Insider information question

Started reading last year’s CFAI LII text again while I’m waiting for '09 books to arrive (as I failed the 08 test). Got to page 42 in Volume I, under the Application of the Standard for material nonpublic information – Standard II(A), Example 1. Basically, it says that a dude is selling his business for 2x its current price. He’s so psyched about it, that he tells his sister. His sister is obviously very pumped about the whole thing, so she tells her daughter. Her daughter can’t keep her mouth shut, so she tells her hubby, who ofcourse thinks this is his ticket to the big leagues, and tells his big shot broker. And guess what the broker does…yup, he buys the stock for his own account. Well, the comment below this lovely story, is that only the idiot husband actually violates the Standard II(A) for telling his broker, and the broker violated the standard for acting on the information. Doesn’t mention anything about the rest of the idiots and their inability to keep a secret. I totally get why the broker’s a chump for acting on the inside tip, but not sure why the husband is guilty as this example doesn’t mention that he actually acted on this information like buying the stock for himself. So am I correct to understand from this example that you can blab about inside information to anyone you want as long as you don’t act on it … until you tell your broker, at which point you’ve violated the standard? That doesn’t really makes sense using only the information from this example. Anyone interested in putting their 2cents in this one, would be greatly appreciated.

I read this same question and had the same thought about it… I just passed it along as one of the things not to over-think… would be cool if someone knew :wink:

well, at least I’m not alone in thinking that I was missing something… thanks for the support, projectplatnyc

I don’t have the book in front of me but I think it is because the husband acted on the information and told a broker who also acted on the information. Lots of people can talk about inside information…it is when you act on that information for your benefit that it comes into play.

What about the first “dude”? Woulden’t he have committed more of an offence than the husband?

Yeah, I thought that too. But the example doesn’t mention anything about the husband actually buying the stock for himself, only that the broker did for his own account. So unless this is simply a poor example by the CFAI (oh god, I’m blespheming), and it supposed to mention that the husband also bought the stock, it doesn’t make sense for the husband to violate the standard as he’s not really acting/benefiting from his being a dumbass. It would be interesting to compare this example in the old book with an example in the new book once I get it. Thanks for your thoughts, Trek7000

The first “dude” shouldn’t tell anyone, but if he does that doesn’t automatically violate the code, as in order to violate it, you need to “act” on the information, so being an idiot doesn’t really make you violate the standard.

I think I just figured it out, but its a stretch… The standard says “act, or cause others to act”. So if the husband caused his broker to act, that makes him guilty of the violation. However, this same logic can be used for the rest of the chain of idiots in this example, albeit several layers removed. Perhaps its the direct link of either acting yourself, or causing others to act. If that’s the case, then the example and the comment by the CFAI on the example makes sense. What do you all think?

I agree, you have no control over people twice or three times removed from you.

Pffffffffff… That is a bit of a strech… With CFAI, it could be…

I feel ya, but I think acting directly or causing others to act either on your behalf or on their own behalf is the key here. BUT!!! reading a bit further, on pag 43, Example 5, we have a case where a wife (Mrs. X) tells her huband (Mr. X) that her friend (Mrs. Y) can’t make it to the charity event because because her husband (Mr. Y) is busy at work firing the CFO of Mr. Y’s company due to fraud. Mr. X knows Mr. Y, as the CEO of a public company, and decides to sell his shares in that company before the news of Mr. Y’s company’s CFO going to jail hits the tape. Now, Mr. X is obviously guilty of trading on the inside information, but the example does not mention anything about Mrs. X who obviously was the conduit of this inside information, and inadvertenly caused her husband to act on this information. So why isn’t she guilty of violating the standard just like the chump in the original example who told his borker? Is it because there is no way she could have known that her husband would put the 2-and-2 together? Does that mean the INTENT plays a role here? Wow, I hate this stuff, I think that’s why I failed Ethics on the last exam!

That could be… Sounds right, since the husband in the first example made a point of spreading the inside info, wherease the wife just relayed a piece of semi-private information… Perhaps, when you dissiminate insider info on purpuse you are guilty (i imagine you are guilty whether it is used or not) whereas when you do it by mistake, well, you are not…? Would explain why the company owner isnt in trouble in the first example… He told because he was excited, not to spread insider gossip…

Yeah, makes sense, but this kind of stuff makes me nuts! No wonder I’m going bold. Thanks, Johnnyblazini, for your input.

I don’t have the book in front of me, but I remember the example. One thing I didn’t like was that it didn’t factor in proximity to the equation. At some point, the information becomes meaningless because the person relaying it has no credibility. Example: if you overhear someone on the street telling someone else that XYZ is a great buy, then that doesn’t hold a lot of water. If you happen to know that the person is an insider at the company, it suddenly becomes more interesting. There is a different case on proximit in the book. In the example, the broker is acting on information from a guy’s wife’s mother’s brother. Maybe the broker is far enough from the company owner that he’s not acting on inside information, but trading on a rumor? I don’t know. It’s not clear. The husband is a lot closer to the information in my opinion because it’s all within his family. I agree this is a tough one to understand without something explicit from CFAI detailing their rationale when they wrote it.