situations, are often teamed with insider trading violations because
outside activities sometimes allow a broker to come into contact
with material nonpublic information.
Insider trading rules, however, do not apply just to stockbrokers
or those working within the financial arena. They apply to
everyone who may conduct a trade while in possession of material
nonpublic information. The rules prohibiting insider trading are
among the strictest; and violations can subject individuals to imprisonment
for up to ten years and fines up to $1 million.
Material nonpublic information may include information that
something is likely to happen—or just that it might happen. Examples
would be the following:
• A pending acquisition or sale of a substantial business or
other significant transaction
• Development of a major new product or service
• An increase or decrease in dividends
• A stock split or other recapitalization
• A redemption or purchase by the company of its securities
• Major management changes
You may have heard your stockbroker discuss events like these
on numerous occasions. Granted, these events are material, but
how are you supposed to know whether they are nonpublic? The
primary way that investors get drawn into insider trading violations
is when their stockbroker tells them that they have privileged, special
inside information. Remember that ignorance is no defense to
breaking insider trading laws. If your broker simply passes on the information
to you, he would be guilty of tipping, which is also illegal.
You could also face exposure as the tippee if you act on this
inside information. Odds are that if the information is so material
and so nonpublic, your broker will be trading on it too.
Information stops being nonpublic when it has been effectively
disclosed to the public by a filing with the SEC, a press release,
or a newspaper article, for example, followed by a reasonable
waiting period for the information to be absorbed in the marketplace.
In this day and age, when investors get second-by-second reports
beamed into their living rooms from around the world, there
is much less material nonpublic information. The recently enacted
requirement that analysts disclose their material nonpublic information
to the public simultaneously with disclosing it to institutional
entities will also cut down the existence of such information.
Customers can pull a trick of their own in insider trading claims.
Tracy had a case in which her clients were taken in by a stockbro-
ker who assured them he had the inside scoop, that he was talking
to management at the company, and that he was getting information
nobody else was getting. The Statement of Claim read: “[I]t
does not matter whether or not the broker was lying or, in fact, he
was obtaining information from ‘inside’ sources. The broker either
defrauded the Claimants or he violated the insider trading laws.
Either way, it is a violation.”
The net is that you should have your antenna up when you
hear a broker talk of special or inside information. If your broker
tells you he has information that is special, privileged, or the inside
scoop, ask him directly whether what he has told you is public information.
If he says no, run! But before you go, whip off a letter to
your broker’s manager advising him of the conversation.
Source: Brokerage: INSIDER TRADING—NO JOKES, NO HINTS, NO INFERENCES
