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-   -   Is This Insider Trading? (http://archives1.twoplustwo.com/showthread.php?t=553345)

David Sklansky 11-24-2007 05:22 AM

Is This Insider Trading?
 
1. Favorable clinical trials at my company haven't been announced yet. So I can't buy the stock. But I short a competitor's stock.

2. I'm at a pay phone and I overhear the president of IBM lamenting the surprisingly bad earnings for this quarter as he speaks to the chairman on the neigboring phone. I short IBM.

3. I hear two apparent terrorists in the neigboring booth at a restaurant talk about throwing a bomb into the Wynn casino every day for a week. I notify the FBI but I also short the stock.

maxtower 11-24-2007 05:29 AM

Re: Is This Insider Trading?
 
Sounds like you have a short tip for us.

john kane 11-24-2007 06:08 AM

Re: Is This Insider Trading?
 
deleted by john kane as don't think it is wise to try to level sklansky, it will end out not working or backfiring.

john kane 11-24-2007 06:11 AM

Re: Is This Insider Trading?
 
as for what i think though:

1. most likely of the three, given it is non public info, but id say no given it is your judgement that competitor's stock will fall.

2. no. it is IBM president's thoughts, not facts.

3. again it may not happen, so no.

soko 11-24-2007 07:02 AM

Re: Is This Insider Trading?
 
[ QUOTE ]
1. Favorable clinical trials at my company haven't been announced yet. So I can't buy the stock. But I short a competitor's stock.

2. I'm at a pay phone and I overhear the president of IBM lamenting the surprisingly bad earnings for this quarter as he speaks to the chairman on the neigboring phone. I short IBM.

3. I hear two apparent terrorists in the neigboring booth at a restaurant talk about throwing a bomb into the Wynn casino every day for a week. I notify the FBI but I also short the stock.

[/ QUOTE ]

I read through the Insider Trading Wiki and feel I have good enough understanding to answer the questions.


1. I would say this is not illegal insider trading. You have no fiduciary relationship to the shareholders of your competitors stock and you are not in possession of any non-public information pertaining to your competitors stock.

2. Quote from Insider Trading wiki: Not all trading on information is illegal inside trading, however. For example, while dining at a restaurant, you hear the CEO of Company A at the next table telling the CFO that the company will be taken over, and then you buy the stock, you wouldn't be guilty of insider trading unless there was some closer connection between you, the company, or the company officers.

3. Agian, you have no fiduciary relationship to the shareholders of Wynn and therefore are able to trade legally.

DonButtons 11-24-2007 10:58 AM

Re: Is This Insider Trading?
 
Id say no for 2 and 3. At least its almost impossible to get caught.

I think its harder to get action shorting a company then one thinks. Ive tried for smaller companies which I didnt get any. Unless its huge, like IBM, its not easy in my short experience.

Todd Terry 11-24-2007 11:53 AM

Re: Is This Insider Trading?
 
[ QUOTE ]
1. Favorable clinical trials at my company haven't been announced yet. So I can't buy the stock. But I short a competitor's stock.

2. I'm at a pay phone and I overhear the president of IBM lamenting the surprisingly bad earnings for this quarter as he speaks to the chairman on the neigboring phone. I short IBM.

3. I hear two apparent terrorists in the neigboring booth at a restaurant talk about throwing a bomb into the Wynn casino every day for a week. I notify the FBI but I also short the stock.

[/ QUOTE ]

Answer from a former criminal defense attorney:

Number 1 is very interesting. As insider trading is currently defined, which requires trading in the stock for which you have the inside information, among other things, this would not qualify. However, insider trading is not well-defined, over the course of the last 30 years it has often been redefined to the detriment of criminal defendants (which isn't supposed to happen in our country, ex post facto), so I can envision a criminal, or SEC civil, action being brought asking for an expansion of insider trading to include this, and I suspect the SEC/US Attorney's Office would prevail because the rationale underlying the prohibition against insider trading would apply to these facts. I haven't specifically researched insider trading law in the last couple years, so perhaps this issue has already been adjudicated, but I'm pretty sure I would have read about somewhere it if it had.

Number 2 is identical to a classic insider trading case, SEC vs. Barry Switzer, of all people. Barry was in the stands at some sort of high school sporting event and overheard a conversation involving the principals of some company and then made money buying the stock. The court held that this was not insider trading, since insider trading requires wrongdoing by the insider -- either deliberately trading with knowledge of the inside information, or deliberately passing it on to someone else with the intent of having them trade. Liability for tippees, recipients of inside information, is purely derivative, meaning that the tipper must be guilty of something for the tippee to be guilty of something.

Number 3 would not qualify as insider trading for the same reason as number 2 -- information was overheard, not deliberately passed on. Also, the terrorists are not insiders of Wynn, so the reasons underlying why number 1 does not currently constitute insider trading would apply.

Of course, the "overhearing" defense will only be as successful as you are in convincing the fact-finder that it's true (actually, the other side would have to convince the fact finder that it's false, but especially in a civil SEC enforcement case where the burden of proof is a preponderance (> 50%), it's effectively the same thing).

DesertCat 11-24-2007 12:34 PM

Re: Is This Insider Trading?
 
I think Todd Terry is the expert, but let me point out that you might not even face real prosecution on #1, because the govt would loath losing a case like that and have a judge set a precedent. But they might threaten you and try to get you to plea bargain. That makes a public example for other would be copycats. Not sure a good criminal defense lawyer would recommend you plea though, he might laugh at the govt case and itch to set a precedent against their over-reaching.

Todd Terry 11-24-2007 12:45 PM

Re: Is This Insider Trading?
 
[ QUOTE ]
I think Todd Terry is the expert, but let me point out that you might not even face real prosecution on #1, because the govt would loath losing a case like that and have a judge set a precedent. But they might threaten you and try to get you to plea bargain. That makes a public example for other would be copycats. Not sure a good criminal defense lawyer would recommend you plea though, he might laugh at the govt case and itch to set a precedent against their over-reaching.

[/ QUOTE ]

This is a good point in general. The Government often prefers to let the law remain murky rather than risking the setting of a precedent against them. Martha Stewart is a good example of this -- they had IMO a perfectly winnable case of insider trading against her and Baconovic, but chose not to pursue it. That being said, I'm fairly sure they would go after the person in Number 1, at least civilly. If they brought a criminal case, I would recommend fighting it all the way to the Supreme Court if necessary.

DesertCat 11-24-2007 07:05 PM

Re: Is This Insider Trading?
 
[ QUOTE ]

Martha Stewart is a good example of this -- they had IMO a perfectly winnable case of insider trading against her and Baconovic, but chose not to pursue it.

[/ QUOTE ]

I'm surprised you say this. I've been told that not only was her actions not insider trading in that she had no fiduciary obligations and didn't have any material non-public information, she just knew the CEO was selling (and that she was a former stockbroker who should have known this). So instead they went after her for blatantly lying to investigators. Why do you view it differently?


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