Two recent developments in the US slowing the tide of insider trading prosecutions will increase the stakes for IROs. First, we have an appeals court reversal, upheld by the US Supreme Court, of the high-profile convictions of Anthony Chiasson and Todd Newman, who were found guilty in 2012 of trading on advanced looks at upcoming earnings from tech companies Dell and Nvidia. The material non-public information was leaked by corporate insiders, then passed through a web of analysts before reaching the two hedge fund managers.
In the Dell case, the insider was Rob Ray, a member of the IR team, who received career counselling from the analyst to whom he passed along the preview of Dell’s earnings. In the case of Nvidia, the tipper was a member of the corporate finance team, Chris Choi, who passed information to an acquaintance at his church. The two who leaked the information were never sanctioned by courts or regulators.
Lawyers for the fund managers argued – and the courts agreed – that their clients were several layers removed from the original sources of the information and thus had no knowledge it was illegally obtained, so were not culpable. The courts also found that no crime was committed in passing along this information, despite several analysts further up the chain pleading guilty to insider trading. This naive conclusion rests on the court’s determination that Ray and Choi did not receive a benefit ‘of some consequence’ for their breaches. They may have violated their fiduciary duty and confidentiality agreements, exhibited weak ethics and poor professional judgement – but they did not break the law.
The second development involves ongoing investigations into the release of sensitive information from the Federal Reserve in 2012. According to news reports, prosecutors and regulators launched an insider trading probe centered on investment research boutique Medley Global Advisors, which published details of internal Fed discussions about future economic stimulus actions the day before those details were made public by the Fed. Medley, which was bought by the Financial Times in 2010, argues that it is a media firm and thus insulated from insider trading sanctions.
IROs should care about these developments for two reasons. First, I believe the role of insiders will come under greater prosecutorial scrutiny, not less. Successful prosecution will hinge on the facts surrounding the origins of the information. The eye of regulators and enforcement agencies will naturally hone in on the nexus of information exchange between issuers and the capital markets: the IRO.
More troubling is the court’s narrowing of the definition of insider trading. The lane in which analysts operate has just been widened by the courts and, if Medley is successful, it will widen further.
A complex web of data-sharing effectively insulates players further up the chain from the consequences of using illegally obtained information. And corporate insiders who willfully and selectively turn over material non-public information may not only be exempt from prosecution themselves, but can also set in motion an entire enterprise in legal trading on stock tips, if they only do it with friends. Expect to be pushed harder than ever to give an edge to ‘friends’ who will argue, given recent developments, that there is little or no risk in playing along. Expect your CEO, CFO, board members and knowledgeable employees in finance, manufacturing, sales and marketing to be pushed as well. You’ll have to decide what your posture should be.
Business and financial journalist Brad Allen is a former IRO and served as NIRI national board chair between 1996 and 1997
This article appeared in the Spring 2016 issue of IR Magazine
