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United States v. Newman Clarifies the Law of Insider Trading

69 points by misterbwong 11y ago

dummy7953 11y ago
"..do you risk finding a subpoena from the SEC in your stocking?" People actually worry about the SEC under the Bush/Obama administration?!?
nkassis 11y ago
This is interesting, I was under the impression that insider trading covered even things accidentally leaked from companies. Is that not the case? If someone used information hacked or found by another person would that fall under insider trading?
- berberous 11y ago
  "“Dorozhko’s alleged ‘stealing and trading’ or ‘hacking and trading’ does not amount to a violation” of securities laws, Judge Naomi Reice Buchwald of United States District Court ruled last month. Although he may have broken laws by stealing the information, the judge concluded, “Dorozhko did not breach any fiduciary or similar duty ‘in connection with’ the purchase or sale of a security.” She ordered the S.E.C. to let him have his profits." http://www.nytimes.com/2008/02/15/business/15norris.html http://www.nytimes.com/2008/02/15/business/15norris.html
  - jdshutt 11y ago
    The Second Circuit reversed that ruling. http://economix.blogs.nytimes.com/2010/03/29/common-sense-and-insider-trading/ http://economix.blogs.nytimes.com/2010/03/29/common-sense-an...
mannykannot 11y ago
There seems to be a fundamental logical error in the explanation given here: "As the court recognized, the reasoning of Dirks compels this conclusion. The Supreme Court ruled that to be liable a tippee must know that the insider leaked the information in breach of a duty. The Court in Dirks also held that breach of a duty was established if the insider received some personal benefit in exchange for the leak. Logically, therefore, proof the tippee knew there was a breach of duty means proof the tippee knew that the insider received some personal benefit." It would have to be the case that a breach of a duty can only be established if the insider received some personal benefit in exchange for the leak, in order for the conclusion to hold.
- rayiner 11y ago
  That is an explicit conclusion of Dirks (at 662): "Absent some personal gain, there has been no breach of duty to stockholders."
  - gburt 11y ago
    That is true, but it still seems to not follow. I could "breach my duty" to shareholders simply by being negligent.
    - mmatants 11y ago
      It seems that that would trigger a different set of problems - confidentiality issues, rather than conflict of interest. So yes, still bad, but a different rule-set, perhaps?
    - jsprogrammer 11y ago
      Yes, the author seems to assume that: proof_of_breach <-> proof_of_benefit You are arguing that it could be the case that: proof_of_negligence -> proof_of_breach proof_of_negligence -> (proof_of_benefit v ~proof_of_benefit) in which case there could be a contradiction. However, there is probably an argument that: proof_of_negligence -> (proof_of_benefit v ~proof_of_benefit) is wrong and that there actually is a rule: proof_of_breach -> proof_of_benefit For example, if someone is negligent, we already know they received a personal benefit (eg. reduced cognitive load, received compensation for work not performed, etc.). To show a logical incorrectness, you need to show an `x` where: proof_of_x -> (proof_of_breach ^ ~proof_of_benefit) v (~proof_of_breach ^ proof_of_benefit)
      - thaumasiotes 11y ago
        What are you trying to say here? proof_of_negligence -> (proof_of_benefit v ~proof_of_benefit) easily simplifies to true and therefore doesn't need a case to be made for it. It's always true.
roymurdock 11y ago
There was obviously a reason that the tippers (Dell & Nvidia insiders) leaked confidential information to the defendants, two hedge fund managers named Newman and Chiasson. I don't see why it's material whether this reason was friendship/status-boosting or some sort of tangible, cash benefit. The hedge fund managers benefited a great deal from the information, and thus the tippers benefited by extension as they now had stronger ties to two successful hedge fund managers. If the tippers benefited from leaking confidential information, they breached a fiduciary contract with their shareholders by using company property (information) for their own gain.
- ksherlock 11y ago
  "In each case, Newman and Chiasson were several steps removed from the original leak, receiving the inside information only after it had been first relayed between at least two or three other people."
  - roymurdock 11y ago
    This is inconsequential. If I were a hedge fund manager looking for insider info, I wouldn't be dumb enough to go directly to people within the company, unless I was out golfing with the CEO and he let something slip in conversation. I would hire an analyst with ties to any employees in the organization to ask around. Which is probably what happened here. What other reason would there be for the analysts to acquire information and then go to the hedge fund managers with it? You can't wash your hands clean by proxy if you still know what you are doing is wrong. "The judge also agreed with the government that it was required to show only that the defendants [Newman and Chiasson] knew that insiders had leaked the information in violation of their duties to the company – the government did not have to prove the defendants actually knew the insiders had received a personal benefit in exchange." - this was the original logic under which they were convicted, and I think it makes a lot more sense than the final ruling.
- maxlybbert 11y ago
  > There was obviously a reason that the tippers ... leaked confidential information to the defendants ... > I don't see why it's material whether this reason was friendship/status-boosting or some sort of tangible, cash benefit. Mainly because they're facing prison time. I can think of other laws that make similar distinctions. For instance, the punishment for receiving stolen goods will depend on the value of the goods in question. Why should somebody get a lighter punishment for receiving, say, an iPod compared to a car? In both cases, they knew the person giving them the item wasn't the owner. In this case, it isn't a question of how harsh the punishment is, but whether the people will be punished at all. However, if the SEC wishes to create lesser penalties to cover this kind of thing, it has the regulatory authority to do so. If that's not enough, Congress can always reconsider the law, but I can't imagine people getting all that worked up about it.
jessaustin 11y ago
It's good that the court somewhat clarified previously-fuzzier law. The underlying problem is that insider trading as a crime is so ad hoc to begin with. TFA notes the hodgepodge of agencies, laws, regulation, rulings, etc. that "define" insider trading today. I doubt if any legal thinker's interpretation of the current understanding were codified into a single bill, that that bill could pass in Congress. Codifying what currently exists would make obvious what a boon it is for powerful executives. A codification of what the public imagines exists, would never get past those executives' lobbyists. Nearly all executives trade in the securities of the corporations that employ them. Very few are ever charged with insider trading. (I'm not suggesting they should be!) However, whenever company management catches wind of transactions that annoy them, they always have a friendly ear at the prosecutor's office. Long before major stock [EDIT:] moves, many "insiders" knew what was coming. Perhaps some told themselves, like Madoff, that they could get everything turned around. Regardless, insiders know before the public knows. Insider trading prohibitions serve to prolong the public's ignorance, and so deepen the public's trading losses. No one is better placed to dance right up to the line concerning investment decisions and public disclosure, than the firm's executives are. That's why the majority of insider trading prosecutions that succeed, are against outsiders like Martha Stewart or the subjects of TFA. Insider trading is a crime because it's valuable for the executive class to punish early defectors.
- cperciva 11y ago
  Nearly all executives trade in the securities of the corporations that employ them. Lots of executives exercise stock options and sell shares. I think executives buying securities on the open market is far less common. The 'insider trading' issue with the timing of when executives sell shares is why SEC rule 10b5-1(c) exists: It allows executives to establish in advance plans for selling their shares, such that their future trades cannot be deemed to be the result of inside information.
  - walshemj 11y ago
    are you sure Director buying is well reported the Investors chronicle has a weekly run down of which listed company's directors have brought/sold shares.
deleted 11y ago
[deleted]
pitnips 11y ago
"The attorney, as an outsider to the corporation, owes no fiduciary duty to the corporation’s shareholders so the classical theory would not apply. Under the misappropriation theory, the trade is unlawful because the attorney violated a duty to the client by using the client’s confidential information for the attorney’s own benefit." The client is the corporation's shareholders, as management simply acts as an agent for those shareholders.
- rayiner 11y ago
  The client is the corporation, a distinct legal person from any of the managers or any of the shareholders.
  - pitnips 11y ago
    Ah, right. Thanks
deleted 11y ago
[deleted]
tgb 11y ago
I took some time a while back to look into why insider trading is considered bad. The situation turned out to be messy and undecided but interesting. Here's some links I came across in that search if you're curious. [0] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=132529 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=132529 [1] http://www.cato.org/publications/commentary/whats-wrong-about-insider-trading http://www.cato.org/publications/commentary/whats-wrong-abou... [2] http://dealbreaker.com/2012/07/everything-bad-is-insider-trading/ http://dealbreaker.com/2012/07/everything-bad-is-insider-tra... [3] http://www.forbes.com/columnists/free_forbes/2003/0512/050.html http://www.forbes.com/columnists/free_forbes/2003/0512/050.h...

69 points by misterbwong 11y ago

"..do you risk finding a subpoena from the SEC in your stocking?" People actually worry about the SEC under the Bush/Obama administration?!?

nkassis 11y ago

This is interesting, I was under the impression that insider trading covered even things accidentally leaked from companies. Is that not the case? If someone used information hacked or found by another person would that fall under insider trading?

berberous 11y ago
"“Dorozhko’s alleged ‘stealing and trading’ or ‘hacking and trading’ does not amount to a violation” of securities laws, Judge Naomi Reice Buchwald of United States District Court ruled last month. Although he may have broken laws by stealing the information, the judge concluded, “Dorozhko did not breach any fiduciary or similar duty ‘in connection with’ the purchase or sale of a security.” She ordered the S.E.C. to let him have his profits." http://www.nytimes.com/2008/02/15/business/15norris.html http://www.nytimes.com/2008/02/15/business/15norris.html
- jdshutt 11y ago
  The Second Circuit reversed that ruling. http://economix.blogs.nytimes.com/2010/03/29/common-sense-and-insider-trading/ http://economix.blogs.nytimes.com/2010/03/29/common-sense-an...

mannykannot 11y ago

There seems to be a fundamental logical error in the explanation given here: "As the court recognized, the reasoning of Dirks compels this conclusion. The Supreme Court ruled that to be liable a tippee must know that the insider leaked the information in breach of a duty. The Court in Dirks also held that breach of a duty was established if the insider received some personal benefit in exchange for the leak. Logically, therefore, proof the tippee knew there was a breach of duty means proof the tippee knew that the insider received some personal benefit." It would have to be the case that a breach of a duty can only be established if the insider received some personal benefit in exchange for the leak, in order for the conclusion to hold.

rayiner 11y ago
That is an explicit conclusion of Dirks (at 662): "Absent some personal gain, there has been no breach of duty to stockholders."
- gburt 11y ago
  That is true, but it still seems to not follow. I could "breach my duty" to shareholders simply by being negligent.
  - mmatants 11y ago
    It seems that that would trigger a different set of problems - confidentiality issues, rather than conflict of interest. So yes, still bad, but a different rule-set, perhaps?
  - jsprogrammer 11y ago
    Yes, the author seems to assume that: proof_of_breach <-> proof_of_benefit You are arguing that it could be the case that: proof_of_negligence -> proof_of_breach proof_of_negligence -> (proof_of_benefit v ~proof_of_benefit) in which case there could be a contradiction. However, there is probably an argument that: proof_of_negligence -> (proof_of_benefit v ~proof_of_benefit) is wrong and that there actually is a rule: proof_of_breach -> proof_of_benefit For example, if someone is negligent, we already know they received a personal benefit (eg. reduced cognitive load, received compensation for work not performed, etc.). To show a logical incorrectness, you need to show an `x` where: proof_of_x -> (proof_of_breach ^ ~proof_of_benefit) v (~proof_of_breach ^ proof_of_benefit)
    - thaumasiotes 11y ago
      What are you trying to say here? proof_of_negligence -> (proof_of_benefit v ~proof_of_benefit) easily simplifies to true and therefore doesn't need a case to be made for it. It's always true.

roymurdock 11y ago

There was obviously a reason that the tippers (Dell & Nvidia insiders) leaked confidential information to the defendants, two hedge fund managers named Newman and Chiasson. I don't see why it's material whether this reason was friendship/status-boosting or some sort of tangible, cash benefit. The hedge fund managers benefited a great deal from the information, and thus the tippers benefited by extension as they now had stronger ties to two successful hedge fund managers. If the tippers benefited from leaking confidential information, they breached a fiduciary contract with their shareholders by using company property (information) for their own gain.

ksherlock 11y ago
"In each case, Newman and Chiasson were several steps removed from the original leak, receiving the inside information only after it had been first relayed between at least two or three other people."
- roymurdock 11y ago
  This is inconsequential. If I were a hedge fund manager looking for insider info, I wouldn't be dumb enough to go directly to people within the company, unless I was out golfing with the CEO and he let something slip in conversation. I would hire an analyst with ties to any employees in the organization to ask around. Which is probably what happened here. What other reason would there be for the analysts to acquire information and then go to the hedge fund managers with it? You can't wash your hands clean by proxy if you still know what you are doing is wrong. "The judge also agreed with the government that it was required to show only that the defendants [Newman and Chiasson] knew that insiders had leaked the information in violation of their duties to the company – the government did not have to prove the defendants actually knew the insiders had received a personal benefit in exchange." - this was the original logic under which they were convicted, and I think it makes a lot more sense than the final ruling.
maxlybbert 11y ago
> There was obviously a reason that the tippers ... leaked confidential information to the defendants ... > I don't see why it's material whether this reason was friendship/status-boosting or some sort of tangible, cash benefit. Mainly because they're facing prison time. I can think of other laws that make similar distinctions. For instance, the punishment for receiving stolen goods will depend on the value of the goods in question. Why should somebody get a lighter punishment for receiving, say, an iPod compared to a car? In both cases, they knew the person giving them the item wasn't the owner. In this case, it isn't a question of how harsh the punishment is, but whether the people will be punished at all. However, if the SEC wishes to create lesser penalties to cover this kind of thing, it has the regulatory authority to do so. If that's not enough, Congress can always reconsider the law, but I can't imagine people getting all that worked up about it.

jessaustin 11y ago

It's good that the court somewhat clarified previously-fuzzier law. The underlying problem is that insider trading as a crime is so ad hoc to begin with. TFA notes the hodgepodge of agencies, laws, regulation, rulings, etc. that "define" insider trading today. I doubt if any legal thinker's interpretation of the current understanding were codified into a single bill, that that bill could pass in Congress. Codifying what currently exists would make obvious what a boon it is for powerful executives. A codification of what the public imagines exists, would never get past those executives' lobbyists. Nearly all executives trade in the securities of the corporations that employ them. Very few are ever charged with insider trading. (I'm not suggesting they should be!) However, whenever company management catches wind of transactions that annoy them, they always have a friendly ear at the prosecutor's office. Long before major stock [EDIT:] moves, many "insiders" knew what was coming. Perhaps some told themselves, like Madoff, that they could get everything turned around. Regardless, insiders know before the public knows. Insider trading prohibitions serve to prolong the public's ignorance, and so deepen the public's trading losses. No one is better placed to dance right up to the line concerning investment decisions and public disclosure, than the firm's executives are. That's why the majority of insider trading prosecutions that succeed, are against outsiders like Martha Stewart or the subjects of TFA. Insider trading is a crime because it's valuable for the executive class to punish early defectors.

cperciva 11y ago
Nearly all executives trade in the securities of the corporations that employ them. Lots of executives exercise stock options and sell shares. I think executives buying securities on the open market is far less common. The 'insider trading' issue with the timing of when executives sell shares is why SEC rule 10b5-1(c) exists: It allows executives to establish in advance plans for selling their shares, such that their future trades cannot be deemed to be the result of inside information.
- walshemj 11y ago
  are you sure Director buying is well reported the Investors chronicle has a weekly run down of which listed company's directors have brought/sold shares.

deleted 11y ago

[deleted]

pitnips 11y ago

"The attorney, as an outsider to the corporation, owes no fiduciary duty to the corporation’s shareholders so the classical theory would not apply. Under the misappropriation theory, the trade is unlawful because the attorney violated a duty to the client by using the client’s confidential information for the attorney’s own benefit." The client is the corporation's shareholders, as management simply acts as an agent for those shareholders.

rayiner 11y ago
The client is the corporation, a distinct legal person from any of the managers or any of the shareholders.
- pitnips 11y ago
  Ah, right. Thanks

deleted 11y ago

[deleted]

tgb 11y ago

I took some time a while back to look into why insider trading is considered bad. The situation turned out to be messy and undecided but interesting. Here's some links I came across in that search if you're curious. [0] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=132529 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=132529 [1] http://www.cato.org/publications/commentary/whats-wrong-about-insider-trading http://www.cato.org/publications/commentary/whats-wrong-abou... [2] http://dealbreaker.com/2012/07/everything-bad-is-insider-trading/ http://dealbreaker.com/2012/07/everything-bad-is-insider-tra... [3] http://www.forbes.com/columnists/free_forbes/2003/0512/050.html http://www.forbes.com/columnists/free_forbes/2003/0512/050.h...