Alphaville put it:

What Sand Hill appear to have done is to simply sidestep the entire 40-year old edifice of the CFTC by using the blockchain, that bit of the Bitcoin infrastructure that acts as a distributed public ledger, for transactions.

Or as I put it:

Haha what? Just because you mumble the word “blockchain” doesn't make otherwise illegal things legal. Otherwise buying drugs and ordering murders on Silk Road would be fine.

At the time, I was right: The SEC quickly shut down Sand Hill Exchange and reached a settlement with its principals, fining them $20,000 for illegally selling security-based swaps to retail investors. Disclosure?!? One of those principals, Elaine Ou, told me at the time: “We were just app developers. I thought a derivative was just a bet. Everything I know about derivatives, I learned from reading your blog at Dealbreaker. So in a way this is all your fault.” (Further disclosure: Later Ou became a Bloomberg Opinion columnist.) So, arguably, I was responsible for a previous illegal offering of forward contracts on private startup stocks. 

And then last week, having learned nothing from this history, I went and praised the 2025 version. I suppose there are three possibilities:

1. Republic’s version is just as illegal as Sand Hill’s. “Republic CEO Kendrick Nguyen said he’s confident in the tokens’ legality, but added that it’s possible regulators might take a different view,” a pleasing bit of epistemic humility from a crypto CEO.
2. Republic’s version is legal, because it has done a better job of structuring these tokens than Sand Hill did. This is my view, both for substantive reasons (notes are not swaps, etc.) and because the crypto industry has done a lot of maturing in the last decade. In 2015, the people building crypto platforms were often software developers who didn’t know anything about US securities laws and assumed that, because they were messing around in the niche world of cryptocurrency, those laws were not relevant to them. In 2025, sure, there is a lot of philosophical resistance to securities law, but everyone is aware of it. Crypto is a multitrillion-dollar industry, it has lobbyists, it gets politicians elected, it writes laws, it has lawyers: If you are building a crypto project to trade stocks in the US, of course you will work with serious lawyers to structure it in a way that at least arguably works.
3. Republic’s version is legal, because in the last six months crypto regulation has … de-matured? … and now you can do whatever you want. In the Trump administration, the SEC has signaled that it will take a much more limited view of what securities laws apply to crypto. I don’t know that wrapping stock forward contracts in crypto tokens will be exempt from securities laws — it sounds pretty security-like? — but I don’t know that it won’t be, either. A lot of what I read about “tokenization” these days does seem to have the form “if we call it a token then we don’t have to follow securities laws.” In 2015, it was obvious (to me!) that “just because you mumble the word ‘blockchain’ doesn't make otherwise illegal things legal.” In 2025, things are less clear.

I don’t understand how anyone who works in artificial intelligence gets any work done. Every story about AI now is about researchers going to Meta Platforms Inc. for $100 million paydays, or starting their own firms with billions of dollars of venture capital. If I was an AI researcher, I would have a hard timing coming into work and training my model, because I’d be too busy shopping online for yachts. I know, I know, I know, the AI researchers have vast reservoirs of intrinsic motivation that I cannot begin to imagine (they just love AI so much), but still. It must be hard for their bosses to keep them focused. Wired reports:

Mark Chen, the chief research officer at OpenAI, sent a forceful memo to staff on Saturday, promising to go head-to-head with the social giant in the war for top research talent. This memo, which was sent to OpenAI employees in Slack and obtained by WIRED, came days after Meta CEO Mark Zuckerberg successfully recruited four senior researchers from the company to join Meta’s superintelligence lab.

“I feel a visceral feeling right now, as if someone has broken into our home and stolen something,” Chen wrote. “Please trust that we haven’t been sitting idly by.”

Do you think that the employees have that visceral feeling? They run into him in the cafeteria and he’s like “I’m so mad that Meta keeps hiring away our researchers for nine-figure deals” and they have to mumble “yeah, we’re really mad too” between mouthfuls of caviar? Don’t get me wrong, I would be furiously angry if my coworkers kept getting nine-figure offers elsewhere and I didn’t. But I get the sense that every good researcher at OpenAI has found Mark Zuckerberg hiding in the bushes outside their house at least once, and their visceral feelings have to do with the planes they are going to buy with his money. Anyway:

Chen promised that he was working with Sam Altman, the CEO of OpenAI, and other leaders at the company “around the clock to talk to those with offers,” adding, “we’ve been more proactive than ever before, we’re recalibrating comp, and we’re scoping out creative ways to recognize and reward top talent.”

I don’t know, man, Mark Zuckerberg has found the least creative imaginable way to recognize and reward top talent (give them $100 million), and it sounds pretty good to me. 

Meta seeks $29bn from private credit giants to fund AI data centres. Canada Drops Digital Tax That Infuriated Trump to Restart Trade Talks. Saks Secures Financing and Plans to Make Debt Payment Monday. Klarna accelerates shift to digital bank ahead of second IPO attempt. Musk Fumes as Trump Tax Bill Cuts Electric Vehicle Credits. South Korea lifts 14-year ban on ‘kimchi bonds’ after dollar-backed stablecoins frenzy. “We take fitness fashion seriously out here in the Hamptons.” The ‘Enhanced Games’ Is the Ultimate MAGA Athletic Competition.

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