This belongs on the investment forum but I’m under the impression most people don’t read that.
I am not a lawyer but this looks like insider trading to me – tell me if I am wrong. Here is the scenario:
Company XYZ that has both public debt and equity attends a debt conference at investment bank ABC in May and presents new information to those in attendance (a select audience). This information is in the form of a slide deck that is not made available to the public via XYZ’s website, and phone call requests for information to XYZ are refused (i.e., they don’t share the presentation). The most recently available deck dates back to January of 2011 and is lacking material information that was available in the May presentation.
Investment bank ABC hosted the conference, received access to the presentation, and kept a copy of the presentation. ABC also happens to be the largest equity holder of XYZ, currently holding about 15% of the outstanding shares. This was a debt conference, but I know for a fact that the presentation circulated within ABC, and they refuse to give it to clients / other shareholders because it’s “too private” (this is what I am told by the equity team I spoke with)
ABC subsequently sells shares of XYZ after the presentation (within the June quarter, per publicly available filing documents – I suppose they could have sold in April or something as well but that’s unlikely).
ABC also sits on the board of directors of XYZ.
To me, this is clearly a violation of Reg FD by XYZ, and probably a violation of insider trading rules for ABC, with the one caveat being that I don’t know when the shares were sold (but I have to assume they were sold after the presentation based on the liquidity profile and amount of shares in question).
Am I wrong? How is it okay for the largest shareholder, that also happens to be an insider, to get preferential access to material information? This seems really fucked up.
Yes, I did, if by access you mean “glanced at the deck for 5 seconds last time I visited the company” which was a couple of weeks ago. I’ve owned stock for a long time and have not traded the shares during that time. It was absolutely material, and I assume other people who trekked all the way out to see this company probably also saw the deck.
It depends on whether the material non-public information already happened. Material information for purposes of insider trading must be presented in factual form, *and* actually occur at some point (i.e., XYZ management could be lying to ABC about the facts). But if ABC can frame it in the form of “based on our analysis we can reasonably expect that H will happen”, then there’s no case. An instance of misappropriation theory required in an insider trading case wouldn’t be established. Therefore, if you’re positive that what you saw was material, already took place and predictably affected your stake, then you have a case, or will have one when it happens in the future.
It predictably impacted my stake when ABC sold stock after receiving the material inside information. Most of what I saw was forward looking projections, and to me, they didn’t look that good. I’m sure someone with the best inside information available (as ABC has) would have used those projections in estimating future value, especially if they had a hard copy of the presentation and were able to view it for an extended period of time.
So to your point, no, it has not already happened, but equity valuation is a forward looking exercise.
In other words, regardless of what ABC says, if they’ve seen forward projections from management and are selling, I think any reasonable man would conclude that that is insider trading, and that XYZ violated Reg FD.
Here’s what you need for insider trading in the US:
A person or entity purchases or sells securities;
While in possession of material, non-public information;
Where the trader or tipper has acted in breach of a fiduciary or similar duty; and
The culpable parties acted with the appropriate level of scienter (the Latin word for
The key is that you need to receive information in the context of a fiduciary (confidential relationship) of the company. Being present at a conference doesn’t necessarily make you a fiduciary where you have a duty to XYZ (although being on the board gets you there).
I get your point, and of course valuation is forward looking and ABC likely got tipped. The question for the purposes of an insider trading case is, what if the projections are not that accurate? What if someone else has access to that information, shorts the shit out of XYZ, but it turns out sales are not as bad as initially thought and gets creamed? FD fail, probably depending on the document. Insider trading from a legal standpoint, harder to establish. Since ABC had handouts and kept them, XYZ may be deemed them as random-numbers-out-of-nowhere-that-may-or-may-not-happen projections. That of course doesn’t necessarily mean you shouldn’t call the SEC.
I understand your point – if you trade on material inside information and then lose money, I doubt anyone is up in arms about prosecuting that.
But on the other hand, if you have a situation where the company flat out gives them material inside information and they trade on that, how is it not insider trading regardless of whether they make or lose money?
In other words, if _ that _ isn’t insider trading, what is? I mean, the only thing more egregious than that would be if someone sitting on the board called a hedge fund dude and tipped him on material inside information (Rajatanamabamanam or whatever his name is for the fail).
Pretty much what you’re saying is that it’s almost impossible to prosecute insider trading and that people should trade on material info any time they can get it.
This is why there are supposed to be Chinese Walls between the research divisions that back valuation calls and the IB divisions that sponsor conferences and such (and now, arguably the Equity and Fixed Income research).
Of course Chinese Walls here may be about as effective as Chinese Walls in China.
Fun Fact: The term Chinese wall actually comes from a practice in China where the middle/lower class was permitted to not bow to the ruling class in conjested urban areas as long as they did not make eye contact and acted as if they did not see them. This was done to reduce traffic.
Yes, I’ve accepted the outcome here and learned the valuable lesson that insider trading is okay as long as you don’t get caught. Just don’t pay anyone, talk on the phone about it, or make large option bets the day before an event and you should be fine. Glad to see the nearly billion dollar budget that goes to the SEC is such an effective deterrent.
I dunno, I would think they could automate a lot of this stuff and come up with some pretty robust functionality to screen for high proability cases of fraud and insider trading. This particular instance probably would have still gone unnoticed, but maybe some of the really big issues would have been caught.
What has the SEC done in the last 10-15 years? Almost nothing, really. They’ve missed all the huge frauds, including several that were served up to them on a platter. And they can’t even provide incentive for basic compliance to existing regulations. The global settlement is a joke and Reg FD is a complete sham.
Let’s face it, the SEC is nothing more than a figurehead to make retail investors feel safe. At the price of $1.3 billion dollars, that seems like a huge waste of money since it doesn’t seem like anyone really feels safer anyway.
It’s cool though, no worries, we have the CFA ethics program to fall back on.
^ Agreed. Facing insider trading charges in the US is more a consequence of a procedural mistake from the traders’ end. Raj and Gupta thought they could keep doing it because presumably they had done that before, and felt confident enough so they would simply call each other about that. Similarly the retail investor who thinks he can create a track record by previously trading his target security and get binders of “research” to justify when his childhood friend’s fifth-degree cousin tips him about say a merger and then goes all in, but it turns out the SEC shows up shortly after and nails everyone because suddenly he goes from say 10% of his portfolio to maybe 50% or more. Another procedural mistake.
SEC is not 100% effective, but it would be really scary if there was no regulatory agency at all. Despite these headline cases, the US market is much cleaner than say… Hong Kong or most other countries. US bank controls and compliance are also much better than other financial hubs, i.e. London and Europe.
Of course, once you think about it, there’s no way that the SEC can monitor everyone. So, most violations like insider trading are unpunished. However, this does not mean that the SEC does not deter violations at all. There would probably be 100x as much insider trading if there was no enforcement.