Capital One Fraud Researchers May Also Have Done Some Fraud

I&#x27;m starting to agree with the editorial linked from the article [0] that laws against insider trading are pointless. People find ways to do it anyway, but because the laws exist, the general public thinks it&#x27;s rare. It might be better for everyone to know what shark tank they&#x27;re jumping into.<p>[0] <a href="http://www.wsj.com/articles/SB10001424052702304279904579516170211639290" rel="nofollow">http:&#x2F;&#x2F;www.wsj.com&#x2F;articles&#x2F;SB100014240527023042799045795161...</a>

This reminds me of a quote by Eric Schmidt : &quot;One day we had a conversation where we figured we could just try and predict the stock market...&quot; Eric Schmidt continues, &quot;and then we decided it was illegal. So we stopped doing that.&quot;<p>They probably have thousands of employees who can access this information, I think it would be foolish to think that absolutely none of them does it for personal purposes.

Interesting, as the article notes - if Capital One had terms and conditions that said, &quot;we can use sales data for unrelated purposes&quot;, they would be able to trade on that information themselves. I wonder who else has information that they&#x27;re willing to use&#x2F;sell to third parties... Facebook? Google? I wonder how predictive e.g. the ratios of likes of McDonald&#x27;s&#x2F;Starbucks&#x2F;Chipotle pages are. Or clicks on display ads for Puma&#x2F;Adidas shoes.<p>&gt; Surely lots of Wall Street firms -- Chipotle is followed by 31 analysts -- and asset managers are doing tons of research to try to estimate Chipotle&#x27;s sales. They&#x27;re visiting branches and calling investor relations and talking to pork suppliers and surveying consumers and generally getting paid a lot of money to build a robust estimate of how many burritos Chipotle is selling. One more piece of data -- one credit card company&#x27;s charges at Chipotle -- would be helpful, but come on, not that helpful.<p>Could we get this data any other way? How about putting cameras in front of a few flagship Chipotle stores and using CV to track the number of people going in&#x2F;out? That&#x27;s legal, AFAIK.

Kind of highlights the true value of data that users are giving away with every single, in this case, transaction.<p>I am not quite sure how one would go about an alternate method for assessing the actual value of user data, but it has always seemed rather obvious to me that it is hugely downplayed by all the self-interested parties and their defenders.<p>Would it, in this case maybe be the change in market cap pre and post sales figures? But even that, as pointed out, has some increases baked in based on alternative research to estimate performance. I guess you would need to find a very specific company that really does not lend itself to outside, tangential research and that keeps its performance measures and metrics under wraps really well between announcements. Anyone have any idea of an industry or company that fits such a profile?<p>Does anyone else realize we are really in and moving deeply into an era that is going to add significant opportunities for corruption and economic capture.

These guys should start their own credit card transaction aggregator (ala Mint), and gather user data that is expressly made available for market research. Make the analysis for privacy tradeoff more explicit and distribute profits.

I see a lot of comments about how they could have figured out this data by just counting customers outside some Chipotle restaurants. This misses a key point: using their massive database, they were able to sift through thousands and thousands of businesses and actually figure out that Chipotle was one to watch. Without that data, they wouldn&#x27;t know where to put their customer watcher.<p>If they were a little savvier, they could have used their data from CapitalOne to decide which businesses to research and then create shill research, much like the FBI&#x27;s &quot;parallel construction&quot; of evidence. I wonder whether that would have put them in the clear; when the SEC came knocking, they could have pulled out their research, saying &quot;Look, we figured this out fair and square.&quot;

I genuinely think this is a grey area, and it&#x27;s far from &quot;insider&quot; trading. Is it moral, I don&#x27;t think so. Should Capital One sanction these employees, probably. But I think this is far from ilegal.<p>Huang and Huang had access to a db which is not open to everyone, granted, but they had to extrapolate the stock direction based on data from a subset (customers who buy Chipotle with a CC), of a subset (with a Capital One card)... and then compare that to analyst expectations, etc. but then, would it be insider trading if I stood outside a Chipotle polling customers who exited on the dollar amount spent? That is also proprietary information, and one I can use to trade stocks on. I&#x27;d like to know if they did any trades where the return went south. I know of sector investment funds which pretty much do this all day long, forecasting all sorts of industries, and it&#x27;s not ilegal.<p>I&#x27;d like to know what others think.

It reminds me of how search engines know about things like shopping cart exploits right away because all of a sudden there are thousands and thousands of queries for a particular shopping cart software package being used on a web page.<p>Personally I agree with Matt that this is a not the usual kind of thing. Clearly Chipotle could anonymize their sales with dummy purchases but the actual numbers would still be there. Like a search engine, for the data stream (credit card charges) to work you are forced to put enough information in the transaction to identify it.<p>This is also something I see happening with IoT type technologies, when it becomes possible for someone to collect data on their own at thousands of locations for relatively small numbers of $, like the helicopters trying to estimate oil availability, you&#x27;ll have data streams that can inform economic activity. Imagine something like a cellphone sized thing with a camera that just counts customers using OCV to note blobs at the counter, in a restaurant and texts a tally once an hour. Seems ridiculous but its quite possible to do, and much more cheaply than just repurposing disposed cell phones (although that works too).

Wow. I&#x27;m actually quite impressed, in a &#x27;that&#x27;s impressively evil&#x27; kind of way.<p>Maybe anonymized CC trend data should be made public?

So I wonder how much insider trading occurs via government spooks analyzing surveillance data that we don&#x27;t know about. I doubt the SEC would be able to make a public lawsuit about this .

Just from reading the title I knew this would be a Matt Levine piece. Great, entertaining finance columnist.

Workaday co-CEO Dave Duffield said in some interview that he invests privately in the companies that buys Workaday cloud hr solution. If he can sees how many employees are added to a certain company that buys Workaday cloud product, he can use that an edge.

This is a stretch of insider trading laws, which I assume is why they haven&#x27;t been charged criminally (the SEC can only pursue civil sanctions). The data was in the possession of their employer, not of the publicly traded companies. They could probably be prosecuted under the CFAA for misusing a protected computer system, but I cannot imagine them being convicted criminally for insider trading here, or even losing at trial if they choose to fight the civil SEC case.<p>If I pay people to go count the number of customers in line at a representative sample of Chipotle restaurants during lunch every day, compare the results to the previous quarter where I was doing the same thing, and trade on that data, is that illegal? It&#x27;s nonpublic information. Would my employees be prosecuted for this if they traded on it?<p>Prosecutors and the SEC attempt to stretch our laws every day. It doesn&#x27;t mean that they are going to win these cases.

The implications are bigger than for public companies&#x27; insider trading.<p>Think about the success of the Oatmeal&#x27;s <i>Exploding Kittens</i> card game on Kickstarter. Aside from the fact that KS&#x27;s new payment processor Stripe is leeching an <i>astounding</i> amount of money from this campaign (where most pledges have probably been made with cash-like debit cards being charged at the rate of credit cards), there are also implications of aggregation inside that cartel.<p>How many playing card printing companies out there are eager to handle that order? What if you knew ahead of time who they were going to use, based on that &quot;bank account&quot; info you have to give out when you sign up for a campaign on KS? Private companies leverage this info all the time, and it&#x27;s much easier for them to get away with it.

Have a look at 1010Data: <a href="https://www.1010data.com/solutions/by-industry/financial-services/" rel="nofollow">https:&#x2F;&#x2F;www.1010data.com&#x2F;solutions&#x2F;by-industry&#x2F;financial-ser...</a> and <a href="https://www.1010data.com/partners/detail/data-providers" rel="nofollow">https:&#x2F;&#x2F;www.1010data.com&#x2F;partners&#x2F;detail&#x2F;data-providers</a><p>This stuff is already being done legally, with certain industries and within certain financial institutions. Just seems like these guys were just caught in an unfortunate legal snag - otherwise they just seem like good traders to me.

The point is not whether somebody does a lot of research or not. The point is whether he&#x2F;she had data available that is not available to the public. That is simply not fair.<p>Now, using helicopters to track oil tankers - as described in the article - seems to be a blurry line, but in theory anybody could do that and then use that information, it is available to everybody... In principle at least.<p>This data was entirely private, so I would agree with being not fair.<p>That said, I hope these guys do not have to go to jail, but are simply forced to pay their gains (or a portion of those) back, maybe as a fine.

This is probably going on right now in lots of other companies that have access to such data. We only hear about the ones that get caught. Seems like they didn&#x27;t try too hard to cover their tracks. Just think about all the companies that have access to credit card data and all the people that are connected to those companies who could either be selling the data to others or trading on it themselves. Best thing to do to prevent this unfair advantage is releasing publicly available CC spend data.

I&#x27;ve always felt this would be a really interesting job to have. The ability to look at a CC company&#x27;s data and be able to generalize market trends. There are so many questions I&#x27;d want to ask about socioeconomic status and impact on debt, fraud, specific types of purchases, etc. It&#x27;ll never happen, but someone should give a big data firm unfettered access to answer some interesting societal and behavioral questions.

&gt; That&#x27;s amazing! These two like customer-support guys...<p>&gt; You sometimes see insider-trading cases where someone makes like a thousand-percent return...<p>Am I the only one bothered by the author&#x27;s writing? Am I getting old? Conversational is ok, I guess (though, Bloomberg?). But these &quot;like&quot;s? They&#x27;re not &#x27;like customer-support guys&#x27;, they <i>are</i> customer-support guys (or else they <i>are</i> analysts).<p>Bah-humbug.

I think they were primarily a victim of their massive success. If they had only made $500,000 instead of $2.8 million, they might still be going along fine.<p>How did they get caught? Did the SEC see this account has 1,800% return on investment over 3 years and investigate who owned it? Or did Capital One discover some odd queries on their production database and report them to the SEC?

Couldn&#x27;t this kind of thing be easily solved by having companies release sales data more frequently? It seems like the only reason this is profitable is because earnings are released quarterly, so there&#x27;s opportunity for the stocks to become wildly mis-priced over those months.<p>What would the downside be for releasing earnings data daily, or even weekly or monthly?

Big question. If they setup a hedge fund and bought the data from the card issuer, and did the exact same thing. Would it be legal? Don&#x27;t they use private satellites to take pictures of mall parking lots and crop fields to estimate holiday sales and crop yields? Hows is this different. Its data that public doesn&#x27;t have access to.

How did these guys get caught?

for better or for worse, the establishment of decentralized prediction markets will essentially make insider trading laws moot. Who cares if you can&#x27;t bet on the original market when you have another unregulated market where you can bet on the veracity of the first?<p><a href="http://www.augur.net/#what-we-do" rel="nofollow">http:&#x2F;&#x2F;www.augur.net&#x2F;#what-we-do</a><p><a href="http://www.truthcoin.info/" rel="nofollow">http:&#x2F;&#x2F;www.truthcoin.info&#x2F;</a>

metafraud, interesting concept