Suppose I was at a big wing-ding hobnobbing and I just happened to state very loudly to a friend “Sell ABC stock…they’re gonna take a nosedive!” (Pretend ABC is a blue-chip stock.) And suppose, many overhear and decide to act upon my statement. And, perhaps lets even say that the rumour grows and grows…to friends and family…and the ABC stock DOES take a nosedive by my rumour alone.
Is what I did, even if just for fun, illegal?
What if it could be traced back to me…do I have freedom of speech in this instance?
a) How would you answer if I were a big stock broker-type dude? (Also, would I then be bound by some ethical code not to do this?)
b) How would you answer if I were just “Joe Average-on-the-street” at this wing-ding just spouting off my mouth at whim?
c) Can stock brokers talk shop outside the office??? What about to immediate family?
“They’re coming to take me away ha-ha, ho-ho, hee-hee, to the funny farm where life is beautiful all the time… :)” - Napoleon IV
Just my WAG, but talking about stocks isn’t like talking about politics.
If you are a licensed trader or broker, I am sure there are regulations about what you can say outside of work.
I will let the attorneys clarify this, but wouldn’t this fall under the umbrella of “commercial speech”, which can be regulated by the government.
Well how about that…a situation I’ve actually been in. At one point during my job, I was doing mergers and acquisitions work, and we were interested in partnering with a public firm that did consulting for the pharmaceutical industry. Well, in researching the company, I called the analysts at all the various investment houses and told them the party line which was that I was a company represnetative doing research into their firm and that we might be interested in partnering with the firm and/or making a equity investment in the company.
I guess my company has a reputation for using that line when they are going to acquire someone, and next thing I knew, the stock for this firm had shot through the roof on the rumor we were buying them. We did get a phone call from the SEC, asking about the rumor, but we didn’t have anything invested in them, so didn’t stand to make a profit from providing misinformation, and eventually it subsided and the stock dropped back down in price.
Still, it got me to thinking that you could probably buy the stock of random smaller public software companies, calling analysts that cover them, and say you were from the Microsoft M/A division and were interested in finding out as much info. as possible about the company. In my case, it was analysts who had obviously leaked this information, so you could use this to your advantage.
From a legal standpoint, the crime is securities fraud, though I imagine they’d have to show some kind of intent (i.e. that you or someone you are close to made a profit based on your misinformation) If you were a stock broker, or company insider, I’d say the only difference to the joe-on-the-street in prosecuting you is that they would hold the broker/ insider to a higher standard since you are a more reputable source under those circumstances, and thus could probably be busted more easily.
There are many “analysts” who make an excellent living putting out newsletters saying that the market, or even a particular stock, will go up or down.
Now, if you have particular inside information (like you knew that a company was about to be taken over) you would be forbidden to discuss it. In fact, companies who are about to issue stock have to go through a “quiet period” where they can’t talk about their business at all.
And that rule extends to everyone who works with the company, including the investment bankers, issuing brokers, the printer who prints up the reports, etc.
My sister is a stockbroker, and every letter and package, every email, and every phone phone call that comes into her office is reviewed to make sure no one is passing along any unauthorized material.
I understand all the words, they just don’t make sense together like that.
There is a porn star hiding in Canada because the U.S. authorities want to arrest her for insider trading. It seems that she picked up a lover somewhere who gave her inside tips about a stock, and she bought it and profited.
So, if you hear a conversation where a guy divulges insider info and you act on it, YOU may be breaking the law.
It’s perfectly okay to give word that the company will be issuing stock, etc. The quiet period is designed to make sure that all investors have access to the same information – say for example, the stuff that’s written up in the initial offering, and no one (in the sense of not everyone) finds out that 24 hours later, the CEO decided to cash in all his stock options.
Incidentally, people have gotten into huge legal trouble over postings on the major financial message boards (Yahoo, Silicon Investor, Raging Bull, etc.). e.g. Earlier this week, a guy posted a forged press release on the Lucent board warning of disappointing earnings which caused a noticeable (though temporary) sell-off. Very likely, he had shorted the stock and made a pretty penny, but if they catch him, he’ll be prosecuted.
A lot depends on knowledge and intent. If you know that the nosedive is coming (say, if you are an executive at ABC with knowledge not known to the markets), you have been a Very Bad Person. You are guilty of insider trading (even if you yourself do not trade), and each and every person whom you have tipped is also guilty (in their cases, if they trade or pass on the tip to someone who does). Not only that, the people who learn it second hand (the people you tip off tell their bone-head brothers-in-law) are also guilty, even if they don’t know why they made the trade. A recent case in New York had people four tips away from the original source paying fines and agreeing to findings. The technical term for such a person (which term I invented for this very forum a few months ago) is Poor Sap.
OTOH, if you don’t actually have any knowledge, we go to intent. If you are just a drunk spouting off at a party, you are not guilty even if your fellow partygoers are dumb enough to believe you. But if you are saying it for the purpose of driving down the stock’s price (for personal gain, as a prank, to help out someone else matters not), you are guilty of stock fraud. You can appreciate here that unless you personally have gained, intent is difficult to establish here, so the regulators tend to go mostly after those who have a position in the stock. Before the internet chat rooms, this kind of fraud was rare among large, liquid stocks because it took a lot of work to get the selling momentum going. The work involved itself formed the intent. Most stock price manipulation occurred in little piece-of-crap stocks that normal people had no business owning anyway.
The rules covering people in the securities industry are pretty much the same as for others. The main differences are that those people are often more likely to have either inside knowledge or a financial stake that would establish the requisite intent for fraud. And yes, in addition to the law all reputable firms in the securities industry have codes of conduct to proscribe exactly the situation you describe.
And lord, yes, stock brokers can talk shop off the job. In fact, you can’t get them to shut the hell up. But here’s the thing. As long as their talk is opinion, based on their firms’ published research, and not contrary to their own positions in a stock, they’re usually OK.
NYC IRL III
is on April 15th. Do you have what it takes?
Most of the people in the securities industry itself are licensed (I used to have a series 7 and 16, BTW, if that means anything to anyone. ). Since you are licenses by the SEC, you must abide by their rules. If not, you’re out of work. So a true securities analyst always couches his reports so as not to rave too much and to be sure to point out possible downsides.
As far as other people are concerned, it’s a bit more complicated. Insider trading and using inside information is illegal for anyone (i.e., any information that is not available to the general public). I don’t believe the SEC goes after a person who just posts “Buy VBNM! It’s going to double!” due to the free speech question. But if they find out the person stands to profit by that statement, he’s in hot water.
Sure stockbrokers can “talk shop” outside the office. As long as they aren’t giving out information, it’s fine. They can even discuss inside information, but they better be sure no one listening is in a position to act. Stockbrokers are given strong incentives (i.e., free stock trades) to do all their trading at the own brokerage, so it’s easier to keep an eye on trading patterns (they can use other brokerages, but there are quite a few regulatory hoops to jump through).
It’s even stricter with stock analysts. I know one guy who got severly reprimanded for suggesting he might upgrade his rating on a stock. And changes like that have to be announced officially without any suggestion it will happen (though people are free to guess). Every research report must be OKed by a Supervisory Analyst to make sure it follows SEC regulations.
“What we have here is failure to communicate.” – Strother Martin, anticipating the Internet.
). Since you are licenses by the SEC, you must abide by their rules. If not, you’re out of work. So a true securities analyst always couches his reports so as not to rave too much and to be sure to point out possible downsides.