Today the unit price of SemGroup Energy Partners, L.P. (ticker symbol: SGLP) declined 51.75% from $22.80 per unit to $11.00. Yahoo Finance Link SemGroup is a publicly traded master limited partnership involved in the energy midstream business. After the market closed (8:10 eastern), the company issued a press release basically stating that its general partner (essentially parent company) was facing liquidity problems and could be on the verge of bankruptcy. I was aware of the problems facing the parent company as of a couple days ago (through inside information), but it was clearly not public information.
This seems like a clear case of trading on material non-public information to me. The company’s average trading volume is 156,727 units; today it traded 5,742,431 units. In a case that seems as blatant as this, how do people that sold this stock expect to get away with it? It seems like an easy investigation job for the SEC.
The question is “who was doing the trading?” And “did they receive non-public information”?
There can be many reasons for the trade – including any rumors that the stock was about to tank. The SEC might investigate, but the facts as you stated them are not proof of anything.
As for people who are selling and who didn’t have knowledge – that’s the point. The SEC needs evidence that you had this information in advance. If they can’t find any evidence of it, you’re in the clear (though you may be investigated*).
*As someone who was in the middle of an insider trading investigation, I can tell you it’s not a fun experience even if you’re in the clear.
It seems incredibly obvious in this situation though. Why else would the unit price plummet unless people were trading on the non-public information that the parent is in trouble? It seems like the SEC should investigate everyone that sold the units today.
How do you know it was not public knowledge? Lots of information leaks out of companies that are in trouble and just because it’s not published doesn’t it mean it’s not public.
I am not an expert on this but I believe that “public” means readily available to anyone. When I was at Network Solutions we had a typical but very conservative policy regarding insider trading. Some employees, like officers, were considered insiders by fiat and could only trade shares during quarterly trading windows. However, there was a window after earnings announcements where *none * of us were allowed to make a trade for three days. Even though the information was made publicly available, our lawyers wanted us to wait three days until the information could be fully disseminated to the market. Now, in the late 1990’s/early 2000’s with earnings reports published on the Web, it’s hard to understand why this window was any longer than about five minutes.
Leaks could still be considered inside information in some situations. Giving information to people who are not corporate insiders turns them into insiders. That’s not the same as making it public.
There is a gray area where employees may know a lot more about what’s going on in a company than the public and have great insight, but not through specific data, like an earnings report or bankruptcy filing.
Also, there are panic selloffs. If the market has a vague notion that a company is in trouble, and a big trader decides it’s time to bleed off some risk, it can cause an avalanche of copycat behavior.
I think this is a key point. If one big shareholder gets twitchy and sells off a big chunk of stock, that will drive the price down a few points. That may well trigger off other holders’ stop-losses, so they sell, which drives the price down further, and so on.
For instance, there might have been rumors. Or a couple of big institutional investors felt the stock was not performing the way they wanted and decided to liquidate their position. The stock begins to fall.
If there was nervousness about the stock (and if the company was planning on making the announcement they were in deep financial trouble, savvy investors would have seen the possibility), then the fall would cause others to panic and sell the stock.
There are probably other scenarios that did not involve insider trading. Unless there’s some evidence that the news of the possible bankrupcy was leaked, the events do not really point to insider trading. It could be, but the facts as you present them show nothing other than a sell-off of the stock.
Who was doing the trading? If it were the company officials who had access to the information, then insider trading is likely. It it were others who were friends and acquaintences of company officials, then it’s a strong possibility. But if it was individual investors, then, without a way of getting the inside information, it’s not.
IANAL nor do I do anything like this for a living.
I’m not convinced this is true. If for example a company in trouble cancels an order with a 3rd party for equipment that they had planned to purchase, that 3rd party may know things and can act on them. That information isn’t available to the general public, but it’s not “insider information”.
Actually, I think the example you provided would be a good example of illegal insider trading assuming that the canceling of that order is material. Generally, if the information is non-public and material in nature, then you can not trade based on that specific information. It does depend upon how you came across the information though. I believe that if you overhear the CEO of the company talking on talking on the phone about how they are struggling, then that would not be illegal insider trading.
As I said, IANAL. I tried to do some online research and I couldn’t really figure out how you determine if something you learn in the course of business with another company restricts your ability to buy and sell.
The basis for materiality, though, is if the tipee/informant has a fiduciary duty with the company. If the information is considered to be material it will also henceforth be also confidential. The fiduciary duty then therefore stems from the duty to keep the information confidential.
If a major purchase did or did not happen, is the basis of that deal confidential? It depends. My company was rumored to by a power cell/battery something or other. I considered buying shares in that company, but then I saw from public information that they were not making payments and their credit rating dropped and their bonds were rated junk. That was the reason for the price drop. Knowing my company likes to deal with financially secure companies, I didn’t buy any shares. Good thing, too, because that company went bankrupt and is still waiting for a buyer, which isn’t happening because its assets are being sold at a fire sale. Would this have been an inside trade? I’m technically not in M&A, yet, everyone I personally work with (though, say someone from Cali or White Plains might not know what I was talking about) from PMs, to finance, to tax, to treasury, to the DC has heard of this rumor, but not public announcement had been made.
On the other hand, economically speaking, I heard that insider trading should not be restricted.
Rumors are not information. Anyone can start a rumor. For instance, a delivery truck drive may notice that they’re painting out the name of the company’s CEO from his parking spot. This may mean they are firing the CEO, which would have an adverse affect on the stock, so the driver talks and people sell. And if they do fire the CEO, then it looks like insider information.
However, it could merely mean that the CEO is getting a new parking spot.
The same with any piece of information. A company cancels orders? Does that mean there’s a cash flow problem? Or that they’re switching to a new supplier?
People buy and sell on rumors all the time. Sometimes, the rumors are true; other times, not.
As for not restricting insider trading, that would leave the stock open to manipulation by the insiders: they could know the numbers are good but put out information that the company wasn’t meeting targets. The stock drops, they buy things at a bargin, and then say “oops.” Plus it would lead to mistrust of the markets: if insiders can trade on that information, then only insiders could make money.
Perhaps you are right that I have not presented enough relavent details. Let me give it a shot.
Point 1: Here is the recent trading activity of the stock. As you can see, the stock has traded from as low as $22.80 to as high as $27.27 since April 15th, until yesterday when it plummeted to $11.00. You can take this back further and see that the company had not traded below $23.82 in the past two years until it traded at $23.51 on July 15th. It then traded at $22.80 on July 16th, and then $11.00 on July 17th. Overall, I think any observer would agree that the unit price has been extremely stable with no significant price movement until yesterday.
Point 2: Here is a listing of the analyst opinions. As you can see, prior to the two downgrades occurring today by Citigroup and Wachovia, the last opinion occured as recently as July 2nd when SMH Capital issued a Buy rating. The trends for the past month had three firms issuing Strong Buy ratings, one issuing a Buy rating and 2 issuing Hold ratings. Here are Citigroup’s comments from June 25th.
Point 3: Here is a note from a message board about a Standard and Poors announcement that I believe occurred late in the day yesterday. I can’t find a link for the actual announcement because I believe you have to be a registered member of Standard and Poors website. The relavent portions are as follows.
Here is my interpretation. Clearly there was a call with the parent’s lenders on Tuesday. That call was private and everyone on it were insiders. The contents of the call were then leaked causing the collapse yesterday.
Point 4: Other similar entities: public midstream MLPs did not report poor trading days yesterday. Plains All American Pipeline LP (PAA) was basically flat as was Sunoco Logistics Partners LP (SXL), TEPPCO Partners LP (TPP), Genesis Energy LP (GEL), and others. There was not negative information affecting the industry yesterday.
Point 5: Here is a listing of the company’s public filings. There were not any noteworthy public filings until the one occuring today.
I don’t see how any logical person can come to any other determination than that there was trading on material non-public information yesterday. The company had nothing but positive news in the public, it was given strong analyst opinions, there was nothing that affected other industry competitors, and it occurred two days following a lender call that was not public.
Obviously some of the sell off yesterday was random people selling due to triggers or just because they got spooked by the activity earlier in the day. However, it seems clear that insiders started the trading.
I don’t think that is supported by the evidence, although it is certainly possible. When a company is in that much trouble there will be rumors. Even hearing that there was a private call like that could be enough to trigger the sell off.
There are no negative public filings or press releases, their latest financials looked good, they were recently given a buy rating (within the past 2.5 weeks), they have been paying their dividends, and I can find no news stories that even hint at any trouble. It seem slike there were no rumors that were publicly known.
Unless a person knew the contents of the private lender call, you would have no way to know that it was negative. Private lender calls happen all the time. The most likely thought that would have occurred to someone that simply knew a call took place was that they were doing an acquisition or requesting an increase in their loan size or something else.
The only way that a collapse could have occurred is if either the contents of the call were leaked or if someone at the company leaked information. Basically, you had the company, its lenders, and probably attorneys that knew. If any of them said anything, and then someone traded on that information, it would be trading on material non-public information.
I’ve always wondered about the definitions of insider trading. If I am on a train, and overhear the guy next to me talking on the telephone, and on the basis of what I overhear I sell my stock, is that insider trading?
I think you are grossly underestimating how much people in the industry would know even if they were not privy to the exact details. If a company is going bankrupt, people know. It may not be in their interest to publish that information.
So you’re saying that it was widely known, but that: 1) investment banks were issuing buy ratings 2.5 weeks before the meltdown; and 2) no one in the media was tipped off? SemGroup (the parent) is the 12th largest private company in the country according to Forbes yet not even the local Tulsa newspaper had any negative stories about them.
Isn’t it far more likely that one of the lenders on the call leaked the information? Judging by the size of the company, it would be fair to say that there were a lot of banks involved in the call.
I tried to do some online research and I couldn’t really figure out how you determine if something you learn in the course of business with another company restricts your ability to buy and sell.