From: Black Unicorn <unicorn@schloss.li>
Date: Tue, 4 Jun 1996 11:38:26 +0800
To: "Timothy C. May" <tcmay@got.net>
Subject: Re: Saw this on CNN: Anonymous Stock tips over IRC as bad???
In-Reply-To: <add71e4c06021004bdfb@[205.199.118.202]>
Message-ID: <Pine.SUN.3.91.960603144035.8479A-100000@polaris>
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On Sun, 2 Jun 1996, Timothy C. May wrote:

> At 4:30 PM 6/2/96, Martin Minow wrote:
> >>
> >>One of the oldest tricks for running a stock up (or down) is
> >>to put rumor teams on elevators in the financial district of
> >>major cities.
> >
> >It would be more efficient to talk about the rumor on a cellular
> >phone.  Probably make a nice sting scenario, too.
> 
> An interesting example, but I'm having a hard time figuring out who has
> committed a crime, even by SEC rules.
> 
> Namely, are the people "talking up" a stock committing a crime? Even if the
> SEC forbids this (under defined circumstances and for defined persons, as
> most of us are not covered by any such laws), how can talking over a
> "putatively secure" cell phone be construed as talking up a stock?

If it's in relation to a tender offer, they are in deep.  (As, for 
example, if they were hiking up price to deter a hostile aquisition).

[...]

> (To elaborate on this: I was never classified as an "insider" during my
> time at Intel, and I certainly bought and sold the stock based on what
> products and news I knew was coming out or what rumors I'd heard. Only a
> select group of executives and staff in the specific departments generating
> earnings announcements, auditing, etc., were covered. And senior executives
> are covered by various rules about trading stocks. And family members and
> friends may be covered, if they learn of "inside" (in the SEC sense)
> information. But ordinary people, even employees of a company, are not
> considered to be "insiders" and hence are not covered by insider trading
> laws.)

Incorrect.

I direct you to Dirks v. Securities and Exchange Commission, 463 U.S. 646 
(1983).

Specifically footnote 14:

"Under certain circumstances, such as where corporate information is 
revealed legitimately to an underwriter, accountant, lawyer, or 
consultant working for the corporation, these outsiders may become 
fiduciaries of the shareholders....  When such a person breaches his 
fiduciary relationship, he may be treated more properly as a tipper than 
a tipee...."

This circumstance is classically refered to as a "footnote 14 insider."

It has been held to apply to lower level employees within the corporation 
who "knowingly trade based on material non-public information acquired by 
virtue of their position within the company."

After 1983, Mr. May may have committed a crime.

The case against Mr. May would be strengthened if a court were to accept 
a misappropriation theory.  (In short, that the employee used information 
intended for corporate purposes [development, etc.] in order to trade 
stock for his gain).  Misappropriation theory, where it is accepted, 
fills in the needed "fraud" element in rule 10b-5 which would impose 
liability on a trader and which is otherwise absent in the case of an 
employee trading as Mr. May has indicated.  While misappropriation theory is 
waning, it is not entirely dead.

Remember that restrictions on senior management as per trading in the 
company's stock are to prevent director and corporate liability.  No one 
cares much if a lower level employee gets zapped because it doesn't open 
the door for greater corporate liability like it would for senior 
management.  Further, you don't want to have to circulate a memo to the 
whole company as to when trading is restricted.  That would be asking for 
trouble.

Be sure to distingiush between corporate policy with regard to 
employee trading and legality.

> So, the only way I can imagine the cell phone case leading to an insider
> trading charge is if the cell phone users _knew_ that the cell phones were
> not secure, and _planned_ to have their conversations overheard. The people
> doing the intercepting could be charged under one of the laws covering
> unauthorized interception of cell phone conversations, but probably not for
> insider trading.

Or if they were artifically hiking up the price to defend against or 
interefere with a tender offer.

> --Tim May

---
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