Wharton Forensic Analytics Lab
Imagine a world where academics, practitioners, and regulators came together and had meaningful conversations about the ways in which data analytics can detect and prevent white-collar crime. The Wharton Forensic Analytics Lab (WFAL) aims to be the world’s foremost source of research and teaching expertise on the application of data analytics to issues related to insider trading, financial irregularities, and white-collar crime. Research by WFAL’s award-winning faculty has been cited numerous times in academic and popular business media and has quickly become a reliable source for policy-makers and regulatory bodies, including the SEC. WFAL envisions a virtuous cycle of research informed by practitioner needs, and practice grounded in scientific evidence––disrupting the siloes of academia to foster real-world change.
Holding Foreign Insiders Accountable
The Economics of Misreporting and the Role of Public Scrutiny
Audit Process, Private Information, and Insider Trading
Gaming the System: Red Flags of 10B5-1 Abuse
Undisclosed SEC Investigations
Political Connections and the Informativeness of Insider Trades
In 2017, Luckin Coffee quickly emerged as the fastest-growing coffee company in China. Within two years it was set to disrupt the coffee industry––it had surpassed Starbucks’ store count and was listed on the NASDAQ. Luckin’s growth story looked limitless.
In late 2019, an activist short seller released a report raising doubts about NMC Health’s financial reporting. NMC’s board subsequently initiated an internal investigation and disclosed that debt was under-reported by $4.5b.
In August of 2017, a German business magazine reported that Steinhoff’s CEO and a handful of other executives were being investigated for accounting fraud. Subsequent news stories and increasingly odd and frenzied corporate actions in the following months added to investors’ concerns.
Gaming the System: "Red Flags" of Potential 10b5-1 Abuse
In this Closer Look, we present new evidence on the trading behavior of corporate executives using a unique dataset of over 20,000 10b5-1 plans, including their associated adoption dates and trades. We show that a subset of executives use these plans to engage in opportunistic, large-scale selling that appears to undermine the purpose of Rule 10b5-1. We identify three “red flags” associated with opportunistic use of 10b5-1 plans. (1) Plans with a short cooling-off period. (2) Plans that entail only a single trade. (3) Plans adopted in a given quarter that begin trading before that quarter’s earnings announcement. Sales made pursuant to these plans avoid significant losses, and anticipate considerable stock price declines that are well in excess of industry peers.
The Spread of COVID-19 Disclosure
Investors rely on corporate disclosure to make informed decisions about the value of companies they invest in. The COVID-19 pandemic provides a unique opportunity to examine disclosure practices of companies relative to peers in real time about a somewhat unprecedented shock that impacted practically every publicly listed company in the U.S. We examine how companies respond to such a situation, the choices they make, and how disclosure varies across industries and companies.
Governance of Corporate Insider Equity Trades
Corporate executives receive a considerable portion of their compensation in the form of equity and, from time to time, sell a portion of their holdings in the open market. Executives nearly always have access to nonpublic information about the company, and routinely have an information advantage over public shareholders. Federal securities laws prohibit executives from trading on material nonpublic information about their company, and companies develop an Insider Trading Policy (ITP) to ensure executives comply with applicable rules. In this Closer Look, we examine the potential shortcomings of existing governance practices as illustrated by four examples that suggest significant room for improvement.
Follow the Money: Compensation, Risk, and the Financial Crisis
This Closer Look illustrates the relation between executive compensation and organizational risk through the context of the financial crisis of 2008. We demonstrate that the incentives that bankers had to increase firm risk not only increased but increased substantially in the years preceding the financial crisis. We ask: How well do boards understand the relation between compensation and risk? How much attention do directors pay to the risk-taking incentives provided by CEO wealth? Do boards consider the relation between incentives and the risk tolerance of the firm? How much risk should an executive be encouraged to take?
This course will cover three applications of forensic analytics to publicly-traded companies: (i) forecasting future earnings, (ii) predicting accounting fraud, and (iii) detecting insider trading. The course will draw on cutting-edge academic research in each area; introduce students to the basic SQL coding skills necessary to manipulate Big Data and conduct meaningful analyses; and leverage the datasets and computing power of Wharton Research Data Services.
Op-ed: How the SEC Can and Should Fix Insider Trading Rules
Large, seemingly well-timed stock sales by executives at Pfizer, Moderna and others have garnered significant attention. The companies quickly defended their executives by pointing out that many of these stock sales were preplanned, according to a “10b5-1 plan.” In theory, these plans allow insiders who are not in possession of material non-public information to commit to a series of trades well in advance of market-moving events and provide “safe harbor” against violations of securities laws. If used as intended, these plans provide corporate insiders with a tool to trade their shares and obtain liquidity without raising legal concerns. But like any tool, these plans can be misused. Our research shows that the recent examples are the tip of the iceberg.
Op-ed: Insider Trading Loopholes Need to Be Closed
Current rules still allow executives to time their share sales to maximize gains. Caroline Crenshaw, SEC Commissioner, and Daniel Taylor, Associate Professor of Account at The Wharton School see a “cooling off period” as one solution.
Amicus Curiae in Support of Claims that Modern Technology Enables Share Tracing
Co-authored with a dozen law faculty authoring in support. Discusses how an individual can use FIFO methods and modern computing technology to trace the flow of securities using bluesheet and CAT feeds
Amicus Curiae in Support of Claims that Engineered Short Squeezes are a Form of Market Manipulation
Co-authored with six other law faculty authoring in support. Discusses how management engineered short squeezes can be considered a form of market manipulation.
Amicus Curiae in Support of Claims that SPACs are Not Valued as Operating Companies
Lead author; 30 academics authoring in support. Discusses valuation and compensation issues surrounding SPACs.
Amicus Curiae in Support of Claims that 10B5-1 Trading Plans Can Be Probative of Scienter
Lead co-author. Discusses how executives’ knowledge of pre-arranged stock sales during the class period can influence their decision-making, even though the sales themselves were arranged prior to the class period.
Rulemaking Petition to Modernize Lockups Requirements Pursuant to Rule 144
We ask that the SEC amend Rule 144 in light of changes in securities-offering practices and the Supreme Court’s consideration of Slack v. Pirani, addressing Section 11 liability in direct listings. Specifically, the Commission should amend Rule 144 such that, upon the effectiveness of a registration statement, holding periods are reset to the later of: (1) 90 days or (2) the next 10-Q or 10-K.
Rulemaking Petition to Require Public Companies to Disclose Public Companies’ Investments in their Workforce
We ask that the Commission develop rules to require public companies to disclose sufficient information to allow investors to assess the extent to which firms invest in their workforce.
Commentary on the SEC's Proposed Amendments to Rule 144 and Form 144
We support the Commission’s proposal to modernize Form 144. Under the current rule, 99.3% of Form 144s are filed on paper every year (over 700,000 from 2001 to 2020). The Commission’s current practice is to retain hard copies of these paper filings for 90 days in the Commission’s Public Reading Room in Washington DC and not post them on EDGAR (see Exhibit 1 for an example of a Form 144). This arcane practice would be of little consequence if the information contained in Form 144s was of no interest to investors; on the contrary, the demand for information on these Form 144s is sufficiently high that data providers regularly visit the Reading Room to scan, digitize, and disseminate Form 144s to corporate clients. As a result, data on over 700,000 Form 144s is available from third-party data providers (e.g., The Washington Service and Thomson/Refinitiv) but not EDGAR. In effect, the Commission has created a two-tiered disclosure system that makes “public disclosure” accessible to large institutional clients, but inaccessible to individual investors. The Proposal would end this practice by mandating Form 144 be filed electronically on EDGAR.
Paper filings do not protect investors, do not promote efficient and fair markets, and do not promote capital formation. Electronic reporting does all three––it ensures the public, capital providers, and the Commission have timely access to information about officers’ and directors’ transactions and data on their associated 10B5-1 plans.
Commentary on the SEC's HFCA Act Disclosure and Identification of Non-compliant Issuers
We provide analysis and comments with the intent of helping the SEC identify issuers that have filed an annual report containing an audit report by a public accounting firm that is located in a foreign jurisdiction where the PCAOB is unable to inspect or investigate the audit. We identify 226 issuers that meet the non-inspection criteria as defined within the HFCA Act, and an addition 44 issuers with unique situations that may require additional guidance from the SEC. These issuers have a combined market cap. in excess of $2 trillion. We also analyze and discuss current issuer disclosures relating to the inability of the PCAOB to inspect the issuer’s audits, and find that issuers are generally not providing the detailed disclosures necessary to comply with the HFCA Act.
Commentary on the SEC's Proposed Exemption to Internal Control Audits under SOX 404(b)
We comment on the Securities and Exchange Commission’s (the “Commission”) proposed Amendments to the Accelerated Filer and Large Accelerated Filer Definitions. We provide comments and analysis relating primarily to the Request for Comments in Sections II.E and III.D of the proposed Amendments (“Proposal”). Our comments relate to the provisions of the Proposal that would eliminate internal control audits required under Section 404(b) of the Sarbanes-Oxley Act for companies with annual revenue less than $100 million. Part I provides comment on the central premise of the Proposal. Part II provides comments on various aspects of the Commission’s economic analysis. Although it might be socially desirable to encourage investment, and research and development, we believe there are ways to do so without sacrificing oversight.
Commentary on the SEC's Proposed Reporting Threshold for Institutional Investment Managers
We comment on the SEC’s Proposed Reporting Threshold for Institutional Investment Managers (“Proposal”). We estimate the cost savings from the Proposal are economically small, and amount to 0.004% (0.008%) of assets under management for the average (median) affected filer, and 0.02% of assets for the smallest filer. This small cost savings needs to be weighed against the potentially large costs to investors and others created by eliminating a public disclosure that they heavily use. We analyze the usage patterns of the EDGAR system, and specifically the frequency of Form 13F downloads from EDGAR. Our analysis suggests the investing public and other stakeholders are strongly interested in the information in Form 13F filings, particularly those of affected filers, and that exempting such institutions from filing Form 13F would deprive the market of useful information.
SEC Investor Advisory Committee
The Spread of COVID-19 Disclosures
SEC Investor Advisory Committee
Tutorial of 10B5-1 Plans, Disclosures, and Academic Evidence
Holding Foreign Insiders Accountable
SVB CEO Sold $3.6 Million in Stock Days Before Bank’s Failure | Bloomberg
New SEC Rules Target Corporate Insider Trading | The Wall Street Journal
Elon Musk defends his old tweets in securities fraud trial | CNBC
SEC Toughens Insider Trading Rules for Execs, Limits Protections | Bloomberg
Carvana’s CEO’s Net Worth Skids But His Dad, Who Controls Company, Is Worth Nearly $3 Billion | Forbes
FTX Auditors Doubled as Crypto Industry Cheerleaders | The Wall Street Journal
Ryan Cohen’s Bed Bath & Beyond Stock Sales Highlight Gray Area in Disclosure | The Wall Street Journal
Why Bed Bath & Beyond shares surged this week, then fell | The New York Times
SoftBank raises $22bn in moves to sell down Alibaba state | Financial Times
CEO Stock Sales Raise Questions About Insider Trading | The Wall Street Journal
SEC Forces Executives to Put Trading Plans Online | Bloomberg
Airbnb Founders Have Sold More Than $1 Billion Worth of Stock | Forbes
Carvana Insiders Including The CEO’s Billionaire Father are Buying Up Shares As Stock Hits Lows | Forbes
Carvana’s ‘Chaotic’ Zoom Firing Caps Company’s Struggles Amid Market Downturn | Forbes
Elon Musk proves once again that the rules don’t apply to him | CNN
Musk Stuff | Bloomberg
Elon Musk’s Belated Disclosure of Twitter Stake Triggers Regulators’ Probes | The Wall Street Journal
US investors take aim at insider share sale plans | Financial Times
Chinese Executives Sell at the Right Time, Avoiding Billions in Losses | The Wall Street Journal
Moderna CEO has sold more than $400 million of company stock during the pandemic | NBC News
Accountant Shortage, Resignations Fuel Financial Reporting Risks | Bloomberg
Peloton insiders sold nearly $500 million in stock before its big drop | NBC News
Lax rules are allowing corporate fat cats to dump stock | Financial Times
Executive Stock Sales Face More Scrutiny as SEC Tightens Rules | Bloomberg
SEC’s Stunning Trial Loss Rattles Its Insider Trading Strategy | Law360
U.S. SEC to tighten insider trading rules, boost money market fund resilience | Reuters
SEC Proposes Tighter Rules on Insider Trading, Stock Buybacks | The Wall Street Journal
SEC Floats Rules to Shore Up Money Markets, Curb Insider Trading | The Wall Street Journal
Elon Musk, Other Leaders Sell Stock at Historic Levels as Market Soars, Tax Changes Loom | The Wall Street Journal
How China’s tech bosses cashed out at the right time | Financial Times
Money Stuff: Insiders Are Good at Trading | Bloomberg
Redditors Are Right About the Unfairness of the Market | Bloomberg
‘Most Americans Today Believe the Stock Market Is Rigged, and They’re Right’ | Bloomberg
CEO’s Dad Gets a $3.6 Billion Stock Windfall at Carvana | The Wall Street Journal
SEC Is Investigating Electric Delivery-Truck Maker Workhorse | The Wall Street Journal
SEC’s ‘Shadow Trading’ Suit Dives Into Murky Area Of Law | Law360
Executive Stock Sales Are Under Scrutiny. Here’s What Regulators Are Interested In. | The Wall Street Journal
Corporate insiders’ well-timed share sales raise concerns | Financial Times
Sens. Push Bill To Tighten SEC’s Insider Trading Rules | Law360
Lordstown Motors Executives Sold Stock Ahead of Reporting Results and Before Troubles Came to Light | The Wall Street Journal
SEC’s Eye on Exec Trading Plans Should Keep Issuers Wary | Law360
SEC aims to stop insiders dumping stock before the bad news hits | Financial Times
SEC targets corporate insider-trading loopholes with potential rules, enforcement review | Reuters
Corporate Bosses Make Well-Timed Stock Sales in SEC ‘Blind Spot’ | Bloomberg
Moneystuff: 10b5-1 plans | Bloomberg
SEC Chair Aims To Seal ‘Cracks’ In Exec Insider Trading Rules | The Hill
SEC Chairman Calls for New Restrictions on Executive Stock-Trading Plans | The Wall Street Journal
No one is policing corporate America, and white-collar crime is on the rise | Business Insider
Under Armour founder sold $138 million in stock during time period company allegedly misled investors about slowing sales | The Washington Post
PwC to Defend Audit Work, Independence in Whistleblower Trial | Bloomberg Tax
Novavax Bosses cash out $46 mln with COVID-19 | Reuters
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- Creating and disseminating academic research to media, practitioners, and regulators, translating research for the public
- Creating and disseminating new tools and technologies to academics and the private sector, making research actionable
- Creating and disseminating teaching and educational materials to academics and current/prospective students, ensuring experiential, relevant learning experience based on true-to-life cases
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Our dedicated team of faculty, scholars, and staff are committed to advancing research and teaching in forensic analytics.
A tenured professor at The Wharton School, Dr. Taylor is an award-winning researcher and teacher with extensive expertise on issues related to corporate SEC filings, fraud detection, insider trading, and corporate governance. A world-renown scholar, Professor Taylor has written more than 20 articles on these topics published in the leading academic journals in accounting, finance, and management; led seminars at over 100 leading business schools across the globe; won numerous academic and industry awards; and serves on the editorial boards of several top academic journals.
Professor Taylor’s research targets practitioners and regulators, and aims to have direct relevance to current issues facing boards and shareholders. His research is frequently cited in business media, in trade publications, and in rules and regulations promulgated by the Securities and Exchange Commission. His research has been presented at multiple regulatory and enforcement agencies including the SEC, the Public Company Audit Oversight Board, and the Southern District of New York; and has informed multiple investigations by the FBI, Treasury, and Department of Justice.
Professor of Accounting
Arthur Andersen Chair
Director, Wharton Forensic Analytics Lab
Bradford is a researcher at The Wharton School interested in how information affects beliefs and decision making, particularly in the realm of ethics and social welfare. Prior to joining Wharton, he used his knowledge of engineering, computer science, and business to invent new technologies, reduce product development cycles, and improve investment efficiency.
While working for Cummins, Bradford invented a safety technology which is now deployed on millions of heavy-duty trucks throughout China. At the leading automotive simulation suite provider, he developed new fluid dynamics models which accelerated analyses 100x, thereby enabling engineers to better optimize designs. After Microsoft’s hardware group wrote off over $1B in capital equipment, he built a customer behavior driven model of investment to identify optimal investment levels, highlighting opportunities to reduce capital expenditures by more than 60%. As a manager at Amazon Alexa, he was the lead inventor on multiple patents facilitating interactions between autonomous agents and was responsible for the products of several teams including metrics and analytics, engagement, and voice enabling the web.
University of Chicago
New York University Law
University of Miami