Who thinks Martha should get busted for insider trading?

[crispos]

Heh, I'm not fan of Martha Stewart. But there is a difference between bad, sleazy, not-very-nice, and "illegal".

If your broker tells you that the CEO of a public company is dumping his stock, and you sell for that reason, have you committed a crime? ----- this isn't a rhetorical question. Is there somebody here that really knows the answer?

Charlie

In Ontario, under the Securities Act, if an insider were selling their shares, it would be considered a material piece of information, and unless it was accompanied by public disclosure or was part of a previously disclosed plan, would constitute insider information (which could not be traded on).

Under the tippee rules, anyone who sells on this information from another person would also be guilty of insider trading. This would cover off going home to your spouse, or even a friend, and getting them to do the trades. So the previous comment that getting the info from your broker would not exclude one from the tippee rules. I haven't looked closely at either the ImClone, Sam Waxall or Martha Stewart case in detail.

 

[DivePartner1]

Heh, I'm not fan of Martha Stewart. But there is a difference between bad, sleazy, not-very-nice, and "illegal".

If your broker tells you that the CEO of a public company is dumping his stock, and you sell for that reason, have you committed a crime? ----- this isn't a rhetorical question. Is there somebody here that really knows the answer?

Charlie

Charlie, I am subject to these rules and train others on compliance. Perhaps that's why I'm annoyed with the Stewart case: I'd prefer they charge the real crime, one that I know is against the law, and not make new flaky stuff up. How can I prevent 'crimes' that are defined ex post facto?

As to your question, while it is counter-intuitive to most people, assuming the broker did not read it in the paper, he has shared material non-public information. He has committed the crime of 'tipping' whether or not you trade. If you trade on it, you have both committed the crime of insider trading. The key is sharing information on the value of traded stock information that is not generally known. It applies to everyone, not just company 'insiders' and doesnot depend on where or how you hear it. If you overhear non-public material information on, say, a pending M&A transaction in a restaurant and you trade on it, both you and the loud mouth who inadvertently shared it can be prosecuted, and people have been under those circumstances.

As far as I know there is no practical minimum: I'm aware of one investigation over a $500 trade that occured under suspicious timing. In small cases the penalty is usually disgorgement of profits and a fine, rather than jail time.

 

[crispos]

Good DivePartner, sounds like the rules aren't much different in the US. This stuff harkens back to the good ol' days of Ivan Boesky, Levine, and Deep Throat at the WSJ. Don't know what the ex post facto you are referring to. It is clearly a case of did she sell on the broker tip, or did she sell based on a pre-determined plan as argued.

If she did the former, she, maybe impusively without thinking, broke the law. I was interested to read she used to be a broker/trader. On the other hand, I have known many stockbrokers and traders that don't know the compliance rules as well as they should.

My last job, almost exactly 3 years ago, I was manager of about 20 brokers and their staff. I distinctly remember a tag team of more greed than brains duo coming into my office and telling me what a "steal" WorldCom and Nortel Networks were. Yeah, right.

I couldn't get them to stop putting tech into seniors accounts which were inappropriate and without their prior consent. I wrote my bosses, but they too were too greedy or compromised to do anything. So rather than have to convince an indifferent senior management, I resigned.

On the subject of Martha, we have had several high profile cases of just what she was alleged to have done: Bill Bennett, ex Premier of B.C. selling Doman stock, and Mike Copeland selling his Corel stock, both before they bombed. Neither have been convicted, insider convictions in Canada are rare. Biovail and ATI are the latest to attract interest.

The problem seems to be, phone conversations are often not taped or are not admissable, or are erased somehow. Or as in the Stewart case, it is hard to pinpoint when the inside knowledge was obtained. They also seem to be able to afford the most aggressive smarter lawyers than the government.

 

[Charlie99]

Crispos: It's Cowpland, not Copeland. His case is equivalent to ImClone's Waksal, not Martha Stewart.

Divepartner1: regarding overhead conversations, IIRC the Barry Switzer case (Oklahoma coach) where he overheard something at a racetrack was dismissed by a federal judge. (Yes, I know that the "Barry Switzer" rule doesn't apply to Martha, but it is a good example of the vagueness in this area.)

 

[Zippsy]

Guilty. String her up.

 

[crispos]

Crispos: It's Cowpland, not Copeland. His case is equivalent to ImClone's Waksal, not Martha Stewart.

Divepartner1: regarding overhead conversations, IIRC the Barry Switzer case (Oklahoma coach) where he overheard something at a racetrack was dismissed by a federal judge. (Yes, I know that the "Barry Switzer" rule doesn't apply to Martha, but it is a good example of the vagueness in this area.)

Yes, Charlie99, I am quite aware of that, just giving general examples. Let's not nitpick.

Shall we start laying odds? I say she gets off.

 

[ckharlan66]

... but if your information source is your stockbroker, it's hard to argue that you can't use the information.

Not necessarly, If you know that the stockbroker is giving you information that is not public information it is still insider trading.

Now, the typical outcome of this type of case (if found guilty)is disgorgement, a fine, and a ban/suspension from the securities industry. She is being gone after so hard because she lied and keep lying. I have worked with several US Attorneys and the quickest way to get them to start talking jail time is to let them find out that you lied to them.

 

[Charlie99]

Yes, Charlie99, I am quite aware of that, just giving general examples. Let's not nitpick.

But my point WAS the nitpicking counts. In a court it's not whether what she did was wrong or not, it's whether it was legal.

Cowpland was CEO of Corel and is assumed to have inside info. The PM of BC was told about an acquisition and traded on it. Those are pretty clear cut violations.

If you accidently overhear some useful info from somebody you don't know at the next table over in a restaurant, the case law is pretty clear ---- you can trade. If you doubt this, just google on Barry Switzer + insider trading.

Kiplinger Jan 04 article on insider trading is a pretty good discussion of what is and isn't insider trading.

A random overhead conversion, or a business document inadvertantly left on an airpline is tradeable. OTOH, if you have a buddy who works in a company that passes you some info, and you trade on it, you're in trouble.

To the best of my knowledge, nobody has ever been charged in the US with insider trading based upon mere knowledge that an insider is selling ---- but this is very much in the grey zone. Now, if as appeared at the beginning, that Waksal had called Martha, then the feds would have a pretty good case. But that doesn't seem to be what happened.

Charlie

disclaimer: I'm not a lawyer, I'm not a broker or other securities industry guy. Just an engineer with some venture and angel investments where I've had to to wade through the morass of SEC rules (144, 145, etc.), while at the same time staying clear of landmines like insider trading.

 

[SDAnderson]

While we're on the subject of no-good insider-trading scoundrels, I thought this might be of interest:

The World's Greatest Investment Club​

 

[crispos]

This was supposed to be a light-hearted attempt to guage popular support or dismay for the Martha Stewart case.

I was Chief Compliance Officer of a $1 billion mutual fund management company in 1999. I had to step in while the President was suspended for securities law violations and I was completely responsible for the compliance of a company with 80 disgruntled employees. I had to take the company to task on performance reporting mistakes, just like the ones in the papers. Rather than play ball, I made myself into a pariah.

I day trade now, and I dare say I pore over more investments than anyone I know, 60 hours a week, 50 weeks a year. I have been in the securities business for exactly 20 years. I am a CFA, have an MBA, and am "retiring" to Cozumel in a few weeks.

If anyone wants to start playing who is the better securities
lawyer, go ahead, but count me out. Unless you pay me for it.

Do you think Martha Stewart should get off, or not?