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Equifax execs sold shares before the hack was announced — but was it insider trading?

Equifax execs sold shares before the hack was announced — but was it insider trading?
Did Equifax executives engage in insider trading when they sold thousands of company shares in the days after the credit bureau discovered a massive security breach? (Rhona Wise / European Pressphoto Agency)

Did three Equifax executives, including the chief financial officer, engage in insider trading when they sold thousands of shares in the days after the company discovered a massive security breach?

The credit bureau has publicly stated the executives were unaware of the hack at the time of the sales, but the size of breach and timing of the trades has nonetheless stirred suspicion.

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Here's what we know:

Sometime in May, hackers gained access to names, social security numbers and other information on up to 143 million U.S. consumers in Equifax's files. The company said Thursday that it discovered the hack on July 29.

Three days later, according to Securities and Exchange Commission filings, CFO John W. Gamble sold 6,500 shares and John “Trey” Loughran III, president of Equifax’s U.S. Information Solutions business unit, sold 4,000 shares. The next day, Aug. 2, Rodolfo Ploder, president of another business unit, sold 1,719 shares. All shares sold for about $146 each.

On Thursday, weeks later, Equifax publicly announced the hack, sparking a flurry of bad headlines and a selloff of the company's stock. Equifax shares closed Friday at $123.23, down about 14% for the day — and down about 16% from the time the executives sold stock.

Had they sold the same number of shares today, the executives would have made about $275,000 less than they did last month. Gamble alone would be out nearly $150,000.

In each case, the shares sold represent a small part of the executives' holdings. Each of the men still owns about 40,000 shares of Equifax stock, according to the filings. And all three had sold Equifax stock before.

Gamble, who has been with the company since 2014, sold 14,000 shares in May, his first reported sale. Ploder and Loughran have each made a half-dozen sales over the past few years.

Equifax did not respond to requests seeking comment on whether the executives knew about the hack at the time of the stock sale, but has told other news organizations that the executives were not aware of it.

The company also did not respond to questions about who within the company knew about the hack on July 29, when top executives and division presidents were informed about it or about the company's policies for vetting stock sales to prevent insider trading.

Executives who want to sell stock often have plans that call for selling a certain number of shares at a set future date. By setting up transactions in advance, those plans can shield executives from the perception that they are selling based on inside information, said Evan Pondel, president of Century City investor relations firm PondelWilkinson.

In the case of the Equifax executives, though, the filings reporting their recent stock sales do not indicate the transactions were part of such plans.

If the executives knew about the hack before the sales, they could be vulnerable to either civil or criminal insider-trading charges.

To bring a civil charge, the SEC would only need to show that the executives were in possession of material information — that is, information that investors would care about — that was not available to the public when they made trades.

The information is generally considered material if it is shown to affect the price of a company's stock. Equifax's 14% tumble on Friday, then, would likely be enough to show that information about the hack was material.

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The agency could make a civil case if that were shown, even if the executives had other reasons to sell, such as wanting to finance the purchase of a home.

"If you have 50 legitimate data points that say you should make a trade, and one illegitimate one, you're blacked out — you can't trade," said a former SEC attorney who could not speak publicly on the matter.

Making a criminal insider-trading case can be more difficult, said Jason de Bretteville, a former federal prosecutor who is now chair of the white-collar criminal defense group at Newport Beach law firm Stradling.

Prosecutors would have to show that the executives not only were in possession of material information, but also traded because of it.

"It has to be a situation where you say, 'I see some impending event, and I'm going to trade in advance of it to avoid the negative impact of that event,'" de Bretteville said.

A typical defense from those charges, he said, is for an executive to show that he or she made a stock sale for some other specific purpose — indicating that even if the executive made a trade while in possession of non-public information, that information was not the motivation for the trade.

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