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If events are disclosed in a timely manner then shareholders can sue for securities fraud. Matt Levine—a columnist at Bloomberg who is both smart and hilarious

by tyre 8y ago

If events are disclosed in a timely manner then shareholders can sue for securities fraud. Matt Levine—a columnist at Bloomberg who is both smart and hilarious; his Money Stuff newsletter is excellent—has a recurring theme of “everything is securities fraud.” The theory: anything that effects the stock price of the company and isn’t disclosed as soon as possible is securities fraud. Company doesn’t disclose a security breach? Securities fraud. Board buries a sexual harassment settlement with the CEO? Securities fraud. If you buy stock after the event but before the event is disclosed, you were trading when the company had material information that could effect the stock price. That’s securities fraud. Levine is both joking and not that really _anything_ could be prosecuted under this, and the SEC has seemed to make some prosecutions under this theory that feel more like, “what you did was shitty and maybe not exactly illegal or we don’t have exact evidence so we’ll prosecute you under this super broad statute.” Wire fraud seems to be applied in a similar manner. (I’m not a lawyer and this is not legal advice, just some things I’ve read and now you’re reading on the internet from a random commentor. The above is how I understand it.)

elliekelly 8y ago
Securities lawyer here. And... I kind of agree. With respect to insider trading at least. The laws are both complicated and unclear. Recent cases are taking things to the point where it might soon be difficult for senior executives to own stock without a blind trust. Historically insider trading has required some sort of affirmative _action_ (buying or selling) but there's been a trend recently (as alleged here) of alleging insider trading for inaction. You didn't sell as planned, you didn't disclose in time, etc. It could really put management in a difficult spot. Other than the insider trading conundrum though it might seem like everything is securities fraud because we're too used to executives putting their own interests ahead of (or at least in line with) their shareholders*. That's a problem because their fiduciary duty says that company/shareholder interests have to come above all else. Edit: Meant "shareholders" interests not "own" interests.
- vec 8y ago
  Just playing devil's advocate a bit, but what would be the downside of just drawing a bright line that owning stock in your employer is inherently a conflict of interest?
  - chucksmash 8y ago
    Owning stock in your employer can better align your interests with those of the shareholders to whom you answer. If you believe that mechanism is sound, then I guess the downside would be that you have fewer incentives to maximize shareholder value.
    - JohnFen 8y ago
      > If you believe that mechanism is sound I don't really believe that mechanism is sound. I mean, it likely has some sort of affect in that direction, but I don't really think that it's a strong one.
      - ryan_j_naughton 8y ago
        It is absolutely a strong one and one that startup's function as a result of. If an employee couldn't get stock options in a startup, then there would be significantly fewer cases where they would choose to join a startup over a more stable, mature company. Sharing in the upside potential is critical. Sure, that isn't a public company but it still demonstrates the mechanism is sound.
        JohnFen 8y ago
        > If an employee couldn't get stock options in a startup, then there would be significantly fewer cases where they would choose to join a startup over a more stable, mature company That's possible, of course. I haven't seen any data to support it. In my own experience (which is not statistically meaningful), this is a weak effect. I strongly prefer working for startups and very small companies, and most of the engineers I've worked with have stated that things like stock options aren't important to them (that's part of why options are so widely referred to as "wallpaper"). The attraction to working for startups, for both myself and most of the people I've worked with, is that startups offer better working conditions and more interesting projects. However, I do feel the need to underline that this is just my subjective experience and it may not representative overall.
- ska 8y ago
  Recent cases are taking things to the point where it might soon be difficult for senior executives to own stock without a blind trust. Superficially this doesn't seem like a crazy idea - or at least it seems plausible to set it up well. I get the thinking that execs holding equity gives them more skin in the game, but it also seems to often lead to poorly matched incentives, and a reward structure that is only loosely coupled to real performance.
greendestiny_re 8y ago
Interesting that you mention "wire fraud," which is defined in a sense that involves "intent to deceive using an electronic device". Basically, woman lying about her weight on a dating app is committing wire fraud, as is a son lying to his mom that he had dinner. It only matters how much the woman or the son angered the authorities to determine the extent to which they will feel their wrath.
- elliekelly 8y ago
  This is untrue. I am the Queen of England. That's also untrue. But I'm confident I didn't just commit wire fraud. Wire fraud requires an intentional material deception that deprives someone of money or property. While both of your examples have the intent element they're lacking materiality and injury. All fraud requires a lie but not all lies rise to the level of fraud. The vast majority don't.
  - u_dont_knowthat 8y ago
    The woman could have caused the date to spend excessively in anticipation of the date, and benefited from that, know that the man has a reputation for this, but only with women below a certain weight. The son could have caused the mother to throw out the dinner she had prepared for her son, and if wealthy, the family may have a private chef that charges thousands of dollars per each plate prepared for the family. If it can be proven that he really did not eat dinner, had previously agreed to eat the mother’s provided dinner, and instead ate a different dinner after she threw out her perfectly good dinner, maybe it’s a crime after all. Don’t make assumptions about this sort of thing.

by tyre 8y ago

elliekelly 8y ago

Securities lawyer here. And... I kind of agree. With respect to insider trading at least. The laws are both complicated and unclear. Recent cases are taking things to the point where it might soon be difficult for senior executives to own stock without a blind trust. Historically insider trading has required some sort of affirmative _action_ (buying or selling) but there's been a trend recently (as alleged here) of alleging insider trading for inaction. You didn't sell as planned, you didn't disclose in time, etc. It could really put management in a difficult spot. Other than the insider trading conundrum though it might seem like everything is securities fraud because we're too used to executives putting their own interests ahead of (or at least in line with) their shareholders*. That's a problem because their fiduciary duty says that company/shareholder interests have to come above all else. Edit: Meant "shareholders" interests not "own" interests.

vec 8y ago
Just playing devil's advocate a bit, but what would be the downside of just drawing a bright line that owning stock in your employer is inherently a conflict of interest?
- chucksmash 8y ago
  Owning stock in your employer can better align your interests with those of the shareholders to whom you answer. If you believe that mechanism is sound, then I guess the downside would be that you have fewer incentives to maximize shareholder value.
  - JohnFen 8y ago
    > If you believe that mechanism is sound I don't really believe that mechanism is sound. I mean, it likely has some sort of affect in that direction, but I don't really think that it's a strong one.
    - ryan_j_naughton 8y ago
      It is absolutely a strong one and one that startup's function as a result of. If an employee couldn't get stock options in a startup, then there would be significantly fewer cases where they would choose to join a startup over a more stable, mature company. Sharing in the upside potential is critical. Sure, that isn't a public company but it still demonstrates the mechanism is sound.
      - JohnFen 8y ago
        > If an employee couldn't get stock options in a startup, then there would be significantly fewer cases where they would choose to join a startup over a more stable, mature company That's possible, of course. I haven't seen any data to support it. In my own experience (which is not statistically meaningful), this is a weak effect. I strongly prefer working for startups and very small companies, and most of the engineers I've worked with have stated that things like stock options aren't important to them (that's part of why options are so widely referred to as "wallpaper"). The attraction to working for startups, for both myself and most of the people I've worked with, is that startups offer better working conditions and more interesting projects. However, I do feel the need to underline that this is just my subjective experience and it may not representative overall.
ska 8y ago
Recent cases are taking things to the point where it might soon be difficult for senior executives to own stock without a blind trust. Superficially this doesn't seem like a crazy idea - or at least it seems plausible to set it up well. I get the thinking that execs holding equity gives them more skin in the game, but it also seems to often lead to poorly matched incentives, and a reward structure that is only loosely coupled to real performance.

greendestiny_re 8y ago

Interesting that you mention "wire fraud," which is defined in a sense that involves "intent to deceive using an electronic device". Basically, woman lying about her weight on a dating app is committing wire fraud, as is a son lying to his mom that he had dinner. It only matters how much the woman or the son angered the authorities to determine the extent to which they will feel their wrath.

elliekelly 8y ago
This is untrue. I am the Queen of England. That's also untrue. But I'm confident I didn't just commit wire fraud. Wire fraud requires an intentional material deception that deprives someone of money or property. While both of your examples have the intent element they're lacking materiality and injury. All fraud requires a lie but not all lies rise to the level of fraud. The vast majority don't.
- u_dont_knowthat 8y ago
  The woman could have caused the date to spend excessively in anticipation of the date, and benefited from that, know that the man has a reputation for this, but only with women below a certain weight. The son could have caused the mother to throw out the dinner she had prepared for her son, and if wealthy, the family may have a private chef that charges thousands of dollars per each plate prepared for the family. If it can be proven that he really did not eat dinner, had previously agreed to eat the mother’s provided dinner, and instead ate a different dinner after she threw out her perfectly good dinner, maybe it’s a crime after all. Don’t make assumptions about this sort of thing.