Once again we need to talk about insider trading. This SEC press release is about a pretty garden-variety case – allegedly, Thomas Conradt learned about IBM’s planned acquisition of SPSS from his roommate, told his friend David Weishaus, and the two of them bought lots of SPSS stock and call options and made what in hindsight probably looks like an inadequate amount of ill-gotten gains – but it teaches important insider-trading lessons both subtle and otherwise.
First, otherwise: instant messages don’t go away when you close the window! I know, weird, right? But they’re on the internet, and you can be pretty sure that if you IM your idiot buddy “I don’t want to go to jail,” (1) you will be seeing that IM in an SEC complaint and (2) you are going to jail:
Oops!1 But there is also a subtler lesson, having to do with the long and complicated path this information traveled. It started with a law firm associate who worked on the deal for IBM. He (unnamed, but called the “Associate”) was from Australia, and he had a friend (the “Source”) who was a research analyst and from New Zealand, and he told the Source. Source, in turn, had a roommate, and that roommate was Thomas Conradt, one of the dopes charged here. Here is a touching, yet legalese, description of their friendship:
As two young professionals living in a foreign country far from home, they quickly became very close friends. They stayed in close contact through frequent communications and they saw each other regularly. The Associate considered the Source to be his closest friend in New York.
The Associate and the Source frequently shared both personal and professional
confidences with one another and had a history of maintaining and not betraying those
confidences. They regularly exchanged confidential details about their personal and professional lives, relying on each other for support and advice. Based on their history, pattern, and practice of sharing confidences, each knew or reasonably should have known that the other expected such information to be maintained in confidence.
Who cares? It’s a weird little digression; the Associate doesn’t seem to be in trouble here and the Source, well, the Source is no longer of interest to the Feds:
Shortly thereafter, in November 2010, the Source confessed to the Associate that he had tipped the Inside Information to Conradt. Approximately one week later, the Associate visited the Source at the Source’s apartment and observed the Source packing up his belongings. The Source informed the Associate that he was leaving the United States and returning to Australia because, in light of the Commission’s investigation, it was his “best option.”
I feel like that would’ve freaked out Conradt, his roommate and partner-in-literal-crime? Anyway: why isn’t Associate in trouble here? The answer seems to be that he told Source about the deal in good faith: he wasn’t saying “hey, here is a deal you can trade on”; he was saying “I need a shoulder to cry on”:
[W]hen the Associate met the Source for lunch on the subsequent weekend, the Associate’s new assignment was a topic of discussion between the two men. The Associate sought moral support, reassurance, and advice from his friend, the Source.
This matters because insider-trading tippers are only supposed to get in trouble if they anticipate some kind of benefit” for their tipping. Associate wasn’t “tipping” for benefit; he was just asking for moral support.
At all relevant times, Conradt knew or had reason to know that the Inside Information he received from the Source had been obtained in breach of a fiduciary duty or duty of trust and confidence.
But what duty of trust and confidence? The actual “insider” here is Associate, who had a duty as a lawyer to keep this information confidential – but the SEC doesn’t seem to think that he breached that duty. That leaves Source, who the SEC thinks breached his duty as a fellow Antipodean and friend:
Based on, among other things, their history, pattern, and practice of sharing and maintaining confidences, the Source’s sophistication as a professional in the securities industry, and the Source’s knowledge of the Associate’s position at the Law Firm, the Associate expected the Source to maintain this information in confidence and to refrain from trading on this information or disclosing it to others. The Source knew or reasonably should have known that the Associate expected him to maintain the confidentiality of this information and to refrain from disclosing or trading on it.
It’s a weird little case, no? The SEC seems to have set itself up to need to prove that a friend-from-down-under duty of confidentiality exists, and that these guys knew about it.
Fortunately for the SEC, how hard can it be with IMs like that? These guys might not have been able to parse how their trading was illegal, but they were pretty sure it was illegal. Here is something that the SEC cites approvingly:
On August 19, 2008, Defendant Conradt signed an “Insider Trading Certification” for his employer, the Broker, indicating that he understood that it was “unlawful, under federal and state securities laws, for any person to trade and/or recommend trading in securities on the basis of material and nonpublic, or inside information” and that the Broker’s policy required “stringent avoidance of the misuse of inside information.”
So that’s kind of wrong! But it’s probably a good idea to follow that policy anyway.
1. Incidentally, do you think all those “f***”s were originally “fuck” or “f***”? They probably spelled it out, but if they’re like some banks where IMs with curse words get flagged, maybe not? Maybe they thought they were being super-sneaky by IMing about their insider trading while not using words that flag the IM monitoring system? Though I’d guess “jail” is one such word.