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Comment by nhstanley | Hacker News Reader

Well, in the article the make clear that there is case law that this is illegal and considered "misappropriation" insider trading.[1]

Even if we decide it isn't insider trading, Capital One is on the hook for what it's employees do. Chipotle or whoever could sue CapOne for breach of contract, and CapOne could sue these guys for that. So even if we decide as a society it's not criminal, another group of guys doing the same thing somewhere else might not get to keep all that sweet dough they made purely on civil grounds. I don't know. It's interesting.

[1] https://supreme.justia.com/cases/federal/us/521/642/case.htm...

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> Well, in the article the make clear that there is case law that this is illegal and considered "misappropriation" insider trading.

I'm not sure that is the exact same thing. These guys had to do some research.

Consider, for example, a large pork supplier. If they see orders from Chipotle trend up by (say) 30% over a quarter, are they free to buy call options on CMG? What if you're a feed supplier to this pork supplier, and you know that Chipotle is their biggest customer, and see that this pork supplier's demand for feed has gone up by 30%; can you then buy call options?

This is a gray area, and I'm not sure the line is really that clear cut.

>This is a gray area, and I'm not sure the line is really that clear cut.

Your examples are not novel issues, certainly there would be case law on point. I can not cite the case law, but I would tend to believe your examples fall within the classification of insider trading (i.e. trading based on a companies non-public information). I know for example as an attorney if I am working on a merger and I buy/sell stock or inform someone else who buys/sells the stock that would be insider trading.

Generally, think of the Martha Stewart allegations, she was informed by a friend/corporate officer that the FDA was rejecting the companies cancer drug. Based on that non-public information her brother sold the stock and then the FDA decision became public and the stock dropped. It is a stretch from your hypothetical, but the non-public information paradigm would seemingly still apply.

I don't think that example is insider trading. Insider trading is trading on material nonpublic information that was obtained in violation of a duty of confidence (and for a benefit). Do Chipotle's suppliers have a duty of confidence regarding their order sizes? I suspect either it's explicit in the contract, or they don't.

Is that ("that was obtained in violation of a duty of confidence") true? I don't think it is. I'm pretty sure you can't trade on information you overhear in a bar, for example.

The SEC might argue that bar patrons have such a duty of confidence - they have previously done so for roommates, and golfing partners. Or they might charge the person you overheard with violating the Reg FD selective disclosure rules. Or they might let you both away with it (IANAL). But yes, it absolutely is part of the law; http://www.law.cornell.edu/cfr/text/17/240.10b5-2 is the detailed version.

> I'm pretty sure you can't trade on information you overhear in a bar, for example.

Apparently, you can. Read the following: http://sloanreview.mit.edu/article/when-is-it-legal-to-trade...

>Even if we decide it isn't insider trading, Capital One is on the hook for what it's employees do.

Under the legal theory of Respondeat Superior, Capital One would generally be liable for acts of its employees. However, liability will generally not extend to the employer when employees are acting outside the scope of their employment. Certainly if the employees were breaking the law it can be presumed they were acting outside the scope of employment, but even if it is found the employees were not breaking the law it would appear they were acting outside the scope of their employment. In short Capital One would have affirmative legal defenses.

I recently worked at Capital One (left recently), they were not following protocols and probably had gained access to information they should not have had.

That being said, I highly doubt Capital One is "on the hook" because they were breaking company rules and would have been terminated. Further, I am pretty sure the employees were breaking several laws as well as Capital One's policy (at least according to the contracts I signed and seminars I had to sit through), Capital One would not be directly responsible if they attempted to prevent such behavior (which they do).

In this case, Capital One could only be on the hook if they benefited or distributed individuals data, they actually did neither. They had only general sales data and only the two employees illegally made money.

Thanks for the link, it sent me down a path of learning more about breach of fiduciary duty. You are correct, this is a very complex and interesting case.

I heard of people at a renowned analyst company who would trade on their findings before release. Supposedly that was all clear as they only used public data.

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