Material non-public information

If someone worked for a private company that was about to release a new product that they thought would seriously damage a public competitor, could said person short the competitor without breaking any laws or CFA Ethics rules?

Probably not.

That sounds like a no-no, but it also depends to a certain extent on whether a typical investor 1) wouldn’t know that the product is going to be released, and 2) would agree with you that it will clearly hurt a competitor. If it’s not clear whether the competitor is going to be hurt or not, and it’s just their (very possibly biased) opinion that it will, it’s not clear.

But if you are serious about those rules, you are probably best to avoid acting on that information until after the product is announced, released, or becomes public information.

But that’s too late?

To answer the question on the surface without having other information. Yes, it does.

On this note…what if the company had strongly positive material nonpublic info about itself. Aka, successful clinical trial results, etc etc. And uses that info by initiating a stock buyback. Is that still insider trading?

Ilegal insider trading requires a breach of fiduciary duty, and the source of your material, non-public information has to come at some point from inside the firm (even indirectly). In this case, no such breach would exist, and the source is a competitor. Your guy is good to go and bet his grandma’s ranch.

See Misappropriation Theory, the SEC rule 10b5-2, and United States vs O’Hagan to see the difference.

Thank you for all of your respopnses, I think IEV is onto something!

2 Timothy 4:3 “For the time will come when men will not put up with sound doctrine. Instead, to suit their own desires, they will gather around them a great number of teachers to say what their itching ears want to hear.”

Yes, IEV nailed it – you have a fiduciary duty to the company you work for and cannot trade on your company’s stock or that of competitors based on the information. What becomes less clear is if you could make either trade if you didn’t work for the company in question but happened to acquire that information from other means without the fiduciary duty and without doing something illegal (i.e., paying for the information, rumaging through corporate trash bags, breaking & entering, etc.).

I personally believe, but am not 100% this stands legal scruitiny (the law is very unclear), that if you acquired the information from “routine” research activities, that it is tradeable. I have uncovered relevant / material information from meeting with management of publicly traded companies through skilled interviewing / research / product testing / etc. and I believe that’s allowed. However, I am not sure all companies adhere 100% to regulation FD, so it becomes a difficult question to answer – if management has no public guidance but you sit down with them and they point you in the right direction, either directly or indirectly, is that on management for violating red FD or is that on the analyst? My contention is that it is on management (if anyone) and not the analyst, who is just doing his / her job.

Basically, the SEC seems to target cases like fat kid Raj who was paying people off – clearly over the line insider trading supported by extensive wire taps and witness coroboration.

The law and CFA Ethics are two different things, though. I think CFA Ethics states you have to release that information publicly from your interview before it can be traded on. But I could be remembering wrong.

Im more concerned about what the SEC would say, and if as bromion said this information was unconvered through skilled interviewing of a competitor, what’s wrong with that? People do primary research based on other players in the value chain all the time. I think it’s much easier to get useful information about what’s going on with a company than just asking senior management who is usually (but not always) trained to skillfully answer any question you throw at them.

On another note, I’m all open to hearing more Raj Rajafatman jokes. Let me go grab some popcorn first.

I recall in L2 that there was an ethical violation on account of researchers trading on their own unreleased research reports. How is knowledge of a competitor any different?