To get in trouble for insider trading, the information you trade on has to be "inside" information in some sense. Just standing outside a company's offices and seeing who walks in, and extrapolating from that, is probably not insider trading. Seeing where corporate jets land is mostly not insider trading, to the point that it was once a feature of Dealbreaker, though in general my advice to you is never to use "well Dealbreaker does it" as a rationale for anything. Certainly there are gray areas.
Here's a delightful new SEC insider trading case. Richard Bruce Moore, a managing director in the private equity coverage group at CIBC's investment bank, spent a lot of time with his buddy and client, a managing director and LBO deal manager at the Canada Pension Plan Investment Board. In addition to golf and such, "Moore contacted the CPPIB Managing Director at least once a month about deal opportunities and about the possibility of CIBC providing financing for those deals." In early 2010 Moore noticed that his buddy was becoming less available, which set his sponsor-coverage-spidey-sense a-tingle, and so he did what any good coverage banker would do:
Sometime in March 2010, Moore asked how the CPPIB Managing Director's other deals were going. The CPPIB Managing Director told Moore that he was working on something interesting and active. Moore then inquired about the possibility of assisting the CPPIB as an investment banker on the deal.
This got a soft ding - "The CPPIB Managing Director did not disclose the parties to the deal, but responded that, as far as CBIC participation, they would have to wait and see how it went" - and so he followed up a few days later with an email asking if CPPIB needed any debt on that deal. This got a little more information:
The CPPIB Managing Director replied by asking, "Would you guys underwrite 2 billion dollars?" Moore responded with an e-mail that stated, "Part yes," and asked, "In Canada?" In response, the CPPIB Managing Director e-mailed, "Probably not for you guys this time. You will know why if we do it."
The deal was an LBO of Tomkins plc, a UK-based manufacturer with NYSE-listed ADRs. The CPPIB guy never told Moore any details, but "Because they continued to communicate regularly, Moore learned that the CPPIB Managing Director was travelling to London," which he filed away for future reference. And then this happened:
On the weekend of June 12-13, 2010, Moore and the CPPIB Managing Director participated in a charity event. During that event, Moore observed a chance encounter between the CPPIB Managing Director and the Chief Executive Officer ("CEO") of Tomkins. However, the CPPIB Managing Director declined to introduce Moore to the CEO or to reveal his identity. Later that day another CIBC employee attending the event volunteered the CEO's identity to Moore.
From this he deduced what CPPIB was working on. Which: great! That was his job! Nobody ever gave him any material nonpublic information except that (1) CPPIB was working on a deal (which: they're always working on a deal), (2) it was live, and (3) it was big. Usually there's a shady or at least confused tipster, but there's not much reason to fault the CPPIB guy here.1 Moore more or less figured this out using his coverage-banker ninja skills of schmoozing and omnipresence, which makes him a model banker in my book.
But then he went and ruined it, buying 51,350 ADRs2 of Tomkins in June via an offshore bank and doing things like asking the bank to use his home email address because "one thing I should say is I'd probably be pretty keen on not mixing my offshore with my business e-mail." Which never looks good in an SEC complaint. Anyway in July CPPIB's offer to buy Tomkins was disclosed, the stock went up 27%, Moore made $163,000 on his ADRs,3 and the deal closed in September 2010.
The SEC is displeased. Here is why:
Moore, on the basis ofinfonnation that he knew, or was reckless in not knowing, was material, non-public, and had been acquired in the course of his employment, knowingly or recklessly misappropriated the information from his employer for his personal benefit by purchasing Tomkins ADRs ahead of the announcement that Tomkins had received an acquisition offer.
The SEC's theory is that Moore misappropriated the information from his employer. The CPPIB guy did nothing wrong: he didn't tip Moore, and never revealed any details of his deal. And - on this theory, anyway - Moore did nothing wrong in figuring out what the deal was: he pieced together some pieces of non-material nonpublic information - ask yourself if the average investor would consider information like "a CPPIB MD is flying to London a lot" or "a CPPIB MD declined to introduce a banker to the Tomkins CEO" to have "significantly altered the total mix of information made available" about Tomkins - with some pieces of public information (Tomkins is, after all, in London) and came up with a reasonable hypothesis.
But he did all of that "in the course of his employment," meaning, I suppose, that the information then belonged to his employer and not to him? It's comparable to Foster Winans, the Wall Street Journal investment columnist who was convicted of insider trading for front-running his own columns. The columns contained no "inside information" - they were just his opinions - but he did misappropriate them from the Journal.
Which leaves you with some questions. Obviously Moore's job was, in some sense, to figure out what deal CPPIB was working on.4 And, in the course of his employment, he did just that. And then, sure, he was a big bad guy for going and trading on it secretly in his offshore personal account? And, sure, if he had instead used that information to, for instance, pitch CPPIB harder on his employer's financing and advisory capacities, he'd be fine, legally, although there comes a time when continuing to annoy your client just isn't worth it and Moore could reasonably have concluded that he'd reached that point.5
But there's a lot of ground in between those choices. What if he'd gone to another private equity firm, as an adviser, and told them to look at Tomkins because there seemed to be interest from CPPIB? What if he'd gone to his bosses and told them that CIBC's sales and trading division should buy lots of Tomkins stock? On the SEC's own theory, the information belonged to CIBC - why couldn't they use it?6
I dunno, it seems a little weird to think that this information about CPPIB's proposed takeover of Tomkins somehow belonged to CIBC, a bank that was not involved in any way in the transaction except insofar as Moore had sniffed out that it was happening. And I suspect that if CIBC, rather than Moore, had actually traded on the information, the SEC might have a different theory.
It's a shame that Moore won't fight the SEC over this: he settled for $340,000. He also settled with Canadian regulators for more money and an agreement to be "prohibited from trading or acquiring securities for 10 years, subject to certain exceptions," which I feel like there should be more settlements like that in the U.S. Also apparently he got leniency "because he brought more serious conduct to the attention of Ontario regulators who were investigating him," so at least we have that to look forward to.
1.I guess? Declining to introduce him to the CEO is kind of an amateur attention-drawing move, though you can sympathize; maybe he thought the CEO would assume that CIBC was involved in the financing and would blab.
2.And 212,000 common shares, which trade in London, in June and July. Canadian banker buying UK shares of UK company on inside information obtained from Canadian pension fund = not the SEC's problem, so he's only in trouble for the 51,350 ADRs with the SEC, though the Ontario Securities Commission came after him for the rest.
3.There's a Canadian banking compensation data point here, which is the SEC's claim that "Moore spent approximately one-third of his total net worth on his June and July 2010 purchases of Tomkins securities." That's 51k ADRs and 212k common shares, 1 ADR = 4 shares, pre-deal ADR price was $13.87. So he spent like $1.4mm, giving him a net worth of around $4.3mm. He's a 49-year-old managing director in sponsors coverage IBD at CIBC.
4.I mean, really it was to get into the deal, but figuring it out is a step. Knowing what your client is up to is the next best thing to getting business from them. Relatedly, Moore had an exchange with other senior CIBC bankers in June in which he said "Big deal in the works in europe/usa. Sucks we can't help."
5.He continued the soft sell though:
On July 5, Moore sent the CPPIB Managing Director an e-mail asking if he was "still flat out?" The CPPIB Managing Director responded that he had never been busier, and Moore replied, "go get em. Sorry to miss this one. Sounds monumental."
6.Note that in the Winans case the Supreme Court said, "the Wall Street Journal or its parent, Dow Jones Company, might perhaps lawfully disregard its own confidentiality policy by trading in the stock of companies to be discussed in forthcoming articles."