5 ms·

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. Wou

by kypro 3y ago

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?

euos 3y ago
Burden of proof would be on FCC.
- pc86 3y ago
  What do you think the FCC is?
  - euos 3y ago
    SEC. Yes, I mixed up to US 3 letter acronyms.
bragr 3y ago
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." https://www.law.cornell.edu/cfr/text/17/240.10b5-1 https://www.law.cornell.edu/cfr/text/17/240.10b5-1
- yieldcrv 3y ago
  disagree, the SEC has lost a lot of cases on this idea if you’re not affiliated with the company and simply overhear and trade, make enough to retain a lawyer real quick
  - mcguire 3y ago
    Oh, no doubt. There will be an investigation looking for a relationship.
- mock-possum 3y ago
  A guy speaking out loud at a bus stop isn’t public information?
  - bragr 3y ago
    The SEC has very specific rules and even specific form [1] they must file when companies release information like this. [1] https://www.sec.gov/forms https://www.sec.gov/forms
    - jahewson 3y ago
      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.
    - snowwrestler 3y ago
      Those rules regulate the company, not random people at a bus stop.
    - mock-possum 3y ago
      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?
- bluehorizon2 3y ago
  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.
  - ikiris 3y ago
    "if someone posts it on Twitter." Yes, if you trade on public information, then it's not material non public information.
- Retric 3y ago
  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-trade-on-inside-information-2/ 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.
fragmede 3y ago
How many lawyer meetings with the SEC are you willing to sit through for $10M (5 after taxes)?
- pc86 3y ago
  If I've got $5M to spend on attorneys, quite a few.
  - lowbloodsugar 3y ago
    I would imagine that if you are fighting the SEC then $5m isn’t very much?
    - deleted 3y ago
      [deleted]
- pjmorris 3y ago
  More than one?
- munk-a 3y ago
  Probably about ten years worth.
kasey_junk 3y ago
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”.
- hash872 3y ago
  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....?
  - cko 3y ago
    Sounds like he failed in his fiance duties.
  - djbusby 3y ago
    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.
    - lowbloodsugar 3y ago
      Unless your wife is the leader of the house.
      - kasey_junk 3y ago
        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.
teaearlgraycold 3y ago
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.
- conductr 3y ago
  Imagine how easy it would be to accuse lucky traders of insider trading.
conductr 3y ago
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.
cmcaleer 3y ago
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.
- pc86 3y ago
  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.
rvz 3y ago
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. There are no excuses for it. [0] https://www.nbcnews.com/politics/politics-news/ex-lawmaker-convicted-insider-trading-t-mobile-merger-rcna74463 https://www.nbcnews.com/politics/politics-news/ex-lawmaker-c...
mkmk 3y ago
This exact scenario is well discussed here: https://www.bloomberg.com/opinion/articles/2019-03-29/deals-on-the-train-are-everyone-s-business https://www.bloomberg.com/opinion/articles/2019-03-29/deals-...
bluehorizon2 3y ago
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.
deleted 3y ago
[deleted]
wrsh07 3y ago
Matt Levine covers this fairly extensively 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.
thumbsup-_- 3y ago
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.
_ea1k 3y ago
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.
deleted 3y ago
[deleted]

by kypro 3y ago

euos 3y ago

Burden of proof would be on FCC.

pc86 3y ago
What do you think the FCC is?
- euos 3y ago
  SEC. Yes, I mixed up to US 3 letter acronyms.

bragr 3y ago

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." https://www.law.cornell.edu/cfr/text/17/240.10b5-1 https://www.law.cornell.edu/cfr/text/17/240.10b5-1

yieldcrv 3y ago
disagree, the SEC has lost a lot of cases on this idea if you’re not affiliated with the company and simply overhear and trade, make enough to retain a lawyer real quick
- mcguire 3y ago
  Oh, no doubt. There will be an investigation looking for a relationship.
mock-possum 3y ago
A guy speaking out loud at a bus stop isn’t public information?
- bragr 3y ago
  The SEC has very specific rules and even specific form [1] they must file when companies release information like this. [1] https://www.sec.gov/forms https://www.sec.gov/forms
  - jahewson 3y ago
    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.
  - snowwrestler 3y ago
    Those rules regulate the company, not random people at a bus stop.
  - mock-possum 3y ago
    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?
bluehorizon2 3y ago
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.
- ikiris 3y ago
  "if someone posts it on Twitter." Yes, if you trade on public information, then it's not material non public information.
Retric 3y ago
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-trade-on-inside-information-2/ 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.

fragmede 3y ago

How many lawyer meetings with the SEC are you willing to sit through for $10M (5 after taxes)?

pc86 3y ago
If I've got $5M to spend on attorneys, quite a few.
- lowbloodsugar 3y ago
  I would imagine that if you are fighting the SEC then $5m isn’t very much?
  - deleted 3y ago
    [deleted]
pjmorris 3y ago
More than one?
munk-a 3y ago
Probably about ten years worth.

kasey_junk 3y ago

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”.

hash872 3y ago
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....?
- cko 3y ago
  Sounds like he failed in his fiance duties.
- djbusby 3y ago
  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.
  - lowbloodsugar 3y ago
    Unless your wife is the leader of the house.
    - kasey_junk 3y ago
      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.

teaearlgraycold 3y ago

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.

conductr 3y ago
Imagine how easy it would be to accuse lucky traders of insider trading.

conductr 3y ago

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.

cmcaleer 3y ago

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.

pc86 3y ago
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.

rvz 3y ago

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. There are no excuses for it. [0] https://www.nbcnews.com/politics/politics-news/ex-lawmaker-convicted-insider-trading-t-mobile-merger-rcna74463 https://www.nbcnews.com/politics/politics-news/ex-lawmaker-c...

mkmk 3y ago

This exact scenario is well discussed here: https://www.bloomberg.com/opinion/articles/2019-03-29/deals-on-the-train-are-everyone-s-business https://www.bloomberg.com/opinion/articles/2019-03-29/deals-...

bluehorizon2 3y ago

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.

deleted 3y ago

[deleted]

wrsh07 3y ago

Matt Levine covers this fairly extensively 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.

thumbsup-_- 3y ago

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.

_ea1k 3y ago

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.

deleted 3y ago

[deleted]