Question about Insider Trading

Factual Questions
1

This may wind up in GD; but I’m starting off, at least, with a GQ about what the law is.

So, with reference to insider-trading laws, I keep seeing the phrase “material nonpublic information”: the goal seems to be that, if A knows relevant stuff that hasn’t yet been disseminated, he’s limited in how he can use that info until the press release or whatever gets announced — the idea being that B and C and D and et cetera now know what A already knew, such that A no longer has an unfair advantage over them after noon, but would’ve had an unfair advantage over them before noon, if the info in question gets disseminated at, well, noon.

But so long as it takes even a moment or two to process that disseminated info, couldn’t A still have the massive advantage of having already spent minutes or hours slowly reading through the whole thing? Possibly before spending days or even weeks conducting open-source research into whether this new piece of info means a guy should buy or sell or whatever — and then readying a finger on the trigger, as high noon approaches?

We don’t want A acting on that info before B and C and D can act on it; but can’t he still act before B and C and D can meaningfully act on it?

2

I think you’re right, but in reality, A doesn’t really care about having a legalistic advantage, and is unlikely to worry about split-second timing. Insider trading is much more common than we think, often much more subtle, and much harder to stop.

3

I’m going to say that the people A has to persuade that he did not jump the gun is the SEC.

If A’s decision to act required deep knowledge of a certain set of details, then the trick would be to show why those knowledgeable about the business and technology the company was in would have seen the significance without being alerted ahead of time to do a deep dive.

Anoher question would be how widely disseminated this information was put - a release to all shareholders? A news release to the media? Not so much “did A profit from inser knowledge” then, but “did the company abet A by not making such an important announcement truly public?”

4

I think the OP’s question can be reformulated as; If the market-moving information is somewhere within a 2,000-page document, is Insider A (who had previous knowledge of it) free to trade on this information the moment it gets put on the company’s website even though nobody else has yet had a chance to read it?

As I understand securities regulations, yes, he is. The definition of nonpublic information refers to whether it has actually been published and does not factor in data processing times of the public.

5

This is why trading houses spend so much money and effort to get the fastest possible data connections to the stock exchanges. Fractions of a second are important in determining whether you make or lose money in with world of rapid transactions.

6

wasn’t there a wall street bar owner/tender that almost went to jail because he’d use what he overheard to make money … I remember he made a lot of money until he invested in something way too early and the sec stepped in … but I don’t think anything became of it

7

A doesn’t have to persuade the SEC of anything. The SEC has to persuade a judge and jury that A violated insider trading statutes. And insider trading cases are notoriously difficult to prove.

8

For the sake of argument let’s assume the facts are not in dispute.

“A” had insider information on “Company-X”. “A” used that information to buy/sell stock in “Company-X” 30 seconds after the release of that insider information to the public.

Would the SEC even try to bring “A” to court over this?

9

There is typically a period once information is released to the public where the public is given time to absorb the information. If a company announces the acquisition of another firm and the CEO buys a shit ton of stock the moment the press release hits the wire, there is an argument that is still insider trading. However, the law does not specify what these time periods are.

Information is disseminated and analyzed much faster today than it was when these rules were first established, so some people feel these restrictions are outmoded. Instead of needing days or even weeks to distribute an analyze information, it may be done in minutes today.

Most companies have policies in place that are specific as to these time periods and dictate the windows in which insiders may trade stock, in order to protect the company and its insiders from accusations of illegal trades. I was considered an insider at a public dot com company in the late 1990s and was constrained about when I could buy and sell shares, mostly based on the date that quarterly earnings were released. There were specific windows, things like we could only trade starting the third day after an earnings announcement for the subsequent three weeks.

10

I guess it matters a bit if the OP is talking about people working for or with the company who as a matter of course have access to this information, or outsiders who come across this information through alternate channels, whether nefarious or innocent.

When I did catering and banqueting, I was privy to a number of meetings that probably contained inside information that I theoretically could have acted on. If I acted on it 1 minute before it became public, it would be insider trading. If I act on it 1 minute later, it isn’t.

11

Here’s a law journal article on the topic: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2770739

It relates a story about how the University of Michigan had a lucrative arrangement with a financial markets information provider that this provider would get an economic statistic compiled by the University two seconds before the general public. Studies have shown that within 200 milliseconds of this two-second window, the new information became factored into market prices.

This practice was stopped by the New York attorney general, but it was the early access for a particular information disseminator that raised concerns. The basic rule that trading on the information can occur within a short period of time after its disclosure still stands.

12

There was at least one court case in which a promoter who printed prospectuses was tired for insider trading. It went to the Supreme court and he was acquitted, though he paid a civil fine. I think they later explictly made this illegal.

13

The short answer is no. Inside information is only public when, in the words of Prof. Donald Langevoort, “the market has internalized it.”

Courts have recognized for decades that releasing the information to the market doesn’t mean it is instantly “public” for insider trading purposes. In SEC v. Texas Gulf Sulphur, 401 F.2d at 854 n. 18 (2d Cir. 1968), the Second Circuit said:

[W]e note in passing that, where the news is of a sort which is not readily translatable into investment action, insiders may not take advantage of their advance opportunity to evaluate the information by acting immediately upon dissemination.

This was merely dicta, since in Texas Gulf Sulphur, no insiders who were actually before the court traded in securities after the release of the information. However, trial courts generally adopted this approach when it actually mattered. For example, in Shapiro v. Merrill Lynch, certain insiders were trading in shares of Douglas Aircraft with the inside knowledge that the company was about to announce unexpectedly disappointing earnings. The court evaluated insider trading claims by people who bought shares on the day of the release (which was carried over the wire sometime before trading opened). The court said:

There is no doubt that those investors who purchased Douglas stock after public dissemination of the new earnings report do not have a cause of action against defendants. A question arises, however, as to just when such dissemination is accomplished. It is rather doubtful that disclosure is instantaneously achieved upon release of the information to the press.

The same court added:

Conceivably, the news ticker could have carried Douglas’ press release at one minute prior to the opening of the exchange and plaintiffs M. Shapiro, I. Shapiro, Naigles and Saxe could have placed their orders at one minute after the opening. It could not be said, in that event, that full disclosure had been achieved within two minutes of its release.

So, at the very least, in the 1960s, two minutes wasn’t enough time after dissemination to deem the information “public.” There isn’t a precise bright line test for when the market has internalized the information. Courts typically look at when the trading price and volume of the stock “levels off” to the new normal level after “the news had been fully digested and acted upon by investors.” See SEC v. MacDonald, 699 F2d 47 (1st Cir. 1983).

This is true. But, in SEC v. MacDonald, the court also said, “[W]e do not depart from the principle that doubts [about when information is really public] are to be resolved against the defrauding party.”

14

Should also note this is why many press announcements are timed for after the markets have close for the day. (Which is less meaningful with global trading options).

15

…does it?

Schnitte said that, as he understands it, “yes, he is” to the question of whether he’s “free to trade on this information the moment it gets put on the company’s website even though nobody else has yet had a chance to read it” — that the definition of nonpublic information merely “refers to whether it has actually been published and does not factor in data processing times of the public” — and Tired_and_Cranky seems to do a solid job of arguing the other way, by strikingly quoting a court as saying that “It could not be said, in that event, that full disclosure had been achieved within two minutes of its release”.

But why do you figure it matters how folks got the info that hadn’t yet been publicly disseminated? Is there something about that in the plain words of the definition, or have there been court rulings to that effect, or — what?

16

That seems like a rather circular principle.

17

You’re not wrong and yet, I am unbothered by it.