It’s very common to discuss business over a round of golf, but in one case, an invitation to play golf was actually an attempt to conceal a crime.

Robert Stewart, a certified public accountant, had something else entirely on his mind when he sent an email to his friend about “an opportunity to play golf”: insider trading.

But Stewart’s foray into fraud didn’t work. Last summer, Stewart, pled guilty to participating in a conspiracy to trade on inside information that yielded more than $1 million in ill-gotten gains over a four-year period.

Stewart’s subterfuge isn’t all that surprising: People who engage in insider trading often go to great lengths to cover their tracks. In one recent notorious case, a tipster regularly passed material non-public information to a co-conspirator by flashing a ticker symbol on a post-it note to the co-conspirator during face-to-face meetings in the middle of Grand Central station…and then the tipster proceeded to eat the note each time they met to hide the evidence.

Still, despite near constant headlines of people getting caught for trading on inside information, some individuals like Stewart continue to believe they can get away with it. As the Stewart case and many others show, securities fraud investigators are very good at rooting out insider trading, despite crafty attempts by the perpetrators to conceal their illicit activities.

The Subterfuge

Stewart’s insider trading scheme was allegedly a family affair dependent upon information obtained from his son, a young investment banker. It also allegedly involved a family friend, Richard Cunniffe, and an ambitious plan that the three co-conspirators believed was a fool-proof way to cover their tracks.

Over the course of four years, Robert’s son, Sean Stewart, who worked on confidential mergers and acquisitions transactions in the healthcare industry, allegedly provided his father with non-public information ahead of at least six deals, according to the criminal complaint.

Looking to exploit the inside information and to distance himself from the source of the tips, Robert Stewart solicited the help of his friend Cunniffe. Cuniffe would monetize the information obtained from the Stewarts by using his own brokerage account to place trades in shares of the companies about to be acquired.

Robert Stewart and Cunniffe knew they had to be careful in their communications, so to obfuscate what they were talking about, they developed a code. Being avid golfers, they would email each other about tee times, when they were really talking about the timing of big corporate announcements.

“Might have an opportunity to play golf but would need to book the reservation as soon as the office opens Tuesday morning,” Robert Stewart wrote in an email to Cunniffe according to U.S. Attorney’s Office’s criminal complaint. “Let me know if you have time to discuss and if necessary I might be in the area tomorrow.”

After the trades were placed and profits cashed out, Cunniffe would dole out Robert Stewart’s share over time, in small, mostly cash increments, according to the criminal complaint, to avoid leaving a paper trail.

But despite his best efforts to conceal the insider trading scheme, and unknown to Robert Stewart, the Financial Industry Regulatory Authority (FINRA) was already reviewing the electronic trading footprints that would lead to Stewart’s downfall.

FINRA on the Trail

FINRA’s Office of Fraud Detection and Market Intelligence (OFDMI) conducts surveillance for potential fraud and misconduct in U.S. markets. The data-driven surveillance includes sophisticated analysis of trading activity across U.S. equity and options markets surrounding material news announcements for evidence of potential insider trading.

OFDMI combines cutting-edge data analytics and old-school detective work to identify people who make well-timed, suspicious trades. If trading in a company’s securities spikes in the days or hours before a major announcement, FINRA’s surveillance will flag that unusual activity. FINRA investigators will then leverage that data extensively as they put together an “Identification List” of people who placed the well-timed or suspicious trades.

That Identification List becomes an important part of the investigative process, as FINRA’s staff will share that list with all players in a major news event under review, demanding full cooperation in identifying people on that list.

In the case of M&A announcements, the Identification List is provided not just to the companies — and their employees — involved in the deal, but also to the investment banking firms, law firms, accounting firms and other outside groups that helped seal the deal. Recipients of the list are then asked to identify anyone they know on the list and, if so, what communications they had with those identified.

“The identification list protocol is a critical aspect of our investigation,” said Cameron Funkhouser, the head of OFDMI at FINRA. “Persons presented with the list may have information to help us identify potential insider trading and we expect forthright answers.”

“If someone makes a decision not to identify someone on the list or doesn’t provide complete answers, that person is very likely to have a potential SEC and criminal problem,” he said.

If OFDMI suspects certain individuals or entities that are outside of FINRA’s jurisdiction are engaged in potential insider trading, it refers the matter to the Securities and Exchange Commission’s Office of Market Intelligence. Last year, FINRA sent over 400 insider trading referrals involving equities and options to the SEC.

Cracking the Stewart Scheme

FINRA’s investigation into trading surrounding a clinical research company called Kendle began back in 2011.

At the time, Robert Stewart had just traded in Kendle stock based on material non-public information he had received from his son, Sean Stewart, who had worked on the deal as an employee at an investment bank, according to the SEC. Robert made $7,900 on the timely trade—which was flagged by OFDMI investigators.

Following its protocol, FINRA provided Sean Stewart’s employer, J.P. Morgan, an Identification List containing the names of individuals who had traded in Kendle in advance of the deal—including the name of Robert Stewart. It was then J.P. Morgan’s duty to show the Identification List to all its employees and outside contractors involved in the transaction, which included Sean Stewart, and to require their employees to identify anyone on that list with whom they were familiar. Sean failed to identify his father’s name, Funkhouser said.

Incredulous OFDMI investigators, with a strong belief that Robert and Sean were related, requested JP Morgan present the list to Sean again. When asked the second time, he noted his father’s name on the list, and he said he previously “overlooked it.” Soon afterward, Sean “ceased to work” for J.P. Morgan, according to the SEC complaint.

Undeterred, Sean Stewart moved on to another investment bank and he continued to supply his father with illegal tips, according to the SEC and the U.S. District Attorney for the Southern District of New York.

At one point, Sean Stewart even informed his father that he had given him a tip on a “silver platter” that his father failed to exploit, according to the U.S. Attorney’s Office complaint. Ultimately, the scheme unraveled when Cunniffe agreed to cooperate with the authorities, recording meetings he had with Robert Stewart.

With the lead from FINRA, the FBI and the SEC conducted an extensive investigation exposing critical evidence of the scheme. The SEC and U.S. District Attorney for the Southern District of New York filed civil and criminal actions, respectively, against the three co-conspirators in May.

Cunniffe pled guilty to the charges in May. Robert Stewart pled guilty in August.

“Instead of teaching his son lessons of right and wrong, Robert Stewart worked with him to break the law by trading on non-public information and sharing in the benefits with him,” U.S. Attorney Preet Bharara said in a statement at the time. “Robert Stewart’s criminal actions — to which he has pled guilty today — perpetuate the unfortunate perception that the markets are rigged in favor of those with connections.”

Sean Stewart has filed a motion to dismiss the indictment. The SEC’s case against the Stewarts has been stayed pending the outcome of the criminal case.

“The SEC and the criminal authorities did a tremendous job exposing the Stewart scheme,” Funkhouser said, noting that the case is a prime example as to how concealed insider trading is exposed.

“Our insider trading surveillance program goes 24/7,” Funkhouser said. “Those who believe they can go undetected always leave a footprint and we and our co-regulators will connect the dots.”