
United States v. Newman Clarifies the Law of Insider Trading - misterbwong
https://casetext.com/posts/got-a-hot-stock-tip-united-states-v-newman-clarifies-the-law-of-insider-trading
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jessaustin
It's good that the court somewhat clarified previously-fuzzier law. The
underlying problem is that insider trading as a crime is so _ad hoc_ to begin
with. TFA notes the hodgepodge of agencies, laws, regulation, rulings, etc.
that "define" insider trading today. I doubt if _any_ legal thinker's
interpretation of the current understanding were codified into a single bill,
that that bill could pass in Congress. Codifying what currently exists would
make obvious what a boon it is for powerful executives. A codification of what
the public imagines exists, would never get past those executives' lobbyists.

Nearly all executives trade in the securities of the corporations that employ
them. Very few are ever charged with insider trading. (I'm not suggesting they
should be!) However, whenever company management catches wind of transactions
that annoy them, they always have a friendly ear at the prosecutor's office.

Long before major stock [EDIT:] moves, many "insiders" knew what was coming.
Perhaps some told themselves, like Madoff, that they could get everything
turned around. Regardless, insiders know before the public knows. Insider
trading prohibitions serve to prolong the public's ignorance, and so deepen
the public's trading losses. No one is better placed to dance right up to the
line concerning investment decisions and public disclosure, than the firm's
executives are. That's why the majority of insider trading prosecutions that
succeed, are against outsiders like Martha Stewart or the subjects of TFA.
Insider trading is a crime because it's valuable for the executive class to
punish early defectors.

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cperciva
_Nearly all executives trade in the securities of the corporations that employ
them._

Lots of executives exercise stock options and sell shares. I think executives
buying securities on the open market is far less common.

The 'insider trading' issue with the timing of when executives sell shares is
why SEC rule 10b5-1(c) exists: It allows executives to establish in advance
plans for selling their shares, such that their future trades cannot be deemed
to be the result of inside information.

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walshemj
are you sure Director buying is well reported the Investors chronicle has a
weekly run down of which listed company's directors have brought/sold shares.

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MoOmer
You can read all about them at SEC EDGAR [0].

[0]:
[https://www.sec.gov/edgar/searchedgar/companysearch.html](https://www.sec.gov/edgar/searchedgar/companysearch.html)

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mannykannot
There seems to be a fundamental logical error in the explanation given here:

"As the court recognized, the reasoning of Dirks compels this conclusion. The
Supreme Court ruled that to be liable a tippee must know that the insider
leaked the information in breach of a duty. The Court in Dirks also held that
breach of a duty was established if the insider received some personal benefit
in exchange for the leak. Logically, therefore, proof the tippee knew there
was a breach of duty means proof the tippee knew that the insider received
some personal benefit."

It would have to be the case that a breach of a duty can _only_ be established
if the insider received some personal benefit in exchange for the leak, in
order for the conclusion to hold.

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rayiner
That is an explicit conclusion of Dirks (at 662): "Absent some personal gain,
there has been no breach of duty to stockholders."

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gburt
That is true, but it still seems to not follow. I could "breach my duty" to
shareholders simply by being negligent.

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jsprogrammer
Yes, the author seems to assume that:

    
    
        proof_of_breach <-> proof_of_benefit
    

You are arguing that it could be the case that:

    
    
        proof_of_negligence -> proof_of_breach
        proof_of_negligence -> (proof_of_benefit v ~proof_of_benefit)
    

in which case there could be a contradiction.

However, there is probably an argument that:

    
    
        proof_of_negligence -> (proof_of_benefit v ~proof_of_benefit)
    

is wrong and that there actually is a rule:

    
    
        proof_of_breach -> proof_of_benefit
    
    

For example, if someone is negligent, we already know they received a personal
benefit (eg. reduced cognitive load, received compensation for work not
performed, etc.).

To show a logical incorrectness, you need to show an `x` where:

    
    
        proof_of_x -> (proof_of_breach ^ ~proof_of_benefit) v (~proof_of_breach ^ proof_of_benefit)

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thaumasiotes
What are you trying to say here?

    
    
        proof_of_negligence -> (proof_of_benefit v ~proof_of_benefit)
    

easily simplifies to

    
    
        true
    

and therefore doesn't need a case to be made for it. It's always true.

~~~
jsprogrammer
I guess it should be an Exclusive OR, although I'm not sure that is allowed in
propositional logic.

The argument made was that negligence could occur without benefit (ie.
proof_of_negligence does not imply either proof_of_benefit or
~proof_of_benefit).

My argument is that `proof_of_benefit -> proof_of_negligence` and that
`proof_of_negligence -> (proof_of_benefit v ~proof_of_benefit)` (or otherwise)
is nonsense.

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thaumasiotes
Surely, if there is no benefit, then ~proof_of_benefit obtains? Are you
advocating against the law of the excluded middle? How could there be proof of
a benefit if there was no benefit?

Exclusive or, being a logical relationship, is allowed in propositional logic.
It is traditionally indicated, in mathy areas, by the symbol ⊕, but you can
just compose it from the standard and, or, and not operations.

And (proof_of_benefit ⊕ ¬proof_of_benefit) still simplifies to true, unless
you're a hardcore constructivist.

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roymurdock
There was obviously a reason that the tippers (Dell & Nvidia insiders) leaked
confidential information to the defendants, two hedge fund managers named
Newman and Chiasson.

I don't see why it's material whether this reason was friendship/status-
boosting or some sort of tangible, cash benefit. The hedge fund managers
benefited a great deal from the information, and thus the tippers benefited by
extension as they now had stronger ties to two successful hedge fund managers.

If the tippers benefited from leaking confidential information, they breached
a fiduciary contract with their shareholders by using company property
(information) for their own gain.

~~~
maxlybbert
> There was obviously a reason that the tippers ... leaked confidential
> information to the defendants ...

> I don't see why it's material whether this reason was friendship/status-
> boosting or some sort of tangible, cash benefit.

Mainly because they're facing prison time.

I can think of other laws that make similar distinctions. For instance, the
punishment for receiving stolen goods will depend on the value of the goods in
question. Why should somebody get a lighter punishment for receiving, say, an
iPod compared to a car? In both cases, they knew the person giving them the
item wasn't the owner.

In this case, it isn't a question of how harsh the punishment is, but whether
the people will be punished at all. However, if the SEC wishes to create
lesser penalties to cover this kind of thing, it has the regulatory authority
to do so. If that's not enough, Congress can always reconsider the law, but I
can't imagine people getting all that worked up about it.

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roymurdock
I would imagine that it would be in the interest of any shareholder of a
publicly held company to be very concerned about insider trading laws.

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tgb
I took some time a while back to look into why insider trading is considered
bad. The situation turned out to be messy and undecided but interesting.
Here's some links I came across in that search if you're curious.

[0]
[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=132529](http://papers.ssrn.com/sol3/papers.cfm?abstract_id=132529)
[1] [http://www.cato.org/publications/commentary/whats-wrong-
abou...](http://www.cato.org/publications/commentary/whats-wrong-about-
insider-trading) [2] [http://dealbreaker.com/2012/07/everything-bad-is-
insider-tra...](http://dealbreaker.com/2012/07/everything-bad-is-insider-
trading/) [3]
[http://www.forbes.com/columnists/free_forbes/2003/0512/050.h...](http://www.forbes.com/columnists/free_forbes/2003/0512/050.html)

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nkassis
This is interesting, I was under the impression that insider trading covered
even things accidentally leaked from companies. Is that not the case? If
someone used information hacked or found by another person would that fall
under insider trading?

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berberous
"“Dorozhko’s alleged ‘stealing and trading’ or ‘hacking and trading’ does not
amount to a violation” of securities laws, Judge Naomi Reice Buchwald of
United States District Court ruled last month. Although he may have broken
laws by stealing the information, the judge concluded, “Dorozhko did not
breach any fiduciary or similar duty ‘in connection with’ the purchase or sale
of a security.” She ordered the S.E.C. to let him have his profits."

[http://www.nytimes.com/2008/02/15/business/15norris.html](http://www.nytimes.com/2008/02/15/business/15norris.html)

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jdshutt
The Second Circuit reversed that ruling.

[http://economix.blogs.nytimes.com/2010/03/29/common-sense-
an...](http://economix.blogs.nytimes.com/2010/03/29/common-sense-and-insider-
trading/)

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pitnips
"The attorney, as an outsider to the corporation, owes no fiduciary duty to
the corporation’s shareholders so the classical theory would not apply. Under
the misappropriation theory, the trade is unlawful because the attorney
violated a duty to the client by using the client’s confidential information
for the attorney’s own benefit."

The client is the corporation's shareholders, as management simply acts as an
agent for those shareholders.

~~~
rayiner
The client is the corporation, a distinct legal person from any of the
managers or any of the shareholders.

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pitnips
Ah, right. Thanks

