We’ve tracked the various flavors of insider trading betrayals through the years (husband betraying wife, wife betraying husband, boyfriend betraying girlfriend, butler betraying master, etc.) but here is a new one: brother-in-law betraying brother-in-law.

According to this litigation release and complaint from the SEC, on July 21, 2006, Michael Stummer, a self-employed day trader from Ohio, arrived with his family at the New York home of his brother-in-law for an annual weekend gathering. His brother-in-law was a director of a private equity firm advising Buffets Holdings on an impending acquisition of Ryan’s Restaurant Group. The SEC alleged that:

During the weekend visit, Stummer snuck into the brother-in-law’s bedroom office, where, secretly and without permission, he accessed his brother-in-law’s bedroom office computer. By correctly guessing his brother-in-law’s password, Stummer deceptively gained unauthorized access to the private equity firm’s computer network and read several confidential and nonpublic emails relating to the Ryan transaction.

Stummer then allegedly used this information to purchase shares of Ryan’s which he later sold for a profit of $22,351 after the acquisition was announced and the stock surged 40%.

2 quick thoughts:

1. In January 2008, Judge Buchwald of the SDNY ruled in the Dorozhko case that a hacker who stole material, nonpublic information from the computer network of Thomson Financial and traded on that information did not violate Section 10(b). The SEC’s case against Stummer was settled immediately, and therefore will not be further litigated, but how does hacker Stummer differ from hacker Dorozhko?

2. If your password can be figured out by the educated guesses of your brother-in-law, you seriously need to upgrade your password.

George Costanza: Was that wrong? Should I have not done that? I tell you I gotta plead ignorance on this thing because if anyone had said anything to me at all when I first started here that that sort of thing was frowned upon, you know, cause I’ve worked in a lot of offices and I tell you people do that all the time.

According to this SEC Litigation Release, the co-chairman of SINA Corp. (Daniel Chiang), and his wife, the CEO of Trend Micro Incorporated, engaged in illegal insider trading by selling SINA stock short while in possession of material, non-public information about internal SINA projections that SINA’s first quarter 2005 revenues would decline significantly.

The SEC’s complaint alleges that on Friday, February 4, 2005, Chiang participated in a SINA Board of Director’s meeting where he learned confidential information that SINA was going to disclose lower than expected revenue projections. On the morning of Monday, February 7, 2005, the co-chairman placed orders to sell short a total of 200,000 shares of SINA securities in his wife’s mother’s account. Due to the limited buying power in the account, however, only 70,000 shares of SINA were sold short in the account.  After the close of the market on February 7, SINA announced that it was expecting a revenue shortfall, and its stock price dropped approximately 26%.  The SEC alleges that as a result of his unlawful insider trading, Chiang realized $257,833 in ill-gotten gains.

Simultaneously with the filing of the complaint, the SEC announced a settlement with Chiang that, among other things, bars him from serving as an officer or director of a public company for a period of five years, and requires him to pay disgorgement of $257,833 and a civil penalty of $257,833.

About the only good news here for Chiang is that it appears that if he had successfully sold all 200,000 shares short, his disgorgement and civil penalty would both have been about three times higher.