On Sun, 2 Jun 1996, Timothy C. May wrote:
At 4:30 PM 6/2/96, Martin Minow wrote:
One of the oldest tricks for running a stock up (or down) is to put rumor teams on elevators in the financial district of major cities.
It would be more efficient to talk about the rumor on a cellular phone. Probably make a nice sting scenario, too.
An interesting example, but I'm having a hard time figuring out who has committed a crime, even by SEC rules.
Namely, are the people "talking up" a stock committing a crime? Even if the SEC forbids this (under defined circumstances and for defined persons, as most of us are not covered by any such laws), how can talking over a "putatively secure" cell phone be construed as talking up a stock?
If it's in relation to a tender offer, they are in deep. (As, for example, if they were hiking up price to deter a hostile aquisition). [...]
(To elaborate on this: I was never classified as an "insider" during my time at Intel, and I certainly bought and sold the stock based on what products and news I knew was coming out or what rumors I'd heard. Only a select group of executives and staff in the specific departments generating earnings announcements, auditing, etc., were covered. And senior executives are covered by various rules about trading stocks. And family members and friends may be covered, if they learn of "inside" (in the SEC sense) information. But ordinary people, even employees of a company, are not considered to be "insiders" and hence are not covered by insider trading laws.)
Incorrect. I direct you to Dirks v. Securities and Exchange Commission, 463 U.S. 646 (1983). Specifically footnote 14: "Under certain circumstances, such as where corporate information is revealed legitimately to an underwriter, accountant, lawyer, or consultant working for the corporation, these outsiders may become fiduciaries of the shareholders.... When such a person breaches his fiduciary relationship, he may be treated more properly as a tipper than a tipee...." This circumstance is classically refered to as a "footnote 14 insider." It has been held to apply to lower level employees within the corporation who "knowingly trade based on material non-public information acquired by virtue of their position within the company." After 1983, Mr. May may have committed a crime. The case against Mr. May would be strengthened if a court were to accept a misappropriation theory. (In short, that the employee used information intended for corporate purposes [development, etc.] in order to trade stock for his gain). Misappropriation theory, where it is accepted, fills in the needed "fraud" element in rule 10b-5 which would impose liability on a trader and which is otherwise absent in the case of an employee trading as Mr. May has indicated. While misappropriation theory is waning, it is not entirely dead. Remember that restrictions on senior management as per trading in the company's stock are to prevent director and corporate liability. No one cares much if a lower level employee gets zapped because it doesn't open the door for greater corporate liability like it would for senior management. Further, you don't want to have to circulate a memo to the whole company as to when trading is restricted. That would be asking for trouble. Be sure to distingiush between corporate policy with regard to employee trading and legality.
So, the only way I can imagine the cell phone case leading to an insider trading charge is if the cell phone users _knew_ that the cell phones were not secure, and _planned_ to have their conversations overheard. The people doing the intercepting could be charged under one of the laws covering unauthorized interception of cell phone conversations, but probably not for insider trading.
Or if they were artifically hiking up the price to defend against or interefere with a tender offer.
--Tim May
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