Is This Insider Trading?

[Soya]

As others have pointed out, 2 & 3 are not insider trading, but I think there is a strong case that situation 1 violates Rule 10b-5. You have a fiduciary duty to the shareholders of your company and that duty prevents you from profiting from material, non-public information. If you use that information for you own gain in connection with the purchase or sale of a security, you have defrauded the principal's out of its right to exclusive use of that information in a way that triggers 10b-5. This is known as the misappropriation theory of insider trading and, even though it is vague and a real stretch of the language of 10b-5, it is used with regularity.
I actually know of a situation that mirrors hypo 1--we looked for cases and couldn't find any. Nevertheless, we counseled that there was a real danger of liability for misappropriation.
In this situation the SEC or DOJ would almost certainly file a complaint and, unless you had a lot of resources, one would do well to plea to any reasonable offer.

[pig4bill]

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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.

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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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Because juries are stupid? A couple of the idiot jurors went on tv right after the Martha Stewart trial. They thought they convicted her of insider trading.

[Todd Terry]

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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.

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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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Scenario #1 - Baconovic told Stewart only that Waksal was selling, and Waksal did not tell Bacanovic to tell Stewart. Bacanovic had a fiduciary duty to Waksal, violated it by telling Stewart, Stewart knew he violated it because she's a former broker. Misappropriation theory insider trading.

Scenario #2 - It's not a coincidence that Bacanovic told Stewart, a good friend of Waksal, immediately after speaking to Waksal, Waksal must have instructed Bacanovic to tell Stewart. If Stewart didn't have actual knowledge that Waksal was selling based on inside information, she was willfully blind to that fact (especially as a former stockbroker). Classic tipper/tippee insider trading through an intermediary.

In presenting either or both scenarios, and in the absence of a witness as to exactly which happened I'd present both (if Waksal didn't tell Bacanovic to pass the information along, she's guilty under #1, if he did, she's guilty under #2) use her after-the-fact lies as as consciousness of guilt evidence. Not a slam dunk, but a very winnable case.

[pig4bill]

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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.

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Yup, and the Feds know how to play dirty. They would throw you in jail, seize your assets so you can't make bail, harass your business associates to ruin your reputation, and basically drag out the case to wipe you out financially. They can ruin your life without even having a trial.

[Jonathan]

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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.

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1.Yes
2. Yes
3. Yes

[iversonian]

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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.

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1.Yes
2. Yes
3. Yes

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Yeah, let me just ignore everything else that's been said in this thread and go with Jonathan's answers. He seems to know what he's talking about.

[Jonathan]

I posted my gut reaction before reading any of the other responses.
After reading them, I learned something.

[Rotating Rabbit]

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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.

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1.Yes
2. Yes
3. Yes

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Im doing CFA level 3 and i believe the CFA answers would be yes, yes, yes as well.

For anyone whose interested, the cfa definition is to the best of my memory "if you ACT with the intention of profit with the use of MATERIAL, NON PUBLIC information" its bad.

In all these cases, the information is surely both material and non public.

[DesertCat]

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Im doing CFA level 3 and i believe the CFA answers would be yes, yes, yes as well.

For anyone whose interested, the cfa definition is to the best of my memory "if you ACT with the intention of profit with the use of MATERIAL, NON PUBLIC information" its bad.

In all these cases, the information is surely both material and non public.

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If the CFA program says that, then I believe it isn't trying to teach you what the law is, it's trying to guide you to ethical behavior. The actual law is very murky on what is illegal and prosecutors/SEC like it that way. This whole discussion is partly driven by the ambiguity of insider trading laws.

[stinkypete]

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Im doing CFA level 3 and i believe the CFA answers would be yes, yes, yes as well.

For anyone whose interested, the cfa definition is to the best of my memory "if you ACT with the intention of profit with the use of MATERIAL, NON PUBLIC information" its bad.

In all these cases, the information is surely both material and non public.

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If the CFA program says that, then I believe it isn't trying to teach you what the law is, it's trying to guide you to ethical behavior. The actual law is very murky on what is illegal and prosecutors/SEC like it that way. This whole discussion is partly driven by the ambiguity of insider trading laws.

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the correct CFA answers for 2 and 3 would definitely be no. for 1, i'm not sure.