The saying “Buy on rumor and sell on fact” may be one way to manage your investments, but it could also get you in trouble.
Whether it’s nonpublic, material information overheard at a cocktail party, a rumor from a friend or family member or even a financial adviser, if you profit from that information, it can be construed as a crime.
“Insider trading has always been prohibited, and there is a lot of case law about it,” says Shelly Goering, a securities attorney at Tucker Ellis & West LLP.
Insider trading has garnered so much attention because it destroys the public’s perception of fairness in the market and therefore destroys confidence.
“When there is fraud in the market, public investors lose confidence,” says Goering. “They need to know that the market is fair.”
Even though white-collar, corporate crime has been so high-profile recently, what actually constitutes an act of illegal insider trading is not so apparent — at least that’s what Martha Stewart might say.
One of the problems is that before the SEC attempted to prohibit the limited and private dissemination of “forward-looking” statements with its Fair Disclosure rules, keeping key information from the public was par for the course.
“There is no statuary definition of insider trading … it’s all case law,” says Goering. “Insider trading is fundamentally fraud, and it is charged as a fraud offense.”
As confusing as the specifics can be, Goering says the basic are simple. You cannot profit from trading on nonpublic material information. Therefore, “it is very difficult to commit insider trading by accident,” she says.
Perhaps the first question is, who is an insider?
“There are the true insiders … directors and officers of the company who know specific corporate information, material nonpublic information,” says Goering.
Any information passed on by this group and acted upon falls under the definition of insider trading and constitutes a criminal offense.
But with insider trading, there is often a chain of people involved who are also liable, including anyone who receives information or tips.
SEC insider trading cases have gone well beyond information given to family and friends; vendors, brokers and legal and financial advisers have also been charged.
“There was a case that the SEC brought (regarding) a temp, a word processing employee that was working at Goldman Sachs and passed on material information,” says Goering.
The SEC also continues to prosecute cases against brokers getting advance information from the media and employees at printing companies who have seen sensitive financial documents while printing.
“If you hear something from someone that that works for the company or has a fiduciary responsibility to the company … you have to question yourself,” says Goering. “Even if you are simply passing on information, you can still be a defendant. Everyone involved in the chain is liable.”
And getting caught is not worth the risk.
“You can be charged civilly or criminally,” says Goering. “Restitution is common, and it can be three times the amount of the unjust profit.”
And with corporate and market integrity being at the forefront of the mind of the public, Goering warns there are no special circumstances for inside traders.
“All bets are off in terms of white collar criminals receiving less penalties,” she says. “It goes to the integrity of the market … and it will continue to be high-profile.” How to reach:Tucker Ellis & West, (216) 696-1114
Legal motions
The economy may still be uncertain, but even with increasing jobless rates and unemployment, there are areas in the legal profession that promise to grow, according to the Affiliates, a legal staffing firm. Here are six hot legal practice areas.
* Bankruptcy. In 2002, 186 public companies with a total of $386 billion in assets filed for bankruptcy, increasing the demand for firms that specialize in this field.
* Intellectual property and patent law. Many businesses are concerned with intellectual property rights and patents, and with more process patents being awarded, this area promises to grow.
* Employment law. The number of class action lawsuits is growing, especially in the area of wage discrimination and overtime disputes, due in part to complicated federal and state regulations.
* Commercial real estate. Spurred by low interest rates, real estate-related practice areas like banking, land use and eminent domain are picking up.
* White-collar crime. Recent accounting scandals have increased the public’s awareness and government’s pursuit of white-collar crime and regardless of whether criminal charges are filed, attorneys must advise clients on potential exposure.
* Business litigation. From toxic mold contamination to shareholder class action lawsuits, this is another area that will more than offset slowdowns in the merger and acquisitions work. Source: The Affiliates
