After The STOCK Act It Will Still Be Legal To Trade On Congressional Inside Information*

Here’s a sort of touching monologue from David Einhorn’s call with Punch:

If you’ve done the analysis, and come to the conclusion that on it’s own, the company is not going to make it, it makes all of the sense in the world to raise equity at whatever the price is, so that you can know that the company, you know, is – is going to make it. Now, what that brings to my mind though is, you know, obviously we haven’t done your analysis, we haven’t done — signed an NDA; I don’t know that we’re going to sign an NDA, because we prefer to just remain investors, but from my perspective, and I’ll be just straight up with you, is that gives a lot of signalling value. And the signalling value that comes from figuring out the company has figured out that it’s not going to make it on it’s own is that we’ve just grossly misassessed the — you know what’s going on here. And — and that, that will cause us to have to just reconsider what we’re doing, which is not the end of the world to you. You will continue on even if we don’t continue on with you.

You could sort of see why the FSA read that to mean that he was insider trading. Like …
(1) You have told me something with signalling value. Sorry – “a lot of signalling value.”
(2) I will now act on that signal.
(3) Don’t be mad.
“Signalling value” sure sounds like it means “material nonpublic information,” doesn’t it?

Now as we’ve discussed before, trading on that information would not be enough to make Einhorn guilty of insider trading in the US, though maybe it wouldn’t be exactly a great idea here either. Why? Because in our weird but sort of sensible insider trading laws, it’s just not illegal to trade on material nonpublic information. It’s only illegal to trade based on material nonpublic information that was obtained in violation of some sort of duty of confidence. Since Einhorn didn’t sign an NDA, he had no duty of confidence. And since the Punch CEO and bankers weren’t tipping him for nefarious purposes, but were instead sounding him out on the company’s behalf as a shareholder and potential investor in a new capital raise, they weren’t breaching their duty of confidence. You could quibble with the details of that but it’s basically the law here. In England not so much.

That also seems to be the law for our friends in Congress, who recently passed a law making it illegal for them to insider trade, which is worrying some people who make their living from trading on Congressional inside information:

The new concern of the political-intelligence industry stems from the legislation giving lawmakers an explicit “duty” not to act on nonpublic, material information. Prior to the legislation, many securities lawyers thought it was unclear if such a duty—a key tenet of insider-trading law—existed on Capitol Hill.

In establishing that legal duty, however, the legislation also could put lawmakers and aides in legal jeopardy if they divulge that same information to individuals who then trade on the information. “Now that Congress is covered by the insider-trading law, if a member of Congress gives a tip to a hedge fund manager, that is going to be illegal,” says Stephen Bainbridge, a securities-law professor at the University of California, Los Angeles School of Law. … Some legal experts disagree with that interpretation of the legislation. They say Congress has the right and perhaps the obligation to speak with industries and other concerned citizens about pending legislation.

That is a puzzler. One tip-off as to the right answer is that the legal experts who disagree with Stephen Bainbridge’s interpretation (as quoted) include … Stephen Bainbridge:

Of course, [for it to be illegal] it also would have to be shown that the Member got a personal benefit from making the tip, such as a political contribution, log-rolling support for legislation, or enhanced repuation.

So, yeah, it seems pretty safe to say that:
(1) Congresspeople will still have “the right and perhaps the obligation” to talk to people about things, but
(2) if they’re talking to people about things to help those people make money – in exchange for some sort of nefarious back-scratching – then it’s jail for them. If they get caught.

That, by the way, is kind of the right result. You want Congress to talk to people about things. You want them to tell constituents their thought processes, and get advice and input from those constituents. You might even want that to happen in private and off the record, because you might think that would get you better advice. You might even want them to talk to banks about banking regulation. But if you care about the integrity of the capital markets, or of Congress for that matter, then you also don’t want them feeding inside information to hedge funds and political intelligence firms for more or less disguised kickbacks.

But it can be hard to tell the difference. A Congressional aide may actually want advice from a hedge fund on capital markets legislation, in his Congressional capacity – but if the act of asking for that advice provides “a lot of signalling value,” allowing it to make a profit, and if that aide is hired by that hedge fund in a few years, well, who’s to say if it’s a conflict of interest?

This is of course the exact same issue as the one faced by companies, like, say, Punch, that want advice and input from their shareholders – or who just want to keep shareholders happy by meeting with them – and the US has addressed it with Regulation FD. You can have nonpublic but non-material chats with shareholders – or you can have material chats with them after they sign an NDA and agree not to trade. If a company gives an investor material nonpublic information without an NDA, and the investor trades – well, then you have to decide if it was tipping in breach of a duty (in which case the investor and the tipper get in trouble for insider trading), or not (in which case the company gets in trouble for violating Reg FD).

It’s not always easy to tell. Nor is it always easy to tell what’s material – witness the Punch case, or Charlie Gasparino’s pretty alarming story yesterday about an SEC enforcement official who told a roomful of amazed securities lawyers that private post-earnings discussions with analysts, one-on-one meetings during analysts days, and other routine contact between companies and investors is illegal under Regulation FD:

“David [Rosenfeld of SEC enforement] was frankly shocked that some of this stuff was going on, which in turn shocked me,” said another attendee who is a partner at a major law firm. “You talk to your institutional investors as a regular course of business, and I can tell you from talking to people at the SEC, David is not alone at the commission holding these views.”

But, y’know. People try. And one thing that makes it easier – not easy, but easier – is that if you give someone material nonpublic information without a confidentiality agreement, and he trades on it, you’re in trouble. You may be violating Reg FD, or you may be an insider trader – and the recipient may or may not be in trouble – but you’re definitely in trouble.

The STOCK Act is new and … not the law yet … and there are various versions … so it’s hard to know what exactly it prohibits, but basically it makes it clear that Congress has a duty of confidentiality not to go around tipping people off for private profit. What it doesn’t seem to do is have a Regulation FD equivalent requiring a confidentiality agreement. Just like public companies, Congress can still go around talking about potential plans with interested parties – as long as they’re doing it as part of their job rather than for private profit. Unlike public companies, though, Congress doesn’t need to get an NDA before disclosing nonpublic information. And investors who don’t sign an NDA don’t have a duty not to trade.

Of course, England doesn’t have a Reg FD either, and both Einhorn and Andrew Osborne at Merrill seem to have thought that their no-NDA conversation was just fine. And look where that got them.

New Bill Clouds Legality of Tips [WSJ]
Exclusive: Regulators May Expand Definition of Insider Trading [Fox Business]

* I think. Remember how nothing you read on the internet is legal advice? Good. Keep remembering that.

(hidden for your protection)
Show all comments

59 Responses to “After The STOCK Act It Will Still Be Legal To Trade On Congressional Inside Information*”

  1. Guest says:

    My God. An asterisk in the title? This isn't Rocky and Bullwinkle Matt.

  2. 2StopShop says:

    Like, you know…

  3. davidrusso says:

    “Signalling value” sure sounds like it means “material nonpublic information,” doesn’t it?"

    Nice try kid. Signalling value is when I notice your girlfriend seems bored with you at dinner so I swoop in when you are in the can, get her digits and turn her out later that night.

    Inside information is when she sends me her digits, and I turn her out that night, while we laugh as your repeated texts pile up in her inbox.

    The first still has risk, even though we all know where I'll wind up – beayatch.

    -D. Einhorn.

  4. davidrusso says:

    As a side note Matt you and Gasparino should really date or something. Both of you are totally hard for insider trading.

  5. meagain says:

    As much as I am a fan of DE, I think her erred here, just because he did not sign the NDA and received insider info it does not relieve him of insider liability, after all he acted upon such info…should have known better….

  6. Bawny Frank (D - MA) says:

    I'll give you a tip, Einie… followed by a shaft.

  7. Guest says:

    David wouldn't have a wall crossed conversation with us either.

    -GMCR Banker, 11/8/11

  8. Guest says:

    To paraphrase what Raj was caught on tape saying, 'it's impossible to make money without insider information"

    The difference between Raj and DE is that Raj is a fat, brown man and DE is an average-looking white boy. That's why Raj is in prison and DE will never be prosecuted.

  9. James says:

    "signalling" is public information. That's the whole point. You have to read between the lines of the action to get the information. It's called mosaic theory.

  10. Martha Stewart says:

    This guy should be playing second 'skin flute' next to Raj Rajaratnam in the Federal Penn band right now. This is a clean and simple case of insider trading. Doom on him.

  11. sfkbeoyz says:

    GUxPF8 , [url=]nvtcsgyogboq[/url], [link=]kaxmbwdofwfk[/link],

  12. I always emailed this webpage post page to all my associates, because if like to read it afterward my links will too.

  13. Thank you, I have just been looking for info approximately this topic for ages and yours is the best I have found out so far. However, what about the bottom line? Are you certain about the source?

  14. Toiletry travel bag are little bit different from toiletry bag as they are used for only traveling purpose and toiletry bag can be used for traveling as well as for general home purpose also. Toiletry travel bag are more portable than other bathroom bag as while carrying we have to go out for vacation and these bag are so beautiful and before buying you can get customize your toiletry travel bag in what ever design you want but there are only some predefined design that are shown by company.

  15. Donn Osaki says:

    the place is tank?

  16. Gerda Teyler says:

    Wonderful put up. I was checking continuously this web page and I’m impressed! Extremely handy facts specifically the very last aspect I treatment for these kinds of facts substantially. I had been looking for this unique data for any prolonged time. Thankyou and most effective of luck.

  17. After i to start with moved right here to Douglasville GA, during the early 80s there was considered one of these however getting utilized like a daily driver, it absolutely was inside a profound metallic green that reminded me of the aged 50s Buicks… I had forgotten all over it till I experienced these pics.. have not seen it in probably twenty yrs though.. but there WAS a person below back then…

  18. Scot Krummel says:

    Major thankies for that weblog post.Genuinely looking forward to examine additional. Maintain creating.

  19. He has my vote polled family he gets all 8.He makes sensible things happen on budget and at reasonable affordanle cost

  20. 1) I have no defense for sloppy grammar

  21. You need to contact “Fatdawg” ( genuinely) at subway guitars in Berkley CA. He was there and knows each of the people, stories, and I’m certain could be of help in finding the artist. Excellent come across, David

  22. I got a warning message from my Avira AV when I opened your website. Do you know why this occured? Could it perhaps from your advertisements or something? It really unusual and I hope it was harmless? Come on, it’s my new notebook…

  23. I didn’t notice a link anyplace but do you have advertising? I have several blogs within the exact same specialized niche and I’d like to add my banner somwhere in your site.

  24. This is a good item of writing, I learned your net net page studying google for a related subject matter and arrived to this. I couldnt discover to considerably diverse data and facts on this item, so it was brilliant to locate this one particular particular. I possibly will wind up becoming returning to look at some other articles that you’ve got an additional time.

  25. kliknij says:

    Not presented by the side of the moment Lolita Sex Stories
    I would have rathered it in the ass. I darling examination my mans face as he fucks my ass right.

  26. electric bicycles do not require any sort of registration, insurance, licence plates etc. which other conventional motorized transportation need. Associate Professor Christopher Cherry at the University of California-Berkley.

  27. Orit-BIS says:

    I am frequently to blogging and i actually admire your pleased. The article has truly peaks my interest. I’m free to bookmark your situate and retain read-through for brand slap in mint condition information.

  28. fajna strona says:

    Many recognition for the art, previously stimulating and convincing. I identified my method here by route of Google, I’ll restore back greater than again

  29. Zbyszek says:

    I am repeatedly to blogging and i in fact admire your content. The article has truly peaks my interest. I’m free to bookmark your locate and retain checking for brand spanking in mint condition information.

  30. There is visibly a bunch to recognize regarding this. I think about you ended some trivial points in skin texture also.

  31. Heya i am for the first time here. I found this board and I find It really useful & it helped me out much. I’m hoping to present something back and help others such as you aided me.

  32. Read More says:

    Yay google is my world beater helped me to find this outstanding web trap site ! .

  33. I like this site very a lot, Its an extremely nice billet to read and obtain details. “If you could learn from challenging knocks, you’ll be able to also learn from soft touches.” by Carolyn Kenmore.

  34. I’m nonetheless learning from you, however I’m enhancing myself. I definitely love studying every part that is written on your blog.Preserve the tales coming. I loved it!

  35. Frow1975 says:

    But wanna tell that this is handy , Thanks for taking your time to write this.

  36. If gates finds out its for sale he might just invest in it back

  37. Succession planning is often most popular when companies are faced with the candidates in Bcc. says:

  38. Fantastic weblog! I bring into being it where searching by Yahoo News. Do you may have one tips about tips on how to get programmed in Yahoo Information? I’ve been making an attempt representing some calculate except I by no means seem to get there! Thanks

  39. cdytzcpgf says:

    Be Relevant: Just take a “big picture” method of serving your buyer. Search over and above the fast needs of your prospects to a even bigger photo view of the way you can help them triumph, make their lives less difficult, or produce new prospects for them. 1 corporation that sells pipe to developing contractors invitations its best prospects to once-a-year seminars on business enterprise improvement.
    Lots of it is actually unquestionably plausible feel needing to do with concrete as a thing that not simply can they make the to buy be on the lookout unappealing and colorless. This is usually that incorrect. Concrete is that this pliable for additional facts on all are types needing to do with styles designs and hues.
    In order for you for getting seriously extravagant, verify your regional grocery store for flavored club sodas. When you come to feel hungry, test drinking a glass of h2o first. You could just be thirsty.. Even these days you could buy any of a dozen or even more Timex watches that have integrated GPS tracking and [url=]louis vuitton outlet[/url] surveillance. But coupled with this astounding micro technological innovation goes an enormous lawful trouble. Currently the program for these GPS surveillance equipment isn’t going to contain significant safeguards against legitimate and privacy abuses but ideally that could modify in advance of issues get uncontrolled..
    Regardless of whether you’re a jigsaw puzzle collector or even a mum or dad who picks up loose pieces once in a while, you may obtain it beneficial to own puzzle storage. Puzzle storage will maintain the puzzle intact and support organize puzzle pieces. You may have various selections for puzzle storage.
    If you have any considerations regarding your own well being or perhaps the wellness of one’s child, you should often seek advice from with a medical professional and other health care expert. Please overview the Privateness Policy and Phrases of Use ahead of using this site. Your utilization of the website signifies your arrangement to be bound from the Phrases of Use.. [url=][/url]
    Ali does not have a job onstage, but she does handle to wrangle a waitressing work away from Tess which lets her to observe the present and study many of the numbers. This implies that usually, as she’s transferring regarding the club, she’s concurrently generating spastic minor flourishes with her hand, training dance moves, waiting for just a possibility to wow everybody. Ordering anything within a martini glass out of this lady can be dangerous.
    Your days should sense far more achieved so you ought to have a spring within your action if you have the ability to retrieve day-old bread from its rocklike state. Being a larger cultural provider, this idea, when used efficiently, will allow the penny pinchers, starving students, and coupon crazies of [url=]louis vuitton purses[/url] the planet an easy “doctoring” process for his or her discount bread. As for the people other pay-full-price, who-me?-buy-day-old?!, less-than-resourceful customers, they could by no means are aware of the satisfaction of stacking up each of the dimes they saved since they casually tear off a hunk of chewy baguette bread that lived an extra-long existence and was eaten right down to the last crumb..

  40. Human Rights Commission’s consider on it[Read]I talk ad nauseumer, in depth, with Selwyn Manning[Triangle]. [More Superior

  41. You…are…my…hero!!! I cant think some thing like this exists within the online! Its so true, so honest, and in excess of that you dont sound like an idiot! Ultimately, someone who knows tips on how to talk about a subject with out sounding just like a kid who didnt get that bike he needed for Seasonal.

  42. fitness says:

    A place We read a similar content previously, and also Now i am wanting to know if the woman had written this one along with the very same man or woman. The same fashion that I really like, actually approved related views. Jots down content with other web site?

  43. Very interesting subject , regards for putting up. “There are several good protections against temptations, but the surest is cowardice.” by Mark Twain.

  44. Veta Keet says:

    Only a smiling visitant here to share the love (:, btw outstanding design and style. “Individuals may form communities, but it is institutions alone that can create a nation.” by Benjamin Disraeli.

  45. Wow, awesome weblog layout! How lengthy have you been running a blog for? you make blogging glance easy. The overall glance of your site is wonderful, let alone the content! Learn More Here

  46. Inell Lofink says:

    Thanks for the marvelous posting! I really enjoyed reading it, you can be a great author.I will be sure to bookmark your blog and will eventually come back sometime soon. I want to encourage one to continue your great job, have a nice weekend!

  47. kasina says:

    The reason why always you should not visit your personalized to the primary newspaper content? It’s your abilities you can even start succeed right away! Consider, maybe it’s the time!

  48. Admiring the hard work you put into your site and detailed information you present. It’s good to come across a blog every once in a while that isn’t the same unwanted rehashed information. Great read! I’ve saved your site and I’m including your RSS feeds to my Google account.

  49. While homeowner’s policies come with many coverage options, standard policies provide coverage to your dwelling, separate residence structures and contents damages. Will recover from damages and whether there are any restrictions. With a home as your most valuable asset, guaranteeing you are renting a vacation home to travelers or a car is a priority because it affects your life. {||||

  50. I and my pals ended up checking out the nice pointers on your web page then suddenly developed an awful suspicion I had not thanked the site owner for those strategies. Those women came absolutely joyful to read all of them and now have quite simply been enjoying these things. Appreciate your getting considerably thoughtful and then for going for certain outstanding tips millions of individuals are really desirous to learn about. Our own sincere regret for not expressing appreciation to you earlier.

  51. real escort says:

    I enjoy what you guys are usually up too. This kind of clever work and coverage! Keep up the good works guys I’ve you guys to our blogroll. real escort

  52. Fantastic! This is really a thought provoking write up for the content writers. Never have thought in that way before! I really appreciate you for posting such a nice and useful post. Thanks.

  53. I blog frequently and I genuinely thank you for your content. This article has truly peaked my interest. I am going to bookmark your site and keep checking for new information about once per week. I subscribed to your Feed too.

  54. Tia Lieu says:

    Valuable information. Lucky me I found your site by accident, and I’m shocked why this accident didn’t happened earlier! I bookmarked it.

  55. Hello there! I could have sworn I’ve been to this site before but after reading through some of the post I realized it’s new to me. Nonetheless, I’m definitely happy I found it and I’ll be book-marking and checking back frequently!