Tag Archives: Insider trading

Thomson Reuters And Insider Trading

Let’s assume that you work for a major publicly traded corporation. You have scheduled a press conference to release proprietary information to the general public, information that will undoubtedly trigger significant trading in your stock (and thus a significant change in your stock price) within moments of its release.

An investor offers you a significant amount of money to “peek” at the information shortly before you release it to the public. You are certain that such a “peek” will help the investor anticipate the change in the stock price before it occurs.

Can you sell the investor an advance “peek” at the information? Of course not. Such a transaction would run afoul of our insider trading laws; it would represent a criminal activity in most nations.

And yet, until Thomson Reuters finally bowed to pressure from New York State regulators last week, it was engaged in a similar activity. The firm compiles and issues the University of Michigan’s monthly consumer confidence survey, a report which reliably moves markets immediately upon its release.

Thomson Reuters had been selling such advance “peeks” at the survey data prior to release, claiming that firms do not violate insider trading laws when they “legally distribute non governmental data and exclusive news through services provided to fee paying subscribers.”

New York regulators failed to see any distinction between private corporations that illegally reveal exclusive news to favored investors, and private corporations that obtain such news and then resell it to subscribers. Last week, although it admitted no fault, Thomson Reuters announced that it was temporarily suspending this practice.

Nevertheless, the relevant legal question remains unanswered: can “peeks” at insider information be sold to favored parties in advance of public disclosure, as long as the sales are structured as subscription fees to exclusive news?

Thomson Reuters, of course, merely announced a voluntary temporary suspension of this practice. Any firm, including Thomson Reuters, can thus implement it at any time.

Power, Money, and (Legal) Loopholes

Score one for the “old media” scions of journalism! Thanks to the investigative reporters at CBS News’ Sunday program 60 Minutes, the STOCK Act has now been passed by both houses of Congress and appears to be on its way into the law books.

The Act prohibits members of Congress from engaging in insider trading activities. Once passed, our elected officials will no longer be able to trade on confidential information that they obtain while performing their governmental duties.

It’s always a pleasure to watch the venerable news program, one that came of age over 40 years ago, serve the public interest by practicing the profession of journalism. But isn’t it odd that, at this moment in time, federal officials are still permitted to engage in insider trading?

Loopholes, Loopholes, Loopholes

Apparently, the criminal laws that prohibit insider trading have never covered members of Congress. Although they’ve been employed for decades to imprison business executives from the fictional Gordon Gekko to the real Martha Stewart, they’ve never been applied to our Congressional officials, thanks to loopholes that were written into the law by those same officials.

Such loopholes are, regrettably, relatively common. Elected officials at both the national and local levels, for instance, are often permitted to spend their political campaign contributions for personal benefit. And when Indiana Senator Evan Bayh recently announced that he would retire from government, government officials confirmed that he could dedicate his $13 million campaign fund to any legitimate charitable or political purpose.

To be sure, Bayh has undoubtedly earned far more money after leaving office by joining the “K Street” Washington law firm McGuire Woods and the private equity firm Apollo Global Management. Nevertheless, even though Senator Bayh has never been accused of committing an illegal act, the existence of the campaign contribution loophole — like the existence of the insider trading loophole — feeds the sense of ethical skepticism that Americans harbor about government ethics.

Words vs. Deeds: A National Republican

A similar sense of skepticism is generated when our elected officials fail to take the time to explain technical business concepts to the general public. Consider, for instance, the issue of Republican presidential candidate Mitt Romney’s recent tax returns. According to the Romney campaign, he simply pays the stipulated 15% tax rate that is applicable to long term capital gain transactions.

What they fail to explain, though, is that the vast majority of Romney’s earnings are not classified as capital gains at all. They’re actually deferred earnings, which — due to another loophole in the federal law — are classified as carried interest and are taxed at the 15% rate.

Like Democratic Senator Bayh, Republican candidate Romney follows the law and simply takes advantage of existing loopholes. And yet, by failing to fully explain the technicalities of the situation to the American people, Romney’s campaign arguably feeds a sense of public skepticism in government.

Words vs. Deeds: A Local Democrat

Some loopholes, incidentally, are verbal (and not legal) statements that utilize technical business jargon, albeit in ways that are incomprehensible to the general public. Last week, for instance, in the annual Governor’s State of the State Address in Hartford, Connecticut, Governor Malloy proudly proclaimed that his administration “brought honesty and transparency to the state’s books by moving to GAAP.”

He was referring, of course, to his heavily publicized (and deservedly praised) Executive Order #1, which ordered the Nutmeg State to adopt Generally Accepted Accounting Principles (i.e. GAAP) in lieu of non-traditional budgetary accounting methods. What he didn’t mention, though, was that he followed his Executive Order #1 with a subsequent order to delay GAAP’s adoption by two years. In other words, at the present time, Connecticut is not yet utilizing GAAP.

If a Governor initially announces the adoption of GAAP, and then subsequently delays its adoption, is it fair to assert that his State has moved to GAAP? It depends on how you interpret the phrase “moved to GAAP,” doesn’t it? The vagueness of the phrase itself represents a verbal loophole of sorts, given that very few citizens have any idea what it really means.

Power to the Press

And that’s why press stalwarts like 60 Minutes generate civic value. Once American citizens understand how these loopholes actually function, and what these technical terms truly mean, they can apply pressure to their elected officials to act more transparently and speak more clearly.

The STOCK Act, after all, languished for six years until 60 Minutes presented a story about it last November. Then, in response to public pressure, our Congressional leaders finally began to move it towards passage.

Although “new media” companies have earned a significant amount of respect for contributing to the public discourse, the 60 Minutes story demonstrates that “old media” journalists remain a potent force as well. Whether or not you read newspapers and watch traditional television newscasts, you are undoubtedly benefitting from their investigative activities.

Insider Trading: Whither Wall Street’s Future?

As the global economy continues to emerge from the economic collapse of 2008, good times appear to be returning to Wall Street. Indeed, bankers’ year end holiday bonuses are on the rise, stoking growth throughout the New York City metropolitan region.

But while investment bankers party like it’s 1999 in lower Manhattan, the federal government is stepping up its inquiries about insider trading practices. Some commentators believe that our regulatory authorities are about to launch the mother of all enforcement actions.

Many argue that such a move would completely demolish the public’s faith in the financial markets, and thus would kill our nascent economic recovery. Others, though, assert that Wall Street itself has bred a culture of distrust in the essential fairness of the financial system; they believe that a massive enforcement action is long overdue.

A History of Insider Trading

Believe it or not, insider trading was actually a perfectly legal activity in the United States for much of our economic history. In fact, firms were not even required to issue audited financial statements to their own public investors until the newly formed Securities and Exchange Commission (SEC) began enforcing that requirement in 1933.

Some analysts, though, believe that the SEC now imposes too many regulatory constraints on our financial system. Adherents to the Efficient Market Hypothesis believe that transaction prices will inevitably self-correct as privately known information becomes public knowledge, thereby ensuring that traders will never reap significant profits from their personal knowledge of corporate secrets. These analysts believe that insider trading regulations serve no useful purpose; instead, they place a costly reporting burden on publicly traded firms.

Such arguments have driven much of the growth of the private equity markets, associations composed of private organizations that claim to be far more efficient (and thus far more profitable) than the public investment markets. Last week’s announcement that Del Monte will once again be taken private appears to support the assertion that the burdens of public disclosure of financial data may actually hinder the growth of major corporations.

During the past several years, though, financial institutions have begun to engage in various trading practices that raise troubling questions about the essential fairness of our market system. These questions appear to represent the primary impetus for the vast insider trading investigation now being launched by our regulators.

Transparency and Level Playing Fields

Concerns about our financial markets appear to be focused on a pair of fundamental principles; one involves the general goal of market transparency, and the other involves the specific objective of a level playing field. The reputed existence of an insidious insider trading culture tends to undermine both of these considerations.

The goal of transparency refers to the principle that each investor, regardless of his level of power and wealth, should have the ability to understand how market prices are established and how transactions are consummated. The objective of a level trading field refers to the principle that even the largest, wealthiest, and most powerful investors should use the same fundamental mechanisms to research opportunities and place trading orders as the smallest of investors.

Any market practice that allows huge investment organizations to secure special privileges that are not understood by (or are not accessible to) small investors  would undermine faith in these two principles, and would therefore jeopardize confidence in the system itself. Thus, investors who gain access to private information about companies, and who possess the ability to trade on such information before the general public learns about it, jeopardize the very system that enriches them.

Of Soft Dollars and Dark Pools

Concerns regarding transparency flared last week when news of soft dollar accounts at major investment institutions surfaced in the press. This followed earlier reports of robo-signers at banks that are foreclosing on supposedly delinquent mortgages without actually possessing the legal right to do so, while potentially innocent citizens are rendered homeless without any understanding of their own right to defend themselves.

Concerns regarding a level playing field have been surfacing for several years, beginning with rumors of mysterious dark pools of private funds that engage in instantaneous flash trading of securities. Such pools, as well as the private markets whose trades purportedly triggered the infamous Flash Crash of early 2010, enable wealthy institutions to rush to the markets and consummate transactions far more quickly than the average investor.

Will the federal government’s impending insider trading investigation address these concerns and enforce permanent changes in market behavior? Or will it soon be forgotten, like the SEC’s brief prosecution of Goldman Sachs? Some are hoping that this regulatory storm will soon pass, allowing Wall Street to continue focusing on the task of generating capital for rebuilding our economy. Others, though, are hoping for a far more fundamental restructuring of Wall Street’s culture, one they believe is necessary to support our nation’s future.