The acronym of the day is EDGAR, which stands for Electronic Data Gathering Analysis and Retrieval.
It’s a platform created and run by the Securities and Exchange Commission. It could also be known, though, as the latest hacking victim in this economy. The SEC made the disclosure late last night that it'd been breached and added that it's possible some insider trading was done as a result.
John Reed Stark was an enforcement attorney at the SEC for 15 years and is now president of a consulting firm. Marketplace host Kai Ryssdal spoke with Stark about the EDGAR breach. Below is an edited transcript of their conversation:
Kai Ryssdal: Give me a layman's explanation of what EDGAR is, would you? Just so we all know what we're talking about.
John Reed Stark: Sure, that's just a place that the SEC set up — actually pioneered at the time — where companies could make their public filings to the SEC, like annual reports, earnings reports, executive information, other kinds of data.
Ryssdal: It also includes some nonpublic information?
Stark: Yes it may. It really depends on the type of information that's flowing.
Ryssdal: OK. So when you see the phrase, as we saw in the SEC statement about this hack, “possible illicit trading” what kind of bells and whistles go off in your mind?
Stark: Well first, I was really impressed with the disclosure in the sense that they actually disclosed the worst case scenario of this information being made public, which is that a ring of insider traders could somehow access that information and then use it to trade ahead of its own release.
Ryssdal: And just to be clear that's a big no no. You can't do that.
Stark: Yeah but the law is pretty clear. You can't trade on material nonpublic information. You have a duty to either disclose or abstain from trading if you know that kind of information.
Ryssdal: Do me a favor and put me inside the mind of an enterprising hacker who knows he can get inside the EDGAR database. What does he or she look for and then what do they do with that information?
Stark: Oh gee, that's a tough one. You know, it's sort of like when someone comes into your house and wants to rob your house and then you come home and you see your drawers and everything are scattered everywhere and it's really haphazard. My experience with different hackers and attackers is they sort of rummage through everything and look for anything that they can find, and then they might later on look at that data and maybe sell it to somebody else or maybe use it for something else. As far as insider trading goes, any time you know information, the material information that the public doesn't know, you're going to have an advantage in terms of trading. Whether you can actually use that advantage to profit is another story. It's not so easy to conduct insider trading, it also has its own risks. And remember you, leave an audit trail when you do that so you might get caught.
Ryssdal: Right. You brought up something interesting there: it's entirely possible if not likely that the hackers were not the traders.
Stark: Oh absolutely. Exactly. Yeah. In fact, you know most of the time there's just multiple layers of these kinds of organizations and they're loosely connected and the person that steals it isn't necessarily the person that uses it or exploits it.
Ryssdal: Let me get back to the macro picture here then for a second, forgetting the fact that all of our data is already out there. If I am a mom and pop investor or even a small but sophisticated investor, what's my interest level in knowing that the EDGAR database has been breached?
Stark: Well I think in general if you trade in the marketplace you need to have faith that there's integrity in that marketplace and that's why the SEC is there. That's why there's a whole specialized set of regulations that make sure that everything that goes on in the marketplace is fair and above board. So any time there is a disturbance or a disruption along those lines, I think you're going to be concerned and you're going to be hesitant. But in the end, I think you'll probably still be confident in the markets and you'll still trade as you normally would.