Insider Trading: Dear “Guy Speaking Behind Me In the Loud Voice…”
posted by Elizabeth Nowicki
When I discuss insider trading, either in my Corporations class or my Securities Regulation class, I usually talk about a hypothetical that involves a person who has traded on the basis of material, non-public information that he/she has received fortuitously (by overhearing the CEO of Microsoft talking on his cell phone in the grocery store, for example). If a person is lucky enough to stumble upon material, non-public information accidentally, and she has not received that information in breach of a duty or from someone who is breaching a duty in order to give her a benefit, the lucky person can trade securities on the basis of that material, non-public information without violating Section 10(b) of the Securities Exchange Act of 1934. We do not call that person a “tippee,” in violation of Section 10(b) and the insider trading regualtions. Rather, we call that person “lucky!”
I have always worried that my hypotheticals about the “lucky” person who overhears a phone conversation by the CEO on his cell phone in the grocery store (or in the ball park) might seem a bit far-fetched to the students, who can hardly believe that a CEO or a General Counsel or someone similar would speak carelessly on a cell phone in a public place. But my hypotheticals are actually always based in fact, based on my experience at the SEC, in practice, in consulting, or just by reading cases/newspapers.
Now I can add my own first-hand tippee experience to the mix: As I sit here in Laguardia airport, politely typing on my computer, there is a fellow standing about 25 feet behind me, pacing back and forth, discussing a joint venture and related matters that are clearly both material and non-public. He is talking loud enough for me to easily hear him and the juicy details he is discussing, and, were I so inclined (and less ethical (or perhaps more money-focused)), I would be taking notes, so that I could quickly go call my broker and buy (or sell) some stock. Instead, I am blogging.
Based on his side of the confidential conversation, I understand how important Robby (name concealed for obvious reasons) is to consummating the pending deal, and I understand the fact that he will want to feel out whether they really have cash flow issues before they ink the deal in December. I appreciate that the machinations of the Obama administration might impact the value of the deal, and I do appreciate the fact that they want to close the deal before the year end. Brazil is a hot market. I get that. Thanks for sharing.
Excuse me while I go call my broker….
(Tongue-in-cheek on that last point, by the way.)
August 27, 2009 at 9:28 am
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Responses (5)
Kaimi - August 27, 2009 at 12:00 pm
This is a perfect illustration of the drive-a-truck-through-it gap that Chiarella+O’Hagan leaves in insider trading law.
The hypothetical I always use in teaching O’Hagan is along the lines of:
“You’re walking down the street, and a piece of paper suddenly blows out the window of the office building next to you, and lands at your feet. It reads, ‘The merger is going to happen tomorrow’ . . . “
Mike - August 27, 2009 at 12:15 pm
What interests me is the attention Securities Regulations (the law-school course as well as the enforcement by SEC) pays to insider trading. That issue gets so much play, when the real action is in high-frequency trading; dark pools; flash orders; expert panels, and Goldman Sachs’ “trading huddles.”
Talking about insider trading is almost quaint.
A.J. Sutter - August 27, 2009 at 7:03 pm
This carelessness was a way of life in Silicon Valley during the dot-com period. My favorite example was when I visited the men’s room of a Palo Alto movie theater where the CFO of a company took a call on his cell phone while sitting in a stall, and started discussing not-yet-released financial statements with a member of his staff. The metal-walled, open-top stall acted like a megaphone. Even worse, at the time some of the biggest law firms in the Valley (Cooley, MoFo and a couple others) were in the same office complex as the theater. I wasn’t familiar enough with that particular niche in the software business to identify the company, but there were enough names and substantive remarks that for sure someone else in that men’s room could put the pieces together.
You’re right that airports give a false sense of security — even overseas. A few years ago I was noshing on some pre-flight sushi in Narita airport (which serves Tokyo) when a bunch of Americans walked into the restaurant and began talking very boisterously about their recent negotiation with a Japanese company, and strategy for next steps. I recognized immediately that they were from a particular public company in which my company had made a venture investment (we were also a customer), esp. since the loudest guy was the VP of marketing, whom I’d met. I walked over, introduced myself, and suggested they shut up about business for a while. Anyone in the electronics business could have figured out where they were from — there were only 3 global competitors in that company’s space, and it was obvious from their talk that they weren’t from the either of the other two. And many of the other foreigners in the airport restaurant had come to Japan because electronics was exactly the business they were in.
A.J. Sutter - August 27, 2009 at 7:10 pm
I just noticed Mike’s comment: Profitability isn’t the sole relevant criterion. One reason insider trading should get so much play in law school is because it’s one of the crimes often committed by lawyers.
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