Business Handcuff

A Textbook Case of Insider Trading

Business Handcuff

When we hear about someone being charged with insider trading, the first thought that usually comes to mind is that of company executives or hedge fund sharpies that illegally profited from their access to private information like the folks portrayed in this insider trading documentary from PBS. However, there are many insider trading cases that involve people who are far lower on the totem pole. A textbook example was recently provided by the Securities and Exchange Commission (SEC) in this press release.

It seems that a director of market intelligence at a Manhattan-based investor relations firm (LHA), Michael Anthony Dupre Lucarelli, traded ahead of news announcements by more than a dozen of LHA’s clients, netting nearly $1 million in illicit profits. Being an ex- stockbroker, Lucarelli knew exactly what types of trades to place depending on the nature of the announcement. For good news, he would go long in either the stock or in call options, and for bad news, he would short the stock or buy put options. When opening his brokerage accounts, he would lie about his employment at an investor relations firm, claiming instead that he was self-employed or retired. The director of the SEC’s New York Regional Office, Andrew M. Calamari made it crystal clear that the SEC takes a dim view of these types of activities:

“Employees of investor relations firms have access to sensitive information about their clients, and exploiting that information for personal gain is not an option.”

Sanjay Wadhwa, senior associate director of the same SEC office spelled out their case against Lucarelli:

“Lucarelli knew full well that he was prohibited from trading on information contained in draft press releases that had not yet been made public, but he brazenly gave himself a head start on the rest of the investors by trading based on the nonpublic details and exiting his holdings after the news came out.”

The essence of insider trading is to act or cause others to act on material nonpublic information. The meaning of “material” is if an investor who is thinking of buying or selling the stock would consider the information to be relevant to her decision. The determination of whether information was material often takes place after its release. If the stock price moved more than could be explained by the market, then the information was indeed material. While the definition of “nonpublic” seems clear, the waters can become murky in cases of selective disclosure such as when a company reveals information on a phone call to a handful of investment analysts or large investors. In 2000, the SEC adopted Regulation FD (Fair Disclosure) which requires companies to make simultaneous public disclosure of material nonpublic information that was intentionally disclosed to a select group. Although Regulation FD has done a great deal to level the playing field, it may have also have unintentionally given a boost to the industry of information brokers who service hedge funds. Last year, we came across this salacious recruiting advertisement for one of them:

Secret Agents Needed

Do you have an open mind, a sense of adventure and the desire to make some serious cash? We’re a group that specializes in extracting key pieces of information from business leaders by seducing them with beautiful ladies such as yourself. Each assignment pays between $5k and $20k depending on the value of the information and how long it takes to obtain it. We also reimburse for travel expenses, if any. We have immediate needs for beautiful, sophisticated ladies who will do anything it takes to find out what we need to know! Please send photos and tell us something about yourself.

In closing, if you somehow come into possession of material nonpublic information, our best advice is to not act upon it, unless you think you would look good in an orange jumpsuit.