[Todd Terry]

[ 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).