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Tuesday, October 19, 2010

Insider Trading and Material Non-Public Information

One of the first things any new hire on Wall Street, or any executive in a publicly traded corporation, learns about is the laws pertaining to insider trading.  Individuals are prevented from trading on material non-public information, and from tipping off their friends to trade on such information as well.  The cases aren't always crystal clear in terms of legality, but this one seems pretty easy, and I would have gotten in wrong (although, on the correct side - the side that says "don't do it!")

From Bloomberg:

"Your senator learns that a much- maligned weapons system now has enough votes for funding. Before the news gets to a reporter, he buys shares in the arms manufacturer for a quick, handsome profit.

What’s wrong with this picture? Nothing, according to the law. Nor would it be illegal for him to tip someone else, say, his largest campaign contributor"

Now, it seems pretty clear to me that this is material non-public information.  What's the "reasoning" behind the legality of it then?

"Laws that criminalize insider trading cover corporate insiders and those they tip, but not specifically Congress. And while scholars differ on whether existing law could be applied on Capitol Hill, it hasn’t been."

I never really thought about the fact that insider trading laws cover only corporate insiders.  Congressmen are not corporate insiders, thus they are not covered!  Pretty surprising - if there are any securities lawyers in my audience, make your opinions known in the comments - could the existing law be applied to Congressmen?  There is another article linked to from the Bloomberg article that says that the answer is "no." (of course the whole point of the article itself is that the answer is "no!"  Actually, let me talk for just a second about the claim that linked article makes:

"This Comment argues against prohibiting trading on political intelligence by outside actors  (lobbyists and hedge funds) because these actors are merely the Washington equivalents of market analysts, whose information gathering functions are perfectly legitimate, if not desirable."

Huh?  Market analysts?  No - they are getting material non-public information from policy makers!  Just like it's illegal to trade on this information when it comes from company insiders, it should be illegal to trade on this information when it comes from policy makers.

It seems impossible to me that one could make the argument that if Congress is holding confidential talks about a bailout of the big banks, that it should be legal for Congressmen to trade on that information - or even that it is legal!  As the article notes, "scholars differ whether existing law could be applied on Capitol Hill."

“This is an area in which the public is quite justifiably suspicious about dual standards,” says Representative Brian Baird, a Democrat from Washington state. 

Along with New York Democrat Louise Slaughter, Baird has been trying to apply insider trading law to Congress through the Stop Trading on Congressional Knowledge bill..."

...

"But when it comes to forbidding members of Congress from using access to secrets for financial enrichment, Slaughter and Baird have gotten nowhere on their bill. Now Baird’s retiring. 

He says Congress could solve the problem without a new law or a repeal of an old one. 

“It’s not that we have laws protecting us,” Baird says. “We don’t have laws applying it to us.” 

All it would take is a change in ethics rules, which now generally forbid conflicts of interest and using official influence for personal gain.


EDIT - how about this from the SEC's website:

"Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information." 

Examples of insider trading cases that have been brought by the SEC are cases against:
-Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;
-Government employees who learned of such information because of their employment by the government;"

I guess they are talking about something else other than policy makers?  Maybe, like, it's illegal for the Chairman of the FDA to short the stock of a drug company whose drug his administration is about to reject?


-KD

29 comments:

mrwiizrd said...

Bob Wenzel over at economicpolicyjournal.com has been crying foul on Congressional insider trading for years, the hypocrisy is downright disgusting. It is even more elitist than the Congressional pension and benefits packages.

What kills me is seeing comments like this over at MR, "I'm not too concerned about Senators and Congressmen. They are ultimately subject to recall by the voters."

WTF? Seriously?. Have we really become this apathetic as a nation? The SEC should be all over Congress for this nonsense. Instead they chase around Mark Cuban and Martha Stewart to get their names in the headlines without upsetting our bureaucratic overlords.

Anonymous said...

Kid,

I have always been under the impression that the insider trading rules not only cover those labeled "insiders," but covers anyone in possession of inside information.

For instance, if I am an analyst having a chat with company management in private and the CEO mentions a big contract they signed earlier that morning that will be announced later in the week I am now in possession of inside information. It is unethical (and I swore illegal) for me to trade on or cause others to trade based on my inside information. Once you obtain inside information there are a whole host of procedures (on the institutional side) that you are supposed to go through.

Raj Rajaratnam anyone? He wasn't an insider, he was an investor, yet he was pinched for using inside information. You don't have to be an exec at the company in question for it to illegal to use inside information. You only have to be in possession of that information.

Onlooker said...

I'm with you on this KD. It's unconscionable to me that members of congress can legally trade on information they have that directly affects a company's (or entire sector/industry) prospects and thus stock price. And the rationalizations around it are stomach turning.

This is clearly a case of the foxes watching the hen house and not wanting to give up a huge perk they have given themselves. Why do so many politicians just get richer while in office, other than speaking fees, books, and the like. Gee, I wonder why...

UrbanAnalyst said...

Kid,

This was previously a loophole I was completely unaware existed. Similar to yours and other views I wrongly assumed that MNPI was an insider trading violation regardless of place of employment. If Bud Fox was a congressional aid I guess that might have worked out alright for everyone.

Unconscionable is the lightest term I care to use, but just add it to the list of issues eroding confidence in US markets (FASB mark to unicorn rules, flash crashes, HFT dominance, low volume raids - heady levels with pulled IPOs, etc).

For reference, I came across this tracking of Baird's latest bill:
http://www.govtrack.us/congress/bill.xpd?bill=h111-682

StB said...

This should be considered illegal and I thought it was. I recall people being arrested for trading on information in Business Week before the magazine hit the newstands. They worked at the printer and it was determined that relaying information from a column was considered to be having access to non-public information.

http://lawprofessors.typepad.com/whitecollarcrime_blog/2006/04/broad_insider_t.html

Rob said...

"You don't have to be an exec at the company in question for it to illegal to use inside information. You only have to be in possession of that information."

That is not entirely true, and there is a subtle nuance that most people miss on this issue. It is not enough to be in possession of material non-public information; said information has to have been obtained through a violation of a duty. For example, a CFO has a fiduciary duty to the company which he violates by disclosing said information to an investor. Likewise, someone working at the printing company for a magazine, etc. has a duty to his employer which he violates by selling information about upcoming issues.

When would this not be the case? A classic example is overhearing something in an elevator. You have no duty to the person speaking, and the person speaking did not knowingly violate any duty. Assuming you are just some random person who happened to be on that elevator, you can legally trade on what you hear (unless you overheard something regarding a tender offer; they are a special case and you can't trade no matter how the information is obtained).

That's at least my understanding of the law as of a few years ago. Note I'm a professional investor, not a lawyer, so take this with a grain of salt. But I studied a little securities law in grad school and the above was the law as of then.

Kid Dynamite said...

anon @ 4:30 wrote: "I have always been under the impression that the insider trading rules not only cover those labeled "insiders," but covers anyone in possession of inside information."

yes - I was under that impression too - but I think this bloomberg article is saying that the information has to come from insiders. This information isn't coming from the company at all - it's coming from Congress. Raj's info came from the company.

But that doesn't explain why the case STB mentioned would be illegal - the Business Week case - although common sense and understanding DOES explain why it would be illegal.

Basically, if it's illegal to trade off advance knowledge of what's going to be in Business Week, or WSJ, or Barrons, then I don't understand how it can be legal to trade off of Congressional policy.

Anonymous said...

Here's two stories Kid.

1 Fifteen years ago my brother in law told me about some sleazy stuff reporters in DC were doing. My bro used to work in the Senate and was then a beltway type investigative reporter. He told me there were journalists making money passing along very hot news to moneyed interests, and in return being compensated for their 'work.' Sound shitty to you? It did to bro.

2 Remember when Apple came out with the second, very sleek version of Ipod? In all the shiny colors? This was in the beginning of this decade. So, I knew a scientist working on these toys for a very large computer co. He told me Apple couldn't produce enough of the Ipods, as women in Europe were nuts over them. We were friends and I had previously asked him not to tell me any valuable information from his work. But I haven't stopped wondering if I should have violated our trust, and traded Apple on this information. Have you seen the share price since about 2003?

Kid Dynamite said...

these scenarios can be a lot harder than people realize. I will do a follow up post with some examples. Maybe I find them especially confusing because we were basically taught something along the lines of "if you have to ASK if it's ok, DON'T do it"

follow up questions for Rob- so if the CEO of PFE tells me that his new drug is getting rejected by the FDA - that's clearly illegal to trade on.

But what if the president of the FDA review panel tells me? I'd say it's still illegal - but what duty is the FDA pres violating?

What if I find the PFE CEO's blackberry in the back of a cab, and read his email? Would that be legal?

What if I get in the cab and a letter had fallen out of his pocket with the non-public rejection of the drug - would THAT be legal?

as you can see, it's very much not cut and dry.

# 56 said...

Anon,
You could have loaded the boat on all the AAPL you could afford. A contact at the company telling you business is great is not insider trading. The CFO's secretary telling you they will miss the quarter is.

Rob said...

@Kid - Oh, I agree, it is very much not cut and dry. A lot of this stuff is not so much spelled out in the text of the law itself, but rather in how it has been worked through in cases over the years.

The FDA panel head is working for the FDA (either as his employer or via contract), so that is the duty he would be violating (just like someone working at the printer is violating a duty to his employer by misappropriating the information). Notably, no money need change hands: the SEC assumes the exchange of his information can be for non-monetary benefits, such as reputation, help in some way down the road, etc.

As for the back of the cab issue, if you found the letter lying open in the back of the cab, you could trade on it. If it was sealed and addressed to someone else, or if you had to go through someone's messages on a found phone - well there we're getting beyond my expertise. As far as I know it would be legal from a securities law perspective, but you might be getting into trouble on the basis of mail fraud or some telecommunications statute. Like I said, on some of those grey areas I'm not so sure.

Here's a silly example: Let's pretend that Businessweek does a cover story each issue called "The Best Stock to Own Right Now," and that the stocks featured normally jump in price. As discussed, if someone inside Businessweek knew next week's pick and traded on it, or knowingly passed that information along, that's insider trading and it's illegal. On the other hand, maybe I'm a fund manager and I know that the magazine usually interviews the CEO of the chosen company at the magazine's offices the week before hand. I study their historical picks to figure out the types of companies they seem to be attracted to. I then have an intern or analyst across the street from the offices every day snapping photos of people coming and going. Putting it all together, I figure out who they are going to write about next week. My knowledge is material - history says it is certainly going to move the stock. And it is non-public, as the magazine isn't out yet. But I can most definitely trade on it, since no duty was violated. I just "figured it out."

From a legal perspective, it matters not what you know, but rather how you know it (again, except for tender offers). The public policy interest is generally on the side of getting as much information as possible incorporated into securities prices as quickly as possible.

Kid Dynamite said...

Rob - are you a lawyer?

My examples were attempting to illustrate the point you mentioned - not WHAT you know, but how you know it. I would think that the FDA chairman telling you would be just as illegal as the PFE chairman telling you...

Let's get back to the Business Week issue - how is that even insider trading? Said differently, what if Kid Dynamite published "Best stocks to own right now" each week - and NO ONE CARED... then it wouldn't matter if I told you in advance, right? So the information has to be expected to have impact? That's a pretty blurry line.

But what is BW's piece other than research - thoughts - opinions? Ie, what is the material non-public information - that BW likes XYZ corp? That doesn't really have anything to do with XYZ corp...

If David Einhorn was going to talk about a stock at a big conference, and he told you in advance about his pick - is that insider trading? Would the result change if Einhorn wasn't scheduled to speak at a conference where everyone expected him to announce a stock pick, but instead was being interviewed on CNBC about his Lehman call... and the night before, he told you "by the way, I'm shorting JOE hard." And then CNBC, in the context of the conversation, asks him "are there any stocks right now you think are big time shorts?" and he says "why yes, JOE".... My point here was to illustrate the difference between a planned announcement you got advance knowledge of, and an unplanned question. I don't know the answers - it may be both, it may be neither.

If Goldman Sachs had a research report coming out, which might be expected to move the stock, and the guy who wrote the report told you about it - GS would be pissed and probably fire him, but would the SEC bust you? What did you know - other that GS's OPINIONS - ie, it's not really inside information about the company... What if instead you sat down with the analyst, as analysts do all the time, and you simply realized that he liked the stock from the way he spoke about it? clearly not illegal I think...

this is why it's so tough.

Rob said...

@Kid No, definitely not a lawyer – I hope I made that clear. I’ve worked on the buy side, both in growth equity and at a number of hedge funds. I purposely took some securities law classes in grad school because in a way good buy side work is all about creating “material” (i.e. it matters) and “non-public” (i.e. not priced in by the market yet) information and then acting on it. I wanted to make sure I knew the law in the area and what was and was not allowed (under the “mosaic” theory of securities regulations, by the way).

Yes, the FDA chief telling would be just as bad. And, yes, lots of blurry lines. You’ll get no argument from me.

The definition of material is simply that the average investor would want to know about it in considering the security, and one way to demonstrate it is that the info in question had an impact on market prices. Certainly there have been publications that meet that standard. The relevant information, though, definitely doesn’t have to be narrowly about the company’s operations to be subject to insider trading laws. There is a famous case of someone working for the Wall Street Journal that was front running the “Heard on the Street” column. That was actionable under insider trading laws, even though the columns themselves were presumably filled with public information. The employee traded on info misappropriated from his employer. So, to answer your question, “opinions” can definitely meet the standard sometimes.

Einhorn’s fiduciary duty is to his LPs. Once he has his fund positioned as he likes, he can tell anyone he wants about his picks, investments, etc. He certainly has no affirmative responsibility to tell the world at all, or all at once. In fact, people do stuff like that all the time; talking up your own book is almost a requirement of the job. ;) On the other hand, if one of his traders started leaking the trades the firm was planning on making to someone else, who then traded ahead of them, I’m pretty sure that would be insider trading (a duty to the employer was violated, and the LPs of the firm would be harmed by paying more for their shares). In the GS case, tipping you ahead of time about the reports would violate a duty and probably be actionable.

Transor Z said...

You're a juror and you watch a taped confession admitting to three bank robberies. You act on that information and vote to convict. You have absolutely no doubt that the confession was sincere and real.

Does it matter whether:
a) The police threatened to beat the shit out of the robber if he didn't "tell the truth" on tape; or

b) The robber spontaneously asked to make a recorded confession with no police coercion after an informed waiver of right to counsel.
---------------
Same deal. A lot of people aren't sympathetic to the robber and see no difference -- a or b, figuring the truth is the truth and threats by a cop shouldn't matter. But legally it's all about the manner in which the info was obtained.

When you stop to consider the public policy reasons behind banning trading on insider info, the "anomaly" that the same info obtained in two different circumstances has different legal implications shouldn't seem as bizarre.

To the question at hand, there's an interesting site that addresses this, among other issues:

http://insidertrading.procon.org/

wynngolfhatguy said...

In many cases, Insider trading cases are extremely challenging to prove.

There are so many gray areas.....As you already cited.

In the example of "having enough votes", it's likely that it's not enough to establish insider trading. Lawmakers could change their mind prior to the vote. Amendments or earmarks could be added to make it suddenly unattractive to the majority, etc. In fact, market participants are likely already handicapping the likely passage or failure of the bill in the stock price.

This would be very different than if the lawmaker were in a private subcommittee that was allowed to make such decisions. A lawmaker would likely be breaking the law if they acted on such information.

Just my $0.02

Kid Dynamite said...

Rob, someone sent me this:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1633123

which contains the following:

"Second, the prohibition encompasses not just inside information, but also so called market information. “Inside information” refers to “information which comes from within the corporation or affects the price of corporate stock because of its reflection of a corporation’s expected earnings or assets.”27 “‘Market
information’ refers to information that affects the price of a company’s securities without affecting the firm’s earning power or assets. … Examples include information that an investment adviser will shortly issue a ‘buy’ recommendation or that a large stockholder is seeking to unload his shares or that a tender offer will soon be made for the company’s stock. The distinction rarely matters in insider trading cases, however, because the law imposes liability for misuse of both inside and market information"

Now - back to our examples - why does the Business Week example qualify but not the Einhorn example? Because I'm hurting Business Week by trading on that info? (because they'll sell less mags or something?)

what if my boss at Business Week signed off on my trades - and said - "no problem, KD - go ahead and trade off this column we have coming up"

is it legal now? I'll leave another comment following this one that's related to that and the "fiduciary duty"

Kid Dynamite said...

sent to me from a colleague, and I think that I do NOT agree with this, although the Bainbridge paper makes it sound like it's feasibly correct based on past court rulings:

"cf Bainbridge, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1633123 -- short & an easy read.

it looks like insider trader law is not restricted to corporate insiders, but is much narrower in scope than i thought.

reading Bainbridge, for example, the following should be legal:

1) Microsoft plans a tender offer for Yahoo
2) I, as a Microsoft employee, ask for and receive written permission from my supervisor to trade YHOO shares
3) I buy a shitload of YHOO and dump it during the pop when the tender offer is announced

According to Bainbridge's article, I have screwed no one I have a duty to protect, so it's legal.

1) I have no relationship to YHOO shareholders, so I can screw them. (Buying shares off 'em at what I know is a lower price than will soon be available is screwing 'em. But that's fair. I don't owe 'em, caveat trador.)

2) I do have a duty of care to Microsoft and its shareholders, and by trading in YHOO I might be screwing them. (For example, by revealing my knowledge of the pending tender offer to the market, I bid up market prices and increase the cost of the acquisition.) But if I ask and MSFT explicitly permits me to trade, I am no longer violating my duty to MSFT and its shareholders. Duly authorized representatives of MSFT have permitted me to do so. Presumably they have calculated that whatever costs I impose from my trading are worth benefits MSFT shareholders receive because, for example, they might have to pay me less if I get to act on stock tips.

So, that wouldn't be insider trading!

What surprises me, is that according to Bainbridge, insider trading law does not protect the investing public, but applies only when some specific duty of care would be breached. So Martha Stewart is prosecutable because ImClone dude had a duty to his shareholders that he violates by trading or informing others, and Stewart is exchanging amorphous social benefits for stolen property, i.e. the misappropriated information.

But if I have no relationship with the people I'm trading against, and I have no relationship to the source of the information, and my means of acquiring the information was other than an exchange with or "gift" from some misappropriator, by my reading of Bainbridge, I should be free and clear.
"

Can MSFT really absolve you of your obligations, and sign off on your trading like this? I dunno... sounds insane... but law is insane sometimes.

Rob said...

Here’s the Businessweek rationale: the information is owned by them. By leaking it, you are stealing their property (or misappropriating it, as the cases talk about). This is true even if they weren’t going to monetize it themselves. Since the theft led to activity in the securities markets, they tie it into securities regulations. I don’t think it would be enough for your boss to sign off on the trade. I do think, though, if the company as a whole had a publicized policy that this was OK and accepted, fully disclosed ahead of time, then you would be in the clear. You see sketchy disclosures like this all the time in some investment newsletters and essentially pump and dump schemes (e.g. “We may have investments in companies we write about,” etc.).

In Einhorn’s case, the LP’s are his shareholders. They actually want him to talk up his investments once he has bought all he wants for them, since it will increase the price; they are who he owes the duty to. There are certainly ways he could violate that duty. For example, he could buy shares in his own account before he buys them for the fund (most funds make sure to prevent this kind of front-running, and have very strict rules about allocating shares between accounts so that no one is disadvantaged).

Re: MSFT – In general explicit clearance from your company would give you cover. In this case, though, I don’t think so. Tender offers are treated differently, and you can never trade on inside information on them no matter how you get it. Per statute they are the exception to these rules we’ve been talking about.

Martha Stewart was not convicted of insider trading; rather she was caught lying to the government during the investigation. I don’t remember all the details of the case off the top of my head, but I recall that ironically the government probably didn’t have an insider trading case against her; if she had just been truthful she would have gotten off.

Your friend is right to be surprised; most people – even in the investment world – don’t really understand the law here. It’s more subtle than generally believed.

Transor Z said...

KD, misappropriation theory is difficult because it's a mess. I don't think you're reading Bainbridge's article correctly. He was recapping misappropriation theory and where things stand now is it's "untested" where courts would come down on employee defendants in the fact pattern you put out re: YHOO stock.

A corporate officer who authorizes the sale of a huge (i.e., price-changing) block of stocks in an acquisition target has his ass out in the breeze. That's clear, yes?

But misappropriation theory IMO has become very arcane because the wording of 10b-5 doesn't let you do what everyone knows needs to be done. So this legal fiction emerged esp. in Chiarella and Newman morphing the required duty to a good-faith/fair dealing thingie between the "insider" and ANYONE TRADING IN THE STOCK.

This "transferred duty" idea is a distant cousin to the transferred intent rule you'll see in torts: I intended to shoot Joe but missed Joe and hit Bill. Even though I didn't intend to hit Bill, my wrongful intent is deemed transferred to Bill so that Bill can recover against me for battery, an intentional tort.

That makes some sense but the misappropriation transferred duty theory doesn't make sense because it's bad law, not the law being insane. It's judges trying to compensate for unsatisfactory statutory language that otherwise couldn't nab the little MSFT turds in your example.

So, KD, I'm with you in living your life by the common-sense rule of staying the hell away from the line because the line moves and you're not going to game the line because the law determining how it moves it bad law.

Transor Z said...

s/b corporate officer who authorizes the PURCHASE [by MSFT employees]

sorry

Kid Dynamite said...

Rob - how is it that can MSFT relieve me of my duty (give me "clearance), but Business Week can't?

TZ - related to the MSFT-YHOO example: first, it's not my reading of Bainbridge, it's my friend's. Second - I agree with you - WHO at MSFT is authorized to "waive" this duty? Your direct superior? the CFO? the CEO?

Rob said...

Sorry, I worded that poorly. My point was that an individual boss somewhere in the company probably wouldn't be enough to give you the OK. If Businessweeks Board passed a resolution that said employees could do this, and then is was clearly disclosed in the magazine itself, that might work. Like I said, essentially that is what some stock promoters/newsletters get away with. They issue huge (albeit small print) disclosures in their reports that say they may own the stock, can buy/sell at any time, etc. For a publication, at least, the issue of public disclosure of the policy might be key.

Where the exact line of what is necessary to have it be OK lies - between a well publicized/disclosed Board resolution and some individual boss somewhere in the company saying so - well, I don't know. Maybe a lawyer reading this can chime in.

StB said...

Kid,
I work in compliance for a mutual fund firm. One of my duties used to be approving trades for employees. Factors that would be considered when approving their trades were dependent on their role and whether they had access to portfolio decisions.

In regards to your MSFT/YHOO scenario, we have to make the assumption they would require clearance of personal investment transactions. I highly doubt it but say they do. The boss could give permission and probably would to someone who did not know of the tender offer.

However, the SEC could still come in and prosecute had they knowingly acted on the information, even though the boss believe they did not. The boss' ass is covered but not the employee. Furthermore, MSFT would probably can them for ethics violations.

Kid Dynamite said...

Rob - yes - that was my point - I agree

STB - sure - my entire career I had to get trades precleared. But I can assure you that compliance would never approve a trade where my bank was advising one of the parties, even if I didn't know about at, and they KNEW I didn't know about it.

The scenario my friend laid out is different from what you're talking about - he's saying that the trader (and boss) KNEW that MSFT was going to buy YHOO, but that someone at MSFT can somehow say "it's ok, we know you have a duty to MSFT shareholders, which you're violating by buying YHOO, and making us pay more for the shares we're about to buy -but that's OK! We're cool with it"

1) I can't imagine that would fly and
2) as Rob and I mentioned - WHO could/would be authorized to grant such a pardon?

Hammer Player a.k.a Hoyazo said...

Not a securities lawyer per se but I do not believe the insider trading rules apply only to "corporate insiders". There may be an exemption of some kind for sitting Congresspeople or Senators -- which if true would be an absolute abomination of course -- but I believe in general that the law does apply to anyone who comes into possession of material nonpublic information about a stock in violation of any law or duty. Not sure how any Congressperson could argue this should not apply to him or her.

Cetamua said...

Mark Hulbert, citing a study, reported a fascinating factoid on Marketwatch.com. (That was about 5 years ago. I wish I could find it! GRRR!!) The gist of it was this: CAGR of investments made by members of Congress was an average of 34%, placing them on par with the best fund managers in the trade.

The study didn't not (or would not) elaborate on how it was possible for total noobs in trading to suddenly become THAT awesome.

Personally, I think Sir Sherlock Holmes resolved this kind of conundrum a long time ago: "when you have eliminated the impossible, whatever remains, however improbable, must be the truth."

UrbanAnalyst said...

Kid,

You will have to forgive me for taking the argument perhaps a step too far, but assuming that Congress does get an exemption, and that the group return figures stated by Cetamua above are true, what do you think the creation of an ETF tracking high profile Congressmen's financial disclosures? Does this violate either the 'insider' or 'market' trading laws?

My point is at what derivative level - steps away from original information leak - is there no longer a legal violation? Intuitively one would assume either only the first step is a violation, or the point at which the information is no longer impactful to share price (i.e. non-material).

Thankfully the professional association I belong to requires a 'more stringent' application of conduct, where a guideline for professional conduct applies when local law is deemed too loose. It would be both logical and refreshing if such elected officials would follow suit.

Additionally, similar to your previous employers, I have never heard of my firm's compliance department allowing front office staff to trade names of active engagements or related entities regardless of whether the employee is deemed to possess MNPI.

Anonymous said...

Doesn't it come down to incentives here? If the SEC cracks down on illegal trading by Congress members, Congress will decide to make life tough for the SEC. Therefore, the SEC could know of dozens of cases and still have no interest in going after them.

Ultimately, Congress itself needs to acknowledge the problem and change the laws to limit its own illegal trading profits. Fat chance.

Kid Dynamite said...

Anon - the linked article was about Congressmen trying to address the problem by getting the laws changed. There isn't really anything for the SEC to crack down on, because, surprisingly, it doesn't seem to be illegal!