I wonder about this after a recent case that occurred here in Germany:
A financial services company, listed on the stock exchanges, was accused, by an anonymous screed published on a web site the domain of which was registered through a privacy service just a week before, of various crimes (mainly money laundering), on a scale that would surely involve the CEO’s involvement.
The share price dropped (by as much as 20% at a time). It was generally assumed that the perpetrators of (1.) were parties who had shorted the stock.
The company denied the accusations as baseless.
The company’s CEO took the opportunity to invest a considerable sum of his own money in the company’s stock (and this transaction was duly published as legally mandated). If and when the stock rebounds he stands to do very nicely out of it.
Now, assuming for the sake of this question
5. that the accusations were in fact baseless
6. that the CEO was not involved in short attack
what element of the rules for insider trading make his taking that long position not insider trading?
Put simply:
Public information (now): X Corp denies the accusations
Insider information: The above statement was sincere and will be confirmed by investigations.
Public information (much later): The above statement has been confirmed by investigation, so it seems to have been sincere.
Technically, I would argue that all three lines contain the same information if you strip away philosophical fine points.
That would be like Abigail accusing Beatrice of wrongdoing, Beatrice denying it, yet Charlie feels that Beatrice is holding out because she didn’t *prove *she wasn’t lying.
Of course insider trading is illegal (and a criminal offence) in Germany, as is, I suppose, the situation in any reasonably advanced economy nowadays. If you want a statutory citation, it’s sections 14 and 38 of the Securities Trading Act, un unauthoritative English translation of which can be found here.
As to the OP, I think the best reasoning why this would not amount to insider trading is that there is a general presumption that CEOs of publicly listed companies are not crooks. This presumption can be rebutted, of course, but as long as it has not been rebutted it stands, and a publication by an anonymous whistleblower is not sufficient for such rebuttal as long as investigations are ongoing. In such a situation, the information that the CEO is, in fact, not a crook is therefore not insider information.
That would be my line of reasoning if I had to defend such a CEO. I admit, however, that it’s a somewhat grey area, and if I were in the situation of this CEO I’d play it safe and not buy my own company’s shares in such a scenario.
Because the CEO should not be expected to treat “Some anonymous asshole on the internet” as a legitimate source of investment advice. “Sure, you can buy shares, but not if anyone on the internet is saying anything bad about your company” is not meaningfully different to banning it outright.
The CEO could very publicly buy the stock as a sincerity test of his and his company’s honesty. “Look, this company is honest, and so am I. As a public show of my sincerity I’m now investing serious money in the company, even though it has tanked in the market.” His primary duty is to protect his shareholder’s interests, and a public show of such confidence would be expected to staunch the drop in share prices, which is what you would expect his shareholders would want. Especially if done after a pubic denial of wrongdoing, it would be pretty hard to make a case that the CEO had not done everything reasonable to inform the market of the truth.
Much the same case could be made about profiting after a dump and dump attack. If the share value drops below a reasonable expectation of the company’s value, and this valuation is public knowledge as presented by the CEO, who is to say that the CEO should not buy stock at the lower than that value and profit?
So basically you’re saying that the inside information that the CEO has and is trading on is that the accusations are baseless. The rest of us have to wait for the outcome of the investigation to determine whether the accusations have merit, but since the CEO would know about them and knows that they are baseless, he can be confident slightly earlier than everyone else that the stock price will rebound.
This is pretty much the exact opposite of what people are worried about with insider trading laws. Yes, the CEO has access to non-public information that he is acting on, but it’s not like he’s doing so with nefarious goals in mind. As mentioned, he is putting his money on the continued health of his company even though it has potentially ruinous accusations being thrown at it. We’re much more concerned with CEOs quietly dumping their stock while telling people that everything is fine, or quietly buying it up because they’re going to get bought out at a premium by a larger company. The CEO is doing exactly what one would expect an upstanding CEO to be doing in this situation, not something that someone with criminal intent would.
And yeah, just because some wacko says something about your company that temporarily drives your stock price down shouldn’t be cause for you to not buy your own company stock. It’s knowing of regulatory approval or a pending merger or something of that nature before the public does and acting on that knowledge that’s forbidden.
I’d like to chip in on this, because it contains the implications that free market “fans” would be opposed to insider trading restrictions/bans. That’s an implication that I think should not be left unresponded to. From the perspective of those who believe in the efficiency of markets, prohibitions of insider trading are perfectly justifiable or even necessary: Even the staunchest free market libertarian acknowledges that information asymmetries can lead to market failure and should be corrected. From that perspective, it’s one of the rare instances where the market failure argument, which anti-free market activists use very cheaply and easily, is actually accurate.
It’s like antitrust law: Free market libertarianism is not the same thing as “anything goes”. It means that government interference should be limited to providing and protecting the environment within which market forces operate, without interfering in the operation of this market,
Getting back to the OP, I think the argument can also be made that the company’s financial position is public information, based on the disclosures made by the company in response to the allegations, and therefore it’s not insider trading for the CEO to buy stocks after that public disclosure and rebuttal has been made.
It would be a problem if the share price tanked in response to the allegations, the CEO knew that the allegations were false, bought the shares, and then a few days later the company issued the information to the public about their fiscal situation, and the share price improved. But if the CEO waits until the information is made public, and then buys shares, what private information is the CEO relying on?
The CEO in question was very open about the whole affair. His stock purchase was widely publicized and he explained his intentions, i. e. reassuring the public by committing himself to the company with his own money. I don’t think that being convinced of one’s own integrity constitutes “insider knowledge”. Of course, that’s assuming the man is completely honest and that this wasn’t all an elaborate scheme.
The CEO actually purchased huge amounts of stocks in the last two yours. He now owns, according to one source, 7 percent. It is a bit strange. :dubious:
The CEO here has made his investing decision based on publicly available information, every shareholder had the exact same information. We have a set of shareholders here who are unfamiliar with the company’s operations, read the allegation, and quickly dumped their stock. Anyone who is watching the company be a thriving business will snap up the stocks at a discount. All this is based on information that everyone could have had.
This is different from Martha Steward being fore-warned that the cancer drug she invested in was disapproved by the FDA. She dumped her stock before the information was made public. Thus she had an unfair opportunity over everyone else.
I don’t think of this as a strictly free market system, We the People though our government set certain minimum standards on our markets. For example, nuclear power plants are not allowed to dump spent fuel rods out in the ocean, even though such activity would boost dividend payments.
Isn’t the general rule that the insider must either disclose or refrain from trading? It would seem that in theory, the very fact that he truthfully “disclosed” the fact that the accusations are baseless would constitute disclosure regardless of whether anyone else believed him.
That makes me wonder…what about the standard insider trading scenario where the CEO knows that earnings are going to be much lower than expected but where the CEO decides/schemes to make the required pre-trading disclosure in a manner to make readers doubt its truthfulness and disregard it (even though it is actually true)?
For example, instead of using traditional routes, the CEO arranges to have the required disclosures published in the Flat Earth Research Quarterly under the name Gigantor Regulonus Dr. Dr. Perspakex and edited to display especially horrendous grammar. “BigCo’s earninggz r goign 2 be bout 50% of projackted. Yeah me awsum insidrr liek ceo managr r somthn. No kiddings, is troooo. Lng live flat earth ant time cube!!!111!!one”
Most corporations have internal rules about insider trading on top of government regulations. For example, “no trade” period of time for executives before quarterly earnings announcements. Or executives that buy stock cannot sell for a period of time (say 6 months).
To the OP. If the CEO had inside knowledge or even colluded with the anonymous screed folks, bought a lot of long options, publicly released overwhelming evidence that the anonymous screed was false, then dump his long options as soon as the share price rebounded, then that would be pretty clearly insider trading.
In this case, you have a CEO that has buying stock in his company, the stock gets hammered by short sellers for whatever reason, and he takes that opportunity to buy even more stock is a far cry from insider trading.
To the OP, are what you trying to say is that by virtue of being CEO, the CEO has both public and private insider knowledge of the company, based on that knowledge knows that the accusations that caused the share price to collapse was baseless, and therefore at least the perception of an unfair advantage vis-à-vis the public? If that’s your case, I grant you have a point. Some companies go so far as to not allow employees/executives to trade shares in their own company to avoid the perception of impropriety. But as far as I know, no major developed market has such a regulation for executives and/or employees not being able to trade in their company’ stock.
The concept of insider trading is very simple - the CEO (and other executives) owe a duty to the shareholders to run the company so as to maximize their share value by whatever means, provided it is legal. Generally, this means running the business in a professional manner as a going concern.
By buying stock with “inside knowledge” they are taking advantage of their position - that they know something the public does not - to buy stock (or sell it quick). Thus, they are making a profit off the very shareholders whom they are supposed to be protecting, the people who own stock and it is their duty to ensure its value. they are paid to do so, this is their job. If the people they were buying shares from knew what the insiders or their friends knew, would they still sell for that price.
At the very least, in that OP example, the CEO announces that there is no basis to the charges. Thus, he has told the public what he knows, and he is being honest, and he allows time for everyone in the market to hear this news. If some (many?) choose cynically to not believe him, that is their problem. Also note, the law states that a CEO who knowingly lies to manipulate the value of the stock is guilty of a securities violation - so the CEO better be damned sure he knows nothing of any crime.
(IIRC this was one of the charges they tried to bring against Martha Stewart, since her good name was intimately tied to her company’s - and the allegation was that by denying the charges, she was trying to manipulate the stock price… in this case, keep it up. I think this charge got tossed pretty quickly, a person cannot really be charged for insisting they are innocent. Probably, too, she did not make any significant stock sales or acquisitions).
That’s what I was trying to say. Specifically, with reference to any specific illegal act he can know that the CEO has not ordered anyone to do it (because he’s him); anyone else (including most other insiders) can only assume it, pending investigations if any.
But the same is true after the investigation - he can know that the investigators were honest about him being honest, while anyone else can only assume they are not covering his back. Barring credible evidence to the contrary, I don’t think we should be making the solipsist argument that someone is guilty of insider trading.
If it’s a large company, it’s possibly misbehaviour took place without the CEO’s knowledge. (IIRC didn’t Ken Lay during the Enron case try to use the “I was too stupid to know this” defence?)However, if the CEO tells what he believes to be the truth, you can’t fault him for misleading taxpayers.
It depends too what the police told him or the company lawyers about the investigation. If, for example, the police said “we have proof of transactions between Acme Ltd. and Cali Cartel Bros. Inc.” then he now knows there is some serious question what happened. If the police told them nothing, they know nothing to contradict the assertion of innocence.