Bill Gates/Insider Trading

  • What is the exact definition of insider trading? I realize that there is a limit on how much MS stock Bill can part with in a given period, but some friends and I were discussing insider trading. We are also familiar with the concept of conflict of interest/controlling entities. Our best definiton of insider trading was obtaining priviledged information pertinent to stock valuation, something we guessed would require at least two people, or a single person with access to private documents/info systems, etc. What if an individual could simply influence stock price by sheer volume? This was offered as an example: Bill sells 5% (or whatever the limit is) of his MS stock. The price dips accordingly (presumably about 5%, very possibly more). He then repurchases stock with the money he profited by selling earlier. What’s wrong here? I realize that if it were legal, he couldn’t get away with this very often before people didn’t care what he bought or sold. When a single individual has enough stock to influence the trading price, what controls against this sort of behavior are there? - Would it make a difference if he worked for MS or not? In that case, he might not have any insider information; he is simply deciding to sell and then buy again. - MC

IIRC insider trading refers more to someone learning of a major stock changing event (like a merger) and leaks it to selected people prior to that decision so only a select few benefit. As far as I know someone can buy and sell their own stock as much as they want to.

To deal with men by force is as impractical as to deal with nature by persuasion.

BMU is correct. Insider trading involves having information not available outside the stock-issuing entity, ie: impending replacement of a CEO, upcoming poor earnings reports, etc. - things that will cause a rapid and/or amplified change in the stock price, and using such information to trade the stock in such manner as to reap profit from it.

One can see why the temptation to wield such information has proved too much for many an otherwise honest individual. The profits can be enormous.

Oh - buying and selling your own stock on the basis of insider information is strictly prohibited as well - this is how most people get caught.


Pretty good definition, but the law is actually far broader than that (aren’t they all).

Generally speaking, insider trading occurs when one trades, or discloses to others who trade, a security based on information which is:

  1. Material, which is to say something a reasonable investor would be reasonably likely to consider important in making an investment decision.

  2. Non-public.

This definition encompasses not only the kinds of things you described, but also things like “Barron’s is gonna rip the company to shreds this weekend” or “Amalgamated Widget is considering a hostile bid,” or “I’m out on the golf course watching the CEO have a heart attack,” even if the stock-issuing entity itself doesn’t know it yet. The people guilty of insider trading are the person who discloses the information (the “tipper”), the person who trades on it (the “tippee”), and the people who trade based on the first trader’s say so even if they personally don’t have the information (the “poor sap”). An interesting side note is that the simple knowledge that you’re about to recommend a company for purchase or sale is sometimes considered inside information if you’re influential enough to move the price. The law does not require that the price actually move, only that a reasonable person might expect it to. There have been cases before the SEC of people who lost money insider trading (crooked and stupid, how sad).

Since I’m in the industry, it’s important for me to disclose that this discussion is in no way compete, and that the law determining standards for insider trading are evolving. In general, the smell test works pretty well here.

Now to the rest of the OP. Insider trading is not the only way to get into trouble trading stocks. It is also illegal to trade a stock for the sole or primary purpose of manipulating it. If Bill sold and bought that much stock in a short time period with no news in between, he’d have his own personal SEC investigator to go along with the DOJ guys now bugging him. This is true whether one works for the company or not. On the other hand, if he had a plausible reason, i.e. “I sold because I feared LINUX, but we crushed it like a bug so I bought it back,” he’s pretty much in the clear with the regulators. MSFT’s internal policies may or may not prohibit this sort of thing, and you’re right that investors would get sick of it pretty quick.

BTW, there is not a limit on how much stock Bill can sell. He has to file a form with the SEC before he sells it, but he can put his entire stake on the form if he wants to, subject again to MSFT’s internal policies and market acceptance.

This is not an offer to agree or disagree with opinions, which may be done only by a current prospectus.

Here is a better example as its a real one.

Every year Oprah’s tv contract renewal comes along. She says she’s not sure she wants to do it the next year. King World stock drops. Oprah then buys more, renews her contract, the price of King World goes back up.

Happens every year for a long time now.

Handy’s example would be a interesting case if it were true.
But it’s not.
She doesn’t.
According to King World’s annual proxy statement, , Oprah holds directly exactly zero shares of her employer. She has the right to acquire 5+ percent of the company through the exercise of options awarded to her as part of her deal there. If the exercise price of those shares is lower than it would be than if she said right from the get go that she were sticking around (I don’t know), that would be good negotiating, not insider trading.
Handy, don’t go believing every bad thing you hear about people. The stock has in fact historically gyrated around “will she or won’t she time.” As it happens, many professional traders I know make that trade, but it’s speculation, not insider trading. Oprah doesn’t.

This is not an offer to agree or disagree with opinions, which may be done only by a current prospectus.