I know this isn't what happened, but what if one day I'm waiting for the bus and I over hear a guy talking on their phone about an imminent acquisition?
1. Would that still fall under insider trading even if the information was accidentally heard, and even if I wasn't 100% sure of its accuracy?
2. If I had no clear connection to the company how would it be proven that I was trading on insider information? Surely it's not enough just to say the trade was statistically unlikely, or is it?
The SEC has recently been pursuing very expansive insider trading definitions, and they are occasionally losing, so it’s very hard to say.
But traditionally in the US insider trading is not about market fairness, it’s about not stealing from shareholders. So if you have no obligation to the company or it’s shareholders you aren’t an insider. The phrase is “breach of a fiduciary duty or other relationship of trust and confidence”.
This is not correct. If the tip came from an insider, it’s insider trading no matter who acts on it. See for example Martha Stewart who traded on an illegal tip from her stockbroker.
most of the Stewart case was about her actions post the tip. If she’d had just said “my broker told me to sell” she’d likely be good to go (who knows). But she didn’t. She obscured and made it obvious with her actions that she was trying to steal from other shareholders (by acting on information she should not have).
Has to be. If you are monitoring the travel activity of cisco and splunk execs and happen to see them go to a fancy dinner after weeks of office meetings, there is no way that is insider trading. That's the same thing as overhearing a phone call in a cab.
But I'm pretty sure I read a case of a guy who traded on a future acquisition and was convicted on insider trading charges. He surreptitiously overheard it from his fiance, who worked for the company. Doesn't this guy not owe a company he doesn't work for a fiduciary duty....?
There's a sliding scale of accountability from "I did it", "My wife did it", "My fiance did it", "my significant other did it", "my neighbour did it" to "some person I don't know did it".
A fiance is still close enough that they are captured by lots of regulation, because collusion/cooperation between partners is so common.
I feel like the SEC must have already taken into account the possibility of a "Strangers on a Train" situation where an insider tracks down an anonymous third party to commit the crime with the expectation of being paid back a percentage at some later date.
There are convictions for golf buddies swapping tips. In the perfect strangers situation, the tip receiver has no incentive to ever pay back the tipper. There's no legal recourse
Except the guy knows where you live and has already shown a willingness to break the law in ways where he thinks he won't be caught. If the top receiver suddenly finds himself dead there is nothing pointing back towards the original inside trader.
This is the stuff of tawdry crime thrillers, but it's certainly not so far out of the realm of possibility that the SEC can just ignore it.
As a someone in scope of FINRA, yes actually. Your immediate nuclear family owes your company that duty and you have to grant your company's watchdog the ability to monitor your family member's investments for restricted trades.
See also: I am not allowed to use robinhood at all because their referral program can reward you with a restricted security. Nobody was grandfathered and every RH user at my firm was told to xfer out or find a new job. I also can't use any roboadvisor.
For us peons, independence is a serious matter. It's just the rich and powerful that get to flaunt it.
The family has the obligation. When you're trading one of the questions is if you, or your family, has rank at public companies. That would make the link from the guy, to wife, to company.
The Nancy Pelosi case is extremely interesting from a market manipulation point of view! It’s one of the strongest arguments for extreme restrictions on Congress trading. Trumps behavior in office is a similarly strong argument for extreme restrictions on Presidential trading.
But it’s not strictly about insider trading. Pelosi (or trump or Pelosis’ husband) are not traditionally insiders. The testimony they receive is by its nature public. That we’ve allowed lots of things that shouldn’t be secret doesn’t change that. That elected officials can be corrupted by their power isn’t an insider trading issue, it’s a corruption one.
Sure. But the issue is when they have insider information on how a vote is going to go, when the vote impacts stock prices. She has material information that the public does not.
The common belief is that insider trading laws are about having data that the market doesn't know. In the US that's just not the basis for the law. In the US there is no expectation that everyone has the same information when trading. The expectation is that people who have a duty to the shareholders are not trading on any non public material information. If you don't have a duty to the shareholders, it doesn't matter how you trade.
Is that the appropriate standard to hold congress people to? I don't know, personally i think, no. But its not obvious that its incorrect from a legal point of view. What fiduciary duty does Nancy Pelosi have to some fund her husband owns? I'm good with a definition that says "once you become a congress person you have fiduciary duty to everyone" but thats not the law now.
So if I’m a billionaire, I can say I’m going to buy a company, to build up its stock price, and then short it and publicly walk away? That’s fine because I don’t have a duty to that company’s shareholders? I mean sure, can only do it once, but that’s legal?
Many financial laws consider spouses to be "identical" from the point of view of law. Since your wife would benefit from you acting insider knowledge she has, it applies.
Caveat that other jurisdictions do take a broader view (from memory, France is one that comes to mind where overhearing something confidential and trading on it is unlawful).
I believe the SEC went after capital one analysts who used information capital one has via credit card usages at stores to trade against companies not capital one. While one might say that the info that capital one had was proprietary (as they deffinitely use it for other things), its hard to view it ast hurting people one has a fiduciary duty to, but I believe they still won the conviction.
Were the analysts acting independently or on behalf of capital one? Because on its face it's capital one's information to trade with (other laws not withstanding)
But.... if you're trading options you're not stealing from the shareholders, right? The person on the other side is also trading options, not a shareholder.
Yeah. This is a philosophical point that the law contemplates. Your option’s position is a theoretical position against the shareholders. I’m not convinced us insider trading laws are particularly logical or valuable (like most economists I think we shouldn’t have them) but you can usually back out the SEC position by figuring out how a shareholder was harmed.
Just like any crime, they can charge you with it if they think they should. We live in a time when scant circumstantial evidence , like the fact you randomly traded outside your pattern with exceptional timing , can be enough for a DA to charge you.
In this case though you’d probably have a good defense to those charges. It’s possible they’d interview you and look into it more and see this plainly before bringing those charges. If they did though, even with a good defense, it’s going to be disruptive to your life and finances.
The fact they were speaking about it in public and you have no connection to them makes it plausible for you to think that what you heard was public information. The onus is on them to protect sensitive information like this so they could actually face some problems. It’s very much going to vary by all the people involved with the investigation and what they want to do with it.
It's still not public information (e.g. "Material Nonpublic Information"). You can't trade on it.
See 17 CFR § 240.10b5-1 "Trading “on the basis of” material nonpublic information in insider trading cases", particularly section (b) "Awareness of material nonpublic information."
No this is not correct. If someone spreads a rumor and you don’t know that the information is from an authoritative source it’s not MNPI. It’s speculation.
If someone anonymously posts on Twitter that Splunk is going to get acquired by Cisco and you immediately buy options, and you don’t know who this Twitter account is, then it’s speculation. Also it’s no longer non-public information if someone posts it on Twitter.
It becomes public information when shared with the public, unintentionally or not. The specific kinds of relationships involved are a big deal. It’s fine to tell a waitress you closed a huge deal and she can even trade on it, but tell your wife and she can’t trade stocks on that information.
“insiders must be breaching a fiduciary duty owed to their corporation when they trade on or tip confidential corporate information. This stipulation almost always means that an insider cannot trade on such information and cannot tip others about it if the insider stands to gain by doing so.https://sloanreview.mit.edu/article/when-is-it-legal-to-trad...
In the case where an unrelated outsider overhears the information that’s public disclosure. And the information no longer needs to be treated by random people as non-public.
So if the founder goes on TV and announces their merger then it’s nonpublic information until they file the form? Everyone who trades on that is insider trading? That can’t be right.
Right but - that means the company employee gets in trouble for making the information public (via announcing it in public at the bus stop) - not that I would get in trouble for hearing it and acting on it, right?
I believe someone in Europe overheard info on a train and was successfully prosecuted. The US has not historically prosecuted trading on inside information that wasn't obtained illegally
So if you research that's fine. If you overhear something that might be fine (I don't think anyone has been seriously convicted yet but I could be wrong)
It can't be enough to say the trade was statistically unlikely because your independent research might legitimately let you make an unlikely trade. This particular trade was very unlikely though.
I've thought about this type of question a fair bit. I'd even go one step further and ask what if you're in a position where you might hear about this stuff now and then (but not in a way that's easily provable, say you regularly take a train at the same time as an M&A lawyer that you shouldersurf) and you semi-regularly buy $1,0000ish (of variable amounts) in low-DTE options basically on no information - the whole purpose of it is you're buying 'insurance' where you're paying some% premium for obviously -EV trades.
You do this for months (hopefully without your M&A 'friend' swapping jobs or going WFH) before you shoulder surf that a publicly traded company is being acquired at some massive premium and spear the whale for low-DTE calls within 2S.D. of your normal range.
If you get investigated you can just say that you regularly take these kinds of punts for fun. You've got a record to prove it. You've got no contact with people in these positions, you can provide your entire social calendar and contact list and be probably many steps removed.
FWIW I keep all my money in some individual stocks and index funds. I just think this kind of hypothetical is a pretty fun situation to try to optimize for.
The hardest part of this whole thing is finding someone who a) gets regular access to potential useful information, b) talks about it in public, which most of them probably don't, c) you can generally be close enough to overheard consistently but without being "that weirdo that always wants to sit behind me", all while being lucky enough to hear something at the right time.
If this guy had bought these calls last week (at same DTE) all he would have accomplished is donating $22k to some bank or hedge fund somewhere.
In the most conservative definition, anything that communicates materially non-public information to you can potentially be a cause for insider trading.
It is fun to think about what the most minimal case could be. Ask the CEO what he thinks of revenue next quarter. If he smiles, starts to speak, then looks at the CFO and realizes he should stop, is that insider information? It probably is by some people's definition and he communicated no words.
No this would not be insider trading. You have no idea if these people even work for Splunk. And they could have just been speculating.
The SEC could still sue you and turn your life upside down by investigating every aspect of your life to try to find the connection that gave you that information, but if they can’t come up with the proof then eventually you would be fine.
I'm sure it technically counts. If this was allowed imagine how easy it would be to get out of an insider trading accusation.
> Oh, but I didn't pay employees for insider information. I merely overheard it at the bus stop!
Granted, if this really is how someone learns of an acquisition it would be unlikely to get proven in court, and unlikely you'd even get accused as someone with no ties to the company.
That all being said, the clear message from our government is that insider trading is okay. Our politicians do it every week. So don't feel bad about it if you do get a lucky tip.
Remember the case of coinbase PM who had his brother in India buy crypto before coinbase added them to their platform for trading? It was insider trading because insider gave the tip. PM's brother had no connection to the company directly.
Doesn't matter. That is still inside information and you can't trade it. Otherwise you'll end up just like this guy [0] and all the others who thought they could get away with it. Doesn't matter who.
The amount of HNers attempting to defend illegal trades like this is mind-boggling. Those in Congress should also be investigated over their suspiciously timed trades and as long as they are working in Congress, they should not be doing such trading at all.
1. Would that still fall under insider trading even if the information was accidentally heard, and even if I wasn't 100% sure of its accuracy?
2. If I had no clear connection to the company how would it be proven that I was trading on insider information? Surely it's not enough just to say the trade was statistically unlikely, or is it?