In the SEC's first insider trading enforcement action involving ETFs, a former Goldman Sachs employee and his father were charged with insider trading on confidential information about Goldman’s trading strategies and intentions that the employee learned while working on the firm’s ETF desk. Once again, the smoking gun was a taped telephone conversation. "We are aggressively working to identify and prosecute illegal insider trading across multiple markets and derivatives products regardless of the complexity of the trading pattern that we have to unravel in our investigations." -- Sanjay Wadhwa, Associate Director of SEC’s NYRO and Deputy Chief of Market Abuse Unit.

Allegations Based on SEC Findings. Spencer Mindlin allegedly obtained non-public details about Goldman’s plans to purchase and sell large amounts of securities underlying the SPDR S&P Retail ETF (XRT), which he then tipped to father Alfred Mindlin, a CPA.  Both illegally traded in 4 different securities underlying the XRT with knowledge of massive, market-moving trades in these securities that Goldman would later execute. The insider trading occurred in December 2007 and March 2008.  At the time, Goldman was the largest institutional holder of the XRT in order to allow its customers to short the XRT.  To hedge its long position in the XRT, Goldman shorted the individual securities underlying the XRT. Armed with Goldman’s current nonpublic position in the XRT and Goldman’s nonpublic plans to trade large amounts of securities underlying the XRT in order to hedge its position in the XRT, Spencer and Alfred Mindlin began purchasing and selling the 4 individual securities underlying the XRT within months of Spencer Mindlin having joined Goldman’s ETF desk. Almost all of their trades were placed in a brokerage account in the name of another family member.  Spencer Mindlin failed to disclose any of these trades to his employer, Goldman. Information Obtained. Spencer Mindlin allegedly learned on multiple occasions about Goldman’s trading intentions through e-mails he received shortly before he and his father placed their trades.  In one instance, before they began to trade, father Alfred phoned TD Ameritrade to upgrade the family member’s account to allow for the trading of options.  While he was on hold with the TD Ameritrade representative, father Alfred received a call from son Spencer, who passed along the insider information. Unbeknownst to them, because the TD Ameritrade call was recorded, Spencer and Alfred Mindlin’s conversation discussing a trade was captured on tape.  In later instances, Spencer Mindlin impersonated his father on at least 4 calls to TD Ameritrade.  On one call, he instructed the firm not to execute a trade too early in the day because this would "chew into my profit – my profit on this trade."  The Mindlins obtained at least $57,000 in illicit profits through their insider trading. Alleged Violations. SEC Enforcement charged the pair with violating Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the Exchange Act.  The SEC seeks to recover from the Mindlins disgorgement of ill-gotten gains, prejudgment interest, financial penalties, and other remedial relief.

SEC Staff Credits. Investigation by Sandeep Satwalekarm Maureen Lewis of SEC’s Market Abuse Unit in New York, and by Robert Murphy, Stephen Johnson of the NYRO.  Alexander Vasilescu will lead the SEC’s litigation efforts.

For further details, go to: [SEC PR 11-188, 9/21] and [SEC Admin Proceeding 3-14557].