SEC Sues Hong Kong Couple Who Made 8.2 Million From Dow Jones Stock (on Buyout Bid)

[ByLoSellHi]

Quote from Daal:

These options spikes always amused me. How stupid these people can be? Its like the movie Casino where they say if the cheaters weren't greedy they could always get away with their tricks and make a little money but they can't hold their greed

These people were even dumber: Instead of buying call options, they bought 15 million worth of stock, when just prior, they only had $54,000 worth of intel stock in their account, and only had fixed income investments in their Merrill Lynch account.

They borrowed a ton of money to do this, so must have believed the information they received was bulletproof.

Anyone notice how the article says Merrill Lynch ratted them out?

 

[JSL_Capital]

Please link it for me because I think CFA Institute's ethics committee has a little explaining to do if that's the case.

 

[ByLoSellHi]

Quote from JSL_Capital:

Please link it for me because I think CFA Institute's ethics committee has a little explaining to do.

Here is a good "plain english" summary.

I can send you black letter law (case law and statory authority), if you want (just let me know):

http://www.meyersandheim.com/insider_trading.html

The Law of Insider Trading

In order to effectively analyze a client's potential exposure in an insider trading case, the defense lawyer must be familiar with the elements that must be established in order to prove insider trading. The vast majority of insider trading cases consist of circumstantial evidence and the failure of the prosecutor to establish one of the elements will result in the case being dismissed. Insider trading is generally defined as purchasing or selling securities while in the possession of material, non-public information in violation of a duty not to trade.

The Purchase or Sale of Securities

The first element that must be established is an actual purchase or sale of securities. Insider trading can be broken down into two categories: 1) buying securities prior to a good news announcement by a company, such as unexpectedly high earnings or a promising merger; or 2) selling securities prior to a bad news announcement, such as the receipt of an FDA rejection letter as was allegedly involved in the ImClone and Martha Stewart matter. In order for an insider trading prosecution to succeed, there must be an actual purchase or sale of securities. The government may not allege that a defendant refrained from trading securities as a result of inside information. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917 (1975). Generally, this element is not in dispute because the monthly account statements and trade confirmations will establish whether or not a security was purchased or sold.

Generally, this element is not in dispute because the monthly account statements and trade confirmations will establish whether or not a security was purchased or sold.

The "In Possession Of" Requirement

Trading while "in possession of" material non-public information is the second element. The SEC has consistently taken the position that insider trading has occurred when the trader had possession of material non-public information, even when there were other factors that may have been more important in his trading decision. The SEC's position is that it does not matter whether the trader used the non-public information in making his trading decision, so long as he had possession of the information insider trading has occurred. However, some courts have rejected this position and have required that the SEC prove that the trader actually used the non-public information in making his decision to trade. See U.S. v. Smith, 155 F.3d 1051 (9th Cir. 1998); SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998). In the Second Circuit, the government only has to prove possession of non-public information, not use of such information.

"Material" Information

The third element that must be proven is that the non-public information was "material." The U.S. Supreme Court has held that information is "material" if there is a substantial likelihood that a reasonable investor would consider it important in making investment decisions. TSC Industries, Inc. v. Northway, Inc, 426 U.S. 438, 449 (1976). In discussing the materiality standard, the U.S. Supreme Court has stated "[w]hat the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the . . .[information] would have assumed actual significance in the deliberations of the reasonable [investor]. Put another way, there must be a substantial likelihood that the [information] would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available." Id.

Whether the defense attorney can argue that the non-public information is not material will depend on the facts of each case. It is important to note that merely because the price of the stock went up or down after the disclosure of the information is not enough to show materiality because the price change can be due to other factors such as the overall movement of the stock market on a particular day. The defense attorney should examine news articles and analyst reports to see whether the information alleged to be material was viewed as such by market participants. Frequently, an expert witness can be brought in to testify that the information at issue was not viewed as material by market participants.

"Non-Public Information"

This is the final element that must be established by the government. Occasionally, a defense attorney can show that the information at issue was in fact public due to rumors and leaks from the company or others. However, in most cases it is conceded that the information at issue is non-public.

 

[JSL_Capital]

Dude read this part and I get a different interpretation from yours:

"Insider trading is generally defined as purchasing or selling securities while in the possession of material, non-public information in violation of a duty not to trade."

This part is crucial: "in violation of a duty not to trade." This duty is usually confined to insiders and their arms-lengths and not the general public who happen to accidentally stumble upon the information as long as it is not misappropriated (i.e. stolen or there was a quid pro quo arrangement between an insider and the defendants who aren't insiders). The prosecution has the burden of proof even with this kind of blatant market manipulation and that is why I'm saying this is going to be an interesting saga.

You and I are not disagreeing on the definition of "insider trading" and "material non-public information" which is what you posted, but the definition of being an "insider"

I hate linking wiki but it's got some relevant info: http://en.wikipedia.org/wiki/Insider_trading

 

[El OchoCinco]

Martha Stewart was convincted and she supposedly got the info from an insider. So there is your proof right there that it is not only illegal if you are an insider. Anyone trading with insider information is subject to fines and imprisonment.

martha stewart... enough said.

 

[volatilitypimp]

Quote from ByLoSellHi:


Anyone notice how the article says Merrill Lynch ratted them out?

Merrill internalizes some of their order flow, so they probably took the other side of this trade.

 

[ByLoSellHi]

Quote from JSL_Capital:

Dude read this part and I get a different interpretation from yours:

"Insider trading is generally defined as purchasing or selling securities while in the possession of material, non-public information in violation of a duty not to trade."

This part is crucial: "in violation of a duty not to trade." This duty is usually confined to insiders and their arms-lengths and not the general public who happen to accidentally stumble upon the information as long as it is not misappropriated (i.e. stolen or there was a quid pro quo arrangement between an insider and the defendants who aren't insiders). The prosecution has the burden of proof even with this kind of blatant market manipulation and that is why I'm saying this is going to be an interesting saga.

You and I are not disagreeing on the definition of "insider trading" and "material non-public information" which is what you posted, but the definition of being an "insider"

I hate linking wiki but it's got some relevant info: http://en.wikipedia.org/wiki/Insider_trading

JSL, I'll find the statute later and give you the cite. PM me if I forget. Dinner beckons me.

But the gist is that once the outsider comes into possession of 'material information' that is confidential, they are imbued with the same duty of confidentiality (including the restriction to trade on the info) that a true insider has.

http://www.investopedia.com/articles/03/100803.asp

"And He Told Two People and So On And So On…

Oftentimes, people accused of the crime claim that they just overheard someone talking. Take for example a neighbor who overhears a conversation between a CEO and her husband regarding confidential corporate information. If the neighbor then goes ahead and makes a trade based on what was overheard, he or she would be violating the law even though the information was just "innocently" overheard: the neighbor becomes an insider with a fiduciary duty and obligation to confidentiality the moment he or she comes to possess the nonpublic material information.

 

[JSL_Capital]

Quote from optioncoach:

Martha Stewart was convincted and she supposedly got the info from an insider. So there is your proof right there that it is not only illegal if you are an insider. Anyone trading with insider information is subject to fines and imprisonment.

martha stewart... enough said.

- That information wasn't accidentally obtained. Those two had a good rappport so it could be established that some sort of quid pro quo relationship existed.

- If you followed the case closely, she was convicted and went to jail for lying about it (obstruction) rather than the trade itself.

 

[Dr. Zhivodka]

OC...if I remember right she wasn't convicted of insider trading. She was convicted of Obstruction. Yet I suppose it was effectively the same thing. Bitch still ended up in the slam.

Quote from optioncoach:

Martha Stewart was convincted and she supposedly got the info from an insider. So there is your proof right there that it is not only illegal if you are an insider. Anyone trading with insider information is subject to fines and imprisonment.

martha stewart... enough said.

 

[JSL_Capital]

Quote from ByLoSellHi:

JSL, I'll find the statute later and give you the cite. PM me if I forget. Dinner beckons me.

But the gist is that once the outsider comes into possession of 'material information' that is confidential, they are imbued with the same duty of confidentiality (including the restriction to trade on the info) that a true insider has.

http://www.investopedia.com/articles/03/100803.asp

"And He Told Two People and So On And So On…

Oftentimes, people accused of the crime claim that they just overheard someone talking. Take for example a neighbor who overhears a conversation between a CEO and her husband regarding confidential corporate information. If the neighbor then goes ahead and makes a trade based on what was overheard, he or she would be violating the law even though the information was just "innocently" overheard: the neighbor becomes an insider with a fiduciary duty and obligation to confidentiality the moment he or she comes to possess the nonpublic material information.

I wish you also posted the paragraph directly following because it's actually the point I'm arguing about.

"It may be difficult for the SEC to prove whether or not a person is a tippee. The route of insider information and its influence over people's trading is not so easy to track. Take for example a person who initiates a trade because his or her broker advised him or her to buy/sell a share. If the broker broker based the advice on material non-public information, the person who made the trade may or may not have had awareness of the broker's knowledge - evidence to prove what the person knew before the trade may be hard to uncover. "

This is exactly why I'm saying the general public has a difficult time grasping this complex ass of a rule.

Geez, I've never posted so many in such a short time - I must be bored AND have no life! .

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CFA Pending