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Comment by colinmorelli | Hacker News Reader

Important clarification: you do not need to have confidentiality obligations with respect to the information or a fiduciary relationship, it need only be information that is material and non-public information that belongs to the company (i.e. only available to those with a fiduciary responsibility or confidentiality obligation to the company). If an insider with confidentiality obligations shares material non-public information with a person who has no confidentiality obligation, and that person trades on that information, that would be insider trading.

The link you referenced also clarifies this point, but it is different from what is written in your comment.

Note: this doesn't change the fact that the answer in this particular case is no, it's not insider trading. You are, as parent mentioned, just the first to know the news.

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That’s not quite correct, it depends on the nature of the disclosure.

Someone receiving information from an insider needs be independent of personal, financial, and quid pro quo relationships. So a random person that happens to sit next to a CEO on an airplane can trade on whatever they hear. The CEO’s mistress sitting on the other side of them can’t.

This exact scenario happened to me. I was flying United business class SFO to EWR and the guy next to me was writing a Powerpoint slide in 9000-point bold type "BUY XYZ CORP FOR 880 MILLION" and when I got to work a few hours later our counsel advised me that it was not at all improper to trade on that information, which we did.

The absolute first thing I ever do when publicly working on a doc like that (if I absolutely must) is Ctrl+r any trademarks, swapping them for [#x].

Seems good. But I also feel like if you're the kind of person who can command the disposition of a billion dollars, just stop writing slides. Stand up in front of the board and say what you came to say and then sit back down.

Well, I’ve figured out how I’m spending my spring break- buy a ton of cheap stock in some random startup, dress head-to-toe in Microsoft swag, and then spend a few days hanging out in various SFO lounges working on fake PowerPoints declaring intent to buy the startup

Sounds fun. You'll also need to hack your photograph into the "about us" page of a major corporation, though.

... but did you make money on it?

", which we did."

This warmed my heart greatly.

> So a random person that happens to sit next to a CEO on an airplane can trade on whatever they hear.

I am under the impression that this would also be illegal, because trading on the basis of MNPI is itself illegal, irrespective of insider/outsider status.

In the specific hypothetical case mentioned, wouldn’t that constitute “public” information if it was overheard in a non-controlled location?

Overhearing could fall under the "misappropriation theory" of insider trading. If you run into "confidential" (material non-public) information about the security, you still would be committing fraud. [1]

But then the passenger could claim that they did not the person next to them was Elon Musk, and that when Elon said over the phone "whoever shorts Tesla stock now will become a billionaire next month" they thought it was some random guy giving his 2c on the trade.

[1] https://www.law.cornell.edu/wex/misappropriation_theory_of_i...

> Before U.S. v. O’Hagan, 521 U.S. 642 (1997), individuals could only be liable for insider trading under the classical theory of insider trading. In U.S. v. O’Hagan, the U.S. Supreme Court faced a scenario where a partner at a large law firm purchased stock futures in a company conducting a tender offer based on inside information that he gleaned from other partners at the firm working on the deal. Although the partner had no fiduciary duty to the companies in whose stock he traded, the Supreme Court found him liable under Rule 10 b-5 on the grounds that he used confidential information to trade securities. The Court reasoned that such insider trading is fraudulent because it is akin to embezzlement; that is, the owner of the confidential information has exclusive use of such information, and the trader misappropriates that information by trading on it and not disclosing the use of the information to the owner of the information.

That partner had privileged access to that confidential information and as such wasn’t an unrelated 3rd party.

Where the ‘theft’ line of reasoning is an issue for unrelated 3rd parties is hacking: https://www.justice.gov/usao-edny/pr/former-hedge-fund-manag...

Agreed. It absolutely could be if it’s technically non-public information. That’s the entire point of the regulations. Just because you don’t work for the company doesn’t make it not insider trading if you act off information the company didn’t disclose.

Always funny when the startup geniuses reinterpret securities and broker-dealer rules

How would a random person know if that information was MNPI? How could you possibly prove that someone knew it was?

Ignorance of the law is not an excuse for misconduct

This has nothing to do with ignorance of the law, it's about intent.

You can be fully versed in insider trading law, receive some information that you reasonably assume isn't protected, trade on it, and that's not insider trading.

If that weren't the case, every single person who traded a stock after some MNPI was inadvertently broadcast/published would be guilty of insider trading.

> because trading on the basis of MNPI is itself illegal

"yes" in Europe, "no" in the US

What if the plane is in the middle, over the Atlantic?

My guess is it is based on where you order the execution of trades. That is physical location of either exchange or your broker.

I'm sorry but you are wrong. Russia is the only country that I know of that does not follow "common understanding" of insider trading

Do you ever bother reading?

https://en.wikipedia.org/wiki/Insider_trading#Legal_differen...

> The principle is that it is illegal to trade on the basis of market-sensitive information that is not generally known. This is a much broader scope than under U.S. law. The key differences from U.S. law are that no relationship to either the issuer of the security or the tipster is required; all that is required is that the guilty party traded (or caused trading) whilst having inside information

But how does this square with rumors? Is trading based on rumors illegal then?

"I heard a rumour that their defect rate is very high for this new product."

Information that isn't meant to be public might still send up circulating sure to mistakes etc. How would you determine whether trading based on it would be legal or not?

Hearing a rumor isn't illegal.

Hearing and trading on a specific statement by an insider at a public company, as an outsider, is insider trading. It's not that complicated

> it need only be information that is material and non-public.

I think this is wrong as well. Suppose you are a independent technician repairing cars. Over time you notice, that, say BMW car quality used to be good but has gone to shit. That's not public information, but you would be allowed to short BMW stock in the hopes that, once public catches on, their share price will tank.

In fact half the point of stock trading if for you to do research, including your own investigation and testing. And then use that as an advantage. In the process you are bringing the price close to it's true value.

P.S. nothing against BMW, just an example.

Just because Car and Driver hasn't published an expose doesn't mean the information isn't public. Presumably lots of other independent (and non-independent) technicians have noticed the same thing. Your observation may be sampling error or not something that is sufficiently noteworthy to have percolated up to all the car forums out there en masse.

"Public" doesn't mean the company has publicly announced it - just that the information is available to the public. The situation you're describing is very similar to the Boeing situation above. You just happen to be the first person aware of the news, because your job provides you the ability to see a bunch of cars and understand how their quality is trending. Nor is it any different than you buying, say, one of the first Rivans, thinking the QC was horrible, and shorting the stock.

Regardless of when you learned it, the quality of BMW's cars (in this example) became public information when they started selling them to the public.

Now, however, if an internal employee told the technician that BMW had removed all QA checks from their line, and (s)he should expect quality to fall precipitously in the years ahead, that would be different.

>I think this is wrong as well.

The gp's wording is a little confusing but he's just trying to explain the transitive logic of non-public information transferring from a "true insider" to an outsider is also "insider trading" and thus illegal. Think of it as the provenance of information coming from an insider.

E.g. Martha Stewart is an "outsider" and not an insider of drug company ImClone but she was found guilty of insider trading because she did get confidential information from insiders at the Merrill Lynch brokerage that handled stock trades for the ImClone CEO: https://www.sec.gov/news/press/2003-69.htm

Your scenario of a mechanic repairing cars, or somebody counting the number of cars in various Walmart parking lots, or a hacker that discovers a serious website vulnerability that may cause embarrassment and stock price drop ... none of those situations have a corporate insider in that information disclosure loop.

Slightly clarified my comment via a parenthetical. "Non-public" in this context refers to information which would only be available to those with a fiduciary responsibility and/or a confidentiality obligation to the organization.

I was trying to avoid the use of "insider," because people tend to assume that means employees or directors, but that is not the case. Outside organizations who have, as an example, signed an NDA with the organization may learn of material non-public information, and trading on that could constitute insider trading.

> "Non-public" in this context refers to information which would only be available to those with a fiduciary responsibility and/or a confidentiality obligation to the organization.

Right, but information available to those with a confidentiality obligation can still be traded on if acquired legally. That's the crucial point. It's not enough for it to be non-public and material, you must also be in breach of a fiduciary duty (or acting in concert with somebody who is). For example, if a Boeing CEO was at a coffee shop discussing an upcoming acquisition at the table next to you, you'd be able to trade on it, even though it was confidential information not available to the general public and obviously material to Boeing's stock price.

It's not required – to my knowledge – that specific person disclosing the information be in breach of a fiduciary duty, as one could easily overcome that by disclosing to someone who discloses it to someone else, who then trades on it.

The scenario you mentioned is generally understood to be permissible, but it's not exactly clear to me why. Perhaps that the information became "public" (whether intentional or not) when discussing it in a public forum such as a coffee shop?

If she put it on twitter could she legally trade on the tip? If I saw the tweet and trade is that legal?

> If she put it on twitter could she legally trade on the tip?

IANAL, but if she traded a picosecond after tweeting: no. If she has zillions of followers and traded a year later: yes, because ’the public’ could be aware of the content of the tweet. A judge will have to decide on in-betweens. When doing that they likely will take into account how open Twitter/X is.

> If I saw the tweet and trade is that legal?

Again, IANAL, but I would think so, if she has ‘enough’ followers.

>> Martha Stewart is an "outsider" and not an insider of drug company ImClone but she was found guilty of insider trading

Minor correction: she was not convicted of insider trading. That charge was dismissed. She was only convicted of lying to investigators.

I can't find any evidence that she was ever charged with insider trading.

The judge dismissed a charge of "securities fraud", which claimed that she had defrauded investors in her own company by making false statements to the public.

The jury convicted her of "false statements", obstruction, and conspiracy.

I’m curious about trading on your supply chain partners.

Can Apple buy stock in a chip manufacture before they sign a deal with them?

Can they short them before not renewing a contract?

Another way of asking, is trading other companies based on insider knowledge from your company legal?

No, no, and yes.

Do you mean no, no, and no?

#3 is a general case of specific cases 1 & 2.

I don’t think 3 can be a yes if 2&3 are a no.

Of course you're right, I had misread the third question.

Oh right, I had misread the last one. Of course it's no, no, and no.

It's not insider trading to judge the quality of a product based on what you experience of the product in the wild and to make an investment decision accordingly. It's just being canny.

Now, if you learned from someone inside that they were going to do a recall but had not announced it yet, on the other hand...

That being said, I am sure that insider trading is widespread (e.g. above example). The thing is that is it not easy to detect unless you are already on the radar.

This is not "non public" information and to be honest it might not even be material

"Non public" usually means an information that's internal to the company, not necessarily something that can't be gathered independently

Google's menu for the week in their offices is "non public" but not material information

Seems to me the technician does have public information, he is not the only technician that has that data he might just be the only wise enough to notice the pattern

This is not insider information you got from the company. You just observed the world. Totally allowed. What would not be allowed is if you got hold of info from BMW that showed way more repairs than previously reported etc (and it was material for the company).

There is a court case about this.

https://www.compliancebuilding.com/2014/02/06/working-on-the...

Roadroad workers notice a bunch of visitors in suits, boss asked them to put together an inventory of property.

So they thought the company was going to be sold and profited on it.

SEC charged them, courts found them not guilty of insider trading.

What if you are on a plane and door blows out but the only other passenger on the plane happens to be a Boeing exec by sheer coincidence?

Anyone could have been on that plane provided they bought a ticket. The fact that nobody else was is irrelevant. The information was not only knowable to those with a fiduciary or confidentiality obligation to the company.

If you're traveling as a regular passenger, you still would not have a fiduciary relationship with Boeing and you have no confidentiality obligations regardless of who else is on the plane.

I know what you're thinking, but no, you still can't push him out.

Ayyoooo

There is a chance that the plane crashing would improve Boeing's management.

What does "non-public" mean here? If some information gets leaked without authorization by an insider (like when people leak stuff online...), (when) does that become public?

There's no bright line. But jurisprudence puts it somewhere below 375 subscribers to a newsletter.

https://www.bloomberg.com/opinion/articles/2023-11-02/the-ba...

(Journalism Section)

What if you infer it from a person that does have a privilege position.

Here’s the scenario. During acquisitions, acquiring company sometimes use market research companies to reach out to former execs at the company as part of their diligence.

Can you trade long if you just receive a bunch of requests from market research firms but never actually talk to the acquiring company?

Depends on how well connected you are to the establishment whether a prosecutor would try to bring charges on more novel fact patterns. Rule by law vs rule of law and all that.

If you infer it, rather than being told by the research company then it’s probably on the “not” end of the “insider trading” spectrum. The SEC could still charge you but it would be hard to prove how you inferred the information

There's an ongoing insider trading case where an executive at Company A learned that Company A by might acquired. He then bought call options on his closest competitor assuming that the news of Company A being acquired would cause the value of the competitor to also increase.

https://corpgov.law.harvard.edu/2023/12/17/sec-defeats-summa...

> If an insider with confidentiality obligations shares material non-public information with a person who has no confidentiality obligation, and that person trades on that information, that would be insider trading.

Is this transitive? If the person with no confidentiality tells a 3rd person and that 3rd person trades, is that still insider trading?

You're muddying the waters here, the original poster is correct, but with a few scenarios for outsiders. For example, a company that printed the financial statements of companies, had no NDAs, was trading on the data, and was convicted of insider trading because they knew the data was company confidential information.

Theft from the company is the central tenet, whether you are an insider, have a fiduciary responsibility, or an outsider who comes across data from inside the company.

Material nonpublic information that isn't taken from the company is fair game, thus all the quant funds that collect detailed market intelligence and trade on it (or the posted example, a passenger on the plane who knew the news ahead of the public). It doesnt matter one whit whether the information was material or public, it matters only that it wasn't taken from Boeing

EDIT: I was involved in the early days of a company that sold data to quant funds, and spent many hours with lawyers on exactly this question

It does seem quite odd to say "it doesn't matter one whit whether the information was material or public" when insider trading is defined as: the trading of a company’s securities by individuals with access to confidential or material non-public information about the company.

Further, I struggle to understand how one could learn information which is non-public without "theft" of that information. It would seem that, by definition, if the organization begins sharing that information with individuals who have no confidentiality obligation, they have now made that information public.

What does tend to happen often is that others assume "public" means "written in the news" and that is certainly not the case. There are plenty of things that are knowable by the public but not obvious, and it's perfectly fine to trade on that.

You're thinking too narrowly.

Example: logs of search queries that suddenly trend with adverse information about companies. Those logs are not public, in fact you need to buy them, but they have real signal (thus material and nonpublic), and are perfectly legal to buy and use. Satellite photos to estimate material stacking up outside a factory, or how many cars are in the parking lots of retail stores. Mobile data that has been statistically tied to foot traffic in stores. Credit card purchase data (not public! very material! perfectly ok!) I could go on forever

Go ask a lawyer this is a big space

EDIT: Yes exactly, ITS HAS TO BE CONFIDENTIAL TO THE COMPANY AND THUS TAKEN FROM THE COMPANY LIKE I SAID ABOVE. Your explanation implicated all the cases I described. You haven't seen how explicitly rich are the sources that I mentioned above, they are very very definitely information about the companies that are traded

My explanation did not implicate the cases you described above, because it explicitly said "only available to those with a fiduciary responsibility or confidentiality obligation to the company"

Regardless of the level of fidelity, if you got that information from an unaffiliated third party entity who captured it in the delivery of their own services, it is not "only available to those with a fiduciary responsibility or confidentiality obligation to the company"

It sounds like we are saying the same thing and you don't feel my original comment was clear enough. That's fine feedback. But there's no substantive disagreement. The points you listed above are all fine to trade on.

You’re missing a clause in what constitutes illegal insider trading. From an SEC site: https://www.investor.gov/introduction-investing/investing-ba... (italics added by me)

> Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.

My statement was copied from Cornell Law's definition [1].

But, yes, all of these shorthand definitions are designed for the general public's consumption, and skip over specific nuances - including the SEC's definition. The sentence read above would seem to permit a person with a fiduciary duty to share information with someone who does not have one, and for that person to trade based on the information. However, we know this is not permitted.

In any case, I think my comment still stands. I specifically called out in my parenthetical in the original comment that the information would need to be knowable only by those with a fiduciary or confidentiality obligation to the company. This seems to cover your comment and sibling's concern.

[1]: https://www.law.cornell.edu/wex/insider_trading

> or an outsider who comes across data from inside the company

Doesn't it matter how you came across that data? If you were at a coffee shop and happened to overhear a bunch of Boeing engineers talking about how they were replacing bolts with hot melt glue I thought you could you trade on that. If they explicitly told you that they were replacing the bolts with hot melt glue, then you wouldn't be able to.

Unless you shad signed an NDA that stated they would not disclose non-public info and then told you about the glue, in which case you could still trade on it.

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