Entirely hypothetical situation (I am not Martha Stewart): On December 27, the then CEO of ImClone Systems, Sam Waksal, calls me up and says, “Hey, CK, dump your ImClone stock! I just found out that the FDA has rejected our application for Erbitux. When the word gets out, IMCL is going to crater.”
Of course, I realize that this is “insider information” and that if I were to act on it, I would be committing a crime.
But could I legally sell my stock if I waited until after ImClone publicly announces the FDA rejection? How long do I have to wait after the public announcement? Could I have my broker on the line and, as soon I hear the ImClone rep say the word “rejected,” start shouting at my broker, “Sell! Sell it all! Sell now!”
What if I attempt to make the information public myself? If I call up Lou Dobbs and he repeats my story on Moneyline, is it no longer “insider information”? What if I just post my tip to a few Yahoo message boards?
Each of the exchanges, under the guidance of the SEC, has different rules about when it considers material news (that is, news which is likely to affect the share price) to be properly disclosed. In Sept. 2001, the SEC issued a regulation called RegFD, for “Fair Disclosure”; you can read the text of that rule here.
In a nutshell, it advises issuers of securities to err on the side of wide disclosure. A posting on the company’s website is not considered sufficient disclosure, because it requires that a person visit the website to see it. Information that is disclosed to analysts and brokers must be made available to the general public. If it is a planned disclosure, it must be made simultaneously to the public and analysts; if it is an accidental disclosure, it must be made as promptly as is practical. The SEC puts it thus:
PR/IR professional and the exchanges recommend disclosing via a press release issued over one of the major press release services: Business Wire (the company for which I work) or PR Newswire are the two most recognized. InternetWire, a newcomer to the field, no longer meets disclosure requirements for the exchanges, thanks to a few well-publicized snafus. That way, the news appears in real-time on all the major online sites, at the exchanges, in the financial databases, on analysts’ screens. and on the newswires (AP, Reuters, DJ, etc.).
All of those will get you in big, big trouble. Any material news not made available by the company to the public in a prompt manner is considered inside information.
In my hypothetical situation, Sam Waksal called me out of the blue. As long as I’m not a director, officer or employee of ImClone, I would have been able to repeat the information I heard from Sam to a reporter (or anyone else?) without getting into trouble though, wouldn’t I?
The thing that I find confusing about these rules is that they only seem to address what the company and its officers are required to do. If I, as Joe Random Citizen, find myself in the possession of inside information (that I didn’t ask for), what are my obligations? Can I just wait until the information is made public (how public?) before acting? Or am I required to call up the SEC and drop the dime on Sam? Or what?
The simple answer is that there is no simple answer.
I can comfortably state that if you’ve read it in the Wall Street Journal, it’s no longer insider information.
Anything less than that, I’d ask a lawyer knowledgable in this area for advice. The laws of insider trading are quite complex, depend significantly on the person with knowledge’s relationship to the company, the relationship of any person or persons who passed on the insider information, the type and restrictions on the securities traded, the timing and a host of other factors.
Where someone with a duty to keep insider information quiet tips off someone else, the laws are subtle and can involve large grey areas. As a practical matter, it is rare that someone will just gratuously get insider information without some relationship to the person doing the tipping on which the SEC can hang an insider trading charge.
The penalties, both criminal and civil, can be quite serious, and the SEC actively investigates and prosecutes cases of insider trading.
When I was doing financial PR, I was instructed that any release of material information must be made to the company’s stock exchange no less than 15 minutes before it was released publicly. As for release, we were ordered to supply it to the major wire services (AP, UPI and Reuters) simultaneously. In practice we also released it to Bloomberg and Dow Jones.
Once we did that, it was considered public information.
We were also required to sign an agreement that we would not use or pass along the information until it had been made public. Of course, we were acting as agents of the company. What you hear from your buddy Sam and then pass along is gossip. Of course, if the gossip is traced back to your buddy Sam, HE could be in big trouble.
You don’t have to turn in Sam, and if you don’t pass the information along or act on it, you’re in the clear.
Once you act on it, it gets dicey. It depends on what information you got and how you got it. The SEC will probably investigate (and, having been a target of such an investigation by the SEC*, I can tell you, it’s no fun).
*I worked in an investment firm, desktop publishing their research reports. One particular report was a scathing attack on Marvel Entertainment Group that was due to the published in Forbes the next Monday (Presidents Day, BTW, so the markets weren’t open in any case). I was working on the report on Friday. When it came out, Marvel played Dr. Doom and claimed we gave out the information in advance. I had to supply records of the times of all drafts of the article; evidently some people had copies in their hands sometime before the Forbes article came out and they wanted to be sure it was the final version (which we released after the markets closed on Friday; since the market was closed until after the article appeared in Forbes, no one was able to act on the report in advance). Nothing came of it – Marvel and Ron Perlman were just being asses – but it was a serious matter.
Once before I asked an insider trading question, and I didn’t really feel like I knew the answer by the time the thread died. This looks like a good place to try it again.
Say the NYSE-traded company for whom I work is going to drill a very high potential exploratory well. The potential is such that if it works it will most likely cause our stock to jump in value in a very short time. If it’s a dry hole it probably won’t affect our stock at all.
So if I purchase stock in the company after we’ve filed the permit for the well, meaning that the fact we’re going to drill this well is then public record, although not very well publicized, but before we actually drill it, so therefore I don’t know myself whether it’s a success or not, and, if it is successful, sell my stock a few days after the press releases, am I clear of any insider trading violation?
SmackFu responded with some relevant cites:
And:
Well now, I am privy to certain geophysical and geological data to which the public is not. But no reasonable investor expects to be privy to such data, and, for the most part, if they were they wouldn’t be able to make heads or tails out of it anyway. They know they must rely on the technical staff’s evaluation of data for decisions about where and when to drill what.
And, of course, while I’m saying that this is a wildcat that could spike our stock price - so, obviously, I think it could be a good one if it works - we never drill wells that we think won’t work. But, exploration is exploration - I won’t know until the well is down whether it’s good or not.
So I guess the question I’ve got to add here is: would my having done the evaluation of the data leading to the drilling of this well, information that does in fact stir thoughts in my brain of trying a stock play, constitute being in possession of material, nonpublic information that can affect the value of the security, even though such information (the G&G data) is never made public by any oil company?
As an aside, it seems to me that most of the insider trading allegations that make the news have to do with dodging a bullet rather than catching a spike.
I was told by my highschool economics teacher (yes, I know, not exactly a valid source) about two years ago that insider trading charges were not pursued in cases where a person acted to avoid losing money, only when they attempted to gain money. Anyone happen to know if this is partial, or complete, BS?
It sounds to me off the top of my head like what you’re talking about is likely subject to the insider information rules. Before trading on that information, I would talk to a competent securities lawyer who has ALL of the relevant information. I would also examine what your company’s policies are with regard to such information and trading.
The G&G information that you are discussing would likely be considered insider information because it would reasonably influence trader if it were public. The fact that it is never released in that form (though I’m sure it’s aggregated and discussed as part of general corporate disclosure) does not make it any less insider information. Further, as an employee or contractor of the company, you probably have a duty not to disclose it.
In insider trading law, and in its enforcement, there is no difference in whether the trading was to make a gain or avoid a loss. Either way will potentially injure the rest of the market.
In short, it would likely to be considered insider trading, but you must consult your own lawyer to make a determination of that.