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shamapant (80.77)

What Counts as Insider Trading?

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October 20, 2012 – Comments (5)

I've been reading Avner Mandelman's The Sleuth Investor...FABULOUS BOOK...but I was wondering where the line is drawn on insider trading?

I'm going to give a few scenarios that I would theoretically trade on and I want you to tell me if they're insider trading 

1)If i talk to a company's supplier and they tell me they aren't seeing as many orders from the company. I draw the conclusion that the company isn't seeing demand. 

2) I talk to a company's supplier and they say they've decided to stop supplying the company's key product.

3) I talk to company personell and they tell me they're seeing increased demand. 

4) I talk to a company's customers and they say they like the company's products more than competitor products.

5) I talk to company personell and they tell me they're going to get acquired for 2x the price.

6) I talk to company personell and they say they're in acquisition talks.

What's insider trading? Where is the line drawn between discussing the company/industry with insiders and trading on that information, and insider trading?

5 Comments – Post Your Own

#1) On October 20, 2012 at 2:03 PM, somrh (90.97) wrote:

I'd be curious about the answer to those questions. It seems if you employ tactics along the lines of Fisher scuttlebutt you're venturing off into that territory. 

As an aside, become a US congressman and you don't have to worry about such details.

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#2) On October 20, 2012 at 2:49 PM, ikkyu2 (99.51) wrote:

More information here:

http://www.sec.gov/answers/insider.htm

Basically, as I see it, 3, 5, and 6 are clear-cut insider trading, as long as the information obtained is non-public.  1 and 2 would be tougher to prove, but similar cases have been successfully prosecuted when the information obtained was supposed to be confidential.

I am pretty sure #4 would not be construed as insider trading, unless somehow the information you were getting was material, confidential by contract, and non-public.  Most companies don't prohibit their customers from talking about how pleased they are!  

As a doc I get plenty of queries to give my opinions about medical products by Wall St. companies; though I don't take advantage of these offers, they pay quite well, so I assume that someone is making money off them.

 

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#3) On October 22, 2012 at 12:45 PM, chk999 (99.98) wrote:

1,2,4 are clearly not insider trading, you didn't talk to anyone in the company at all. Talking to suppliers and customers is called research.

The others depend on who in the company you talked to. An "insider" is a legal term of art and most people in a company are not insiders under the legal definition. 3 is not insider trading if you are talking to Joe the Janitor. But it might well be if you are talking to the CFO about info that has not been made public yet.

5 and 6 are tricky and depend on who you talk to and when versus the information being made public. 

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#4) On October 22, 2012 at 1:12 PM, MegaShort (99.95) wrote:

"An "insider" is a legal term of art and most people in a company are not insiders under the legal definition."

My impression is that the term "insider" gets expanded a bit for an event as significant as acquisition. If an employee knows about acquisition talks, the SEC will make the case that they are an insider. 5 and 6 are not tricky in my opinion, don't risk it.

Other than that I agree.

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#5) On October 24, 2012 at 12:13 PM, Teacherman1 (47.99) wrote:

shamapant

I just saw your post about why I closed out ACPW, that was on my DCIX blog, and wrote a reply.  

Don't know if it helps, but it answers your question.

As for this blog, IMO, trading on information that is not available to the general public (assuming that they have made some effort to find it), would constitute "insider trading".

My suggestion is, "if in doubt, don't".

Hope you have a good week.

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