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The SEC prosecutes people for trading on privileged information.

They also prosecute people for trading linked securities.

Everything you wrote was wrong.

http://www.sec.gov/spotlight/insidertrading/cases.shtml

You see friends, hackers, recipients of information, and more charged, successfully.

No, he wasn't wrong. You can trade on nonpublic information. From [1]:

"The Supreme Court said in 1983 that people who trade on confidential information can be prosecuted only if the insider reaped a benefit from the leak."

The convictions in this case were recently overturned:

"With Nvidia, the disclosure began with an employee in the company’s finance unit who provided earnings numbers to a friend, who then passed the information to an analyst. The information made its way to Newman and Chiasson through the same circle of analysts involved in the Dell leak....Prosecutors said the information earned $4 million for Newman’s fund and $68 million for Chiasson’s."

Of note: "In overturning the convictions, the appeals court said prosecutors needed to show that the person disclosing the information received a clear benefit -- something more than the nurturing of a friendship...The appeals court also said the person being prosecuted had to know about the benefit."

In short, the only way to be convicted of insider trading is to directly pay off someone inside the company for the inside information.

[1] http://www.bloomberg.com/news/articles/2015-10-05/insider-tr...

SEC settles most of them before they get to court

I know at least once case where the insider (a famous Ohio State professor) didn't profit, but his friends and relatives made $1M on his tip. He still got 5 years in prison. http://www.bizjournals.com/columbus/stories/2005/12/12/daily...

He and his friends probably took plea agreements. There is nothing that says the feds can't pursue bad cases, and if you don't take it to trial, then you go to prison. But according to the most recent rulings, there are only very limited circumstances where someone can be convicted on insider trading.

> There is nothing that says the feds can't pursue bad cases

It's unfortunate that there isn't something that says that.

The point is that it's not friends or hackers trading on information they received from someone privileged but someone totally unrelated using information they gathered legally in public without any expectation of privilege. The cases GP mentioned (hiring private investigators observing public places, evaluating satellite imagery) are legal and used every day.

Additionally, you can even trade on non-public information as long as the insider does not benefit in any way.

Yes thats true, what GP mentioned is fine, I've done it. GP's statements were incorrect.

That's far from "Everything you wrote was wrong".

You may be thinking of tippees. Due to recent cases, it is a lot harder to prosecute them successfully. With that minor caveat, the top commenter is absolutely right.

what recent cases?

most significantly, US v. Newman in the 2nd circuit.

http://www.scotusblog.com/wp-content/uploads/2015/08/15-137-...

You're right that the SEC does like to prosecute people. They are not winning their cases though.

Anyway, the NYT did an article about this recently (with respect to Phil Mickelson's insider trading case)

http://www.nytimes.com/2016/05/21/sports/golf/in-the-clear-p...

Altucher basically makes a living from extrapolating from things that most people without definitive knowledge assume to be true.

His writing is the worst kind of merger of self-help, armchair psychology and social commentary.

I will admit to suffering from this misconception, so thanks for explaining it.

What happens with the edge cases? e.g. I play golf with an insider and he tells me to buy Ford stocks, but doesn't profit himself (at least not directly).

Usually there is a sort of assumed propagation of the insider's duty to keep the info private. Edge cases (my brother-in-law the VP of Ford has started drinking heavily and having panic attacks, so I short the stock) and further degrees of removal are of course trickier.

There is also a distinction between the SEC's civil remedies, which theoretically can reach out at a few degrees of separation (eg the Phil Mickelson case recently, where IIRC he unknowingly profited from a tip relayed from a guy who got it from an insider), and criminal liability.

There's a personal benefit test: if the insider didn't gain anything from giving you the information, you can legally trade on it.

See https://www.sec.gov/news/speech/speecharchive/1998/spch221.h..., http://www.bloomberg.com/view/articles/2016-01-19/justices-w..., and https://www.bloomberg.com/view/articles/2014-12-10/appeals-c...

Or https://www.bloomberg.com/view/articles/2016-05-20/insider-t... for a recent example

Fascinating. Thanks for the links. These cases seem to be more evidence for how the system is rigged in favour of the elite.

That said, a technically legal inside tip based trade can certainly face the wrath of the SEC and leave you on the hook for a ton of legal bills.

If it's clearly against previous precedent, they wouldn't prosecute, that just wastes their resources.

In theory, but that's not a theory I'd like to test personally. In cases that they do bring it frequently comes down to arguments about who received benefit. Sometimes it's as little as status/friendship.

Not since Newman, which explicitly found that a friendship is not enough.

Does winning a person's good will and thus the likelihood of them doing favors for you in the future not count?

It depends on the court, and how clearly a quid pro quo can be established.

Not looking for legal advice, but do you know of anything wrong with investigating in order to create a situation that would move the stock?

For example, testing Lumber Liquidators wood for chemicals or reverse engineering (assume legally) Volkswagen ECM code.

You risk becoming an insider, or conspiracy/RICO charges. Your idea would, at the least, require an excellent attorney as advisor. Also, the most likely outcome is finding nothing. You know those two in hindsight. How many investigations came up dry holes?

How could either of those situations make someone an insider or have anything to do with RICO? Buying a product and testing it is something anyone can do and doesn't require any inside information.

In US courts intent matters. If you can be shown to have intended the scandal to manipulate the stock, the courts consider that. To know whom and what to investigate, you had to talk to someone in the know. Almost always, someone inside. For a journalist, this is fine. But to accomplish this, you had to talk about it. Along with intent, especially if you've it done more than once, this suggests conspiracy and even RICO. Which an aggressive prosecutor will use to threaten one of you to convict the rest.

I forget how much HN wants the law to work like code. It does not. Intent matters. Circumstances matter. Context matters. Of course, money does, too.

Many shortsellers do this successfully without issue.. The historic way was to just do really intense due diligence into the financials, but lately they're becoming more sophisticated to find companies lying about their books. A fun example was a short seller counting the number of trucks leaving a factory to prove that the order volume was being inflated. Another fun one is using daily satellite photos to estimate how many cars are in the parking lots of retail establishments.

In the US, this is all legal -- as long as you're not breaking laws to collect the data, you're free to trade on any info you collect. Unfortunately, many of the unscrupulous publicly traded companies are Chinese and the laws are much more fluid around embarrassing companies there.

A good article: http://www.reuters.com/article/china-shortsellers-idUSL4E8K4...

Or see any research by Muddy Waters (among many other short sellers): http://money.cnn.com/2012/05/02/markets/muddy-waters-carson-...

Definitely not illegal. This decidedly critical site [1] was created by a $12 billion hedge fund - Pershing Square Capital Management, run by Bill Ackman. At the time they made this site, they had a ~$1 billion short position in the company's stock.

[1] https://www.factsaboutherbalife.com/

How did that work out for them?

I believe they are currently losing several hundred million dollars in this particular trade. But this kind of tactic works on companies where the problems pointed out by the short seller are both real and appreciable by the general investing public.

This makes me think of the plot of Casino Royale, where an international money launderer (more or less a hedge fund manager) tries to blow up a plane in order to send its maker's stock plummeting.

More on point, some anonymous investors made billions shorting airlines on 9/11. That's like a perfect storm of insider trading ("As long as we're wrecking the airline industry with a terrorist act, let's short some stock on it make a bundle!").

Got a source for the 9/11 claim? If true, that seems like it would have been quite the storm.

http://www.sfgate.com/business/article/Data-shows-heavy-airl...

It's been disproven -- The 'billions' made in shorts were just a hedge against a much larger long position that was initiated. The 9/11 Commission did a pretty detailed investigation that Snopes covered here:

http://www.snopes.com/rumors/putcall.asp

Its important to add that Senators and Congressman are exempt of insider trading.

Here is a good start to read on subject:

https://www.techdirt.com/articles/20130416/08344222725/congr...

That's how you get average poor/rich individuals like N. Pelosi and H. Clinton going from $100k per year to racking up $300MM in fortune within 10 years.

Hillary started on her fortune with cattle futures long before she could rely on Congressional exemption from insider trading...

> Its important to add that Senators and Congressman are exempt of insider trading.

That's not correct. The STOCK Act, as noted in the Techdirt article you cited, prohibited members of Congress and many other government officials and employees from trading on non-public information for profit. This was enacted in 2012.

The STOCK Act was amended in 2013. The amendment changed the disclosure requirements for some government employees, but NOT for Congress. All of the STOCK Act prohibitions and reporting requirements remained in effect for Congress and remains in effect to this day.

In addition to Congress, the amendment also did not change anything for the President; the Vice President; people running for Congress; Deputy Secretary of Defense; Deputy Secretary of State; Deputy Secretary of State for Management and Resources; Administrator, Agency for International Development; Administrator of the National Aeronautics and Space Administration; Deputy Secretary of Veterans Affairs; Deputy Secretary of Homeland Security; Under Secretary of Homeland Security for Management; Deputy Secretary of the Treasury; Deputy Secretary of Transportation; Chairman, Nuclear Regulatory Commission; Chairman, Council of Economic Advisers; Director of the Office of Science and Technology; Director of the Central Intelligence Agency; Secretary of the Air Force; Secretary of the Army; Secretary of the Navy; Administrator, Federal Aviation Administration; Director of the National Science Foundation; Deputy Attorney General; Deputy Secretary of Energy; Deputy Secretary of Agriculture; Director of the Office of Personnel Management; Administrator, Federal Highway Administration; Administrator of the Environmental Protection Agency; Under Secretary of Defense for Acquisition, Technology, and Logistics; Deputy Secretary of Labor; Deputy Director of the Office of Management and Budget; Independent Members, Thrift Depositor Protection Oversight Board; Deputy Secretary of Health and Human Services; Deputy Secretary of the Interior; Deputy Secretary of Education; Deputy Secretary of Housing and Urban Development; Deputy Director for Management, Office of Management and Budget; Director of the Federal Housing Finance Agency; Deputy Commissioner of Social Security, Social Security Administration; Administrator of the Community Development Financial Institutions Fund; Deputy Director of National Drug Control Policy; Members, Board of Governors of the Federal Reserve System; The Under Secretary of Transportation for Security; Under Secretary of Transportation for Policy; Chief Executive Officer, Millennium Challenge Corporation; Principal Deputy Director of National Intelligence; Director of the National Counterterrorism Center; Director of the National Counter Proliferation Center; Administrator of the Federal Emergency Management Agency; Secretary of State; Secretary of the Treasury; Secretary of Defense; Attorney General; Secretary of the Interior; Secretary of Agriculture; Secretary of Commerce; Secretary of Labor; Secretary of Health and Human Services; Secretary of Housing and Urban Development; Secretary of Transportation; United States Trade Representative; Secretary of Energy; Secretary of Education; Secretary of Veterans Affairs; Secretary of Homeland Security; Director of the Office of Management and Budget; Commissioner of Social Security, Social Security Administration; Director of National Drug Control Policy; Chairman, Board of Governors of the Federal Reserve System; and Director of National Intelligence.

For other government employees, the change was that their required disclosures no longer had to be filed electronically or made available electronically. The disclosures are still available to the public, but on paper rather than online.

That's absolutely right! With a minor caveat that there has been some prosecution of non-insiders who are tipped by insiders, but that has been eroded by recent cases much to the SEC's annoyance.

I would also take issue with Altucher's statement that you're not allowed "to make money on" insider info. Insider trading liability is about trading on the info, whether or not you make money, or even lose money, on a particular trade. It's just a lot easier to catch people who make money at it.

As to "overhearing at a restaurant" - the person who speaks may be committing an insider trading violation. They are an insider and did not take all steps necessary to keep it private.

Now, it could be that as a recipient of training, I've been made excessively paranoid but this is how I read it. But lawyers love torts based on "tainted" things.

>That's just completely wrong. If I hire a satellite to track car dealer inventories, buy Ford as a result, and make a ton of money, I'm doing my damn job. No one has committed a crime. Ditto if I sell that data rather than trading on it directly.

He obviously means pay someone _on the inside_ to get such information.

As is the case with his first definition.

Even if it's obvious to the author and some readers it's going to be interpreted differently by many. It's a very common misconception that's only reinforced by those sentences.

I doesn't actually matter whether what you do is illegal or not. What matters is whether the SEC or, more likely, a DA/AG thinks they can benefit from charging you.

Exhibit 1: Preet Bharara's misguided pursuit of US v Newman: http://www.wsj.com/articles/bhararas-supreme-court-miss-1444...

Even the Supremes are itching for a good case to clarify the law: http://www.wsj.com/articles/scalias-insider-trading-invitati...

You know what really grinds my gears when it comes to insider trading though? The fact that the really big names are most obviously participating in insider trading, but it's illegal for everyone else. Don't even get me started on congress and insider trading, but I digress.

The big players, I would say the C-levels and board members of the 147[1], or the other central big players[2], have the ability to manipulate and move markets in a way that I believe qualifies as insider trading... but they have so captured the regulatory market, to the point that the SEC is a gutless, teethless entity that only chases middle-men. Once again, multi-tiered justice creates an environment where all the middle-men are just going to cheat all they can until they get caught because they are just emulating the bosses!

Not to mention that even if they do get caught, almost never are the fines enough to discourage the act, so they see it as a win! Just offer up some low on the totem-pole scapegoat sacrifice, and be on your merry way. (Looking at you Bank of England and LIBOR scandal....)

The entire financial industry is a ponzi scheme of corruption, and I've said it before, and I'll say it again, the supranational bankers are more terrorists than the people with thwabs who we like to think of as terrorists. (plus, where do you think they get funding in the first place? Follow the money, and the money certainly doesn't end in a cave in Afghanistan.)

1. https://arxiv.org/pdf/1107.5728.pdf 2. https://www.sg.ethz.ch/media/medialibrary/2013/12/james_glat...

edit: Anyone downvoting care to actually respond please? I understand my statement about the supranational bankers being terrorists is a jarring statement, so I am willing to discuss the matter in further depth...