Leon Cooperman charged with insider trading by SEC

[maybe4less]

2. The technical definition of insider trading implies both a fiduciary duty and a quid pro quo (I am simplifying).  Leon did not pay for this information, nor was there a written "duty", i.e confidentiality agreement or agreement not to trade on the information. 

 

In other words, if you are talking with an exec (whom you don't pay for this information) and he spouts off material non-public information without getting you to sign a confidentiality agreement in advance, then you are legally allowed to trade on that information.  This is Leon's argument. 

 

In this situation, the executive has violated Reg FD and you have done nothing wrong. 

 

 

 

99.999% sure this is incorrect.  The standard is material, non public information obtained from somebody that had a duty not to disclose. 

 

You can't ask the CFO of a company what earnings will be next quarter then trade on it and say I never agreed not to trade on it.

 

http://mobile.reuters.com/article/idUSKCN11S2RQ

 

I know it sounds completely illogical, but that is basically the law of the land right now.  A few cases are making their way to the Supreme Court (one will be there next term) that should shed some more light.  But this "technically" wasn't insider trading.

 

thinking about this, didnt insider obtain a benefit by currying favor with cooperman.  admonishing not to trade doesnt absolve when tippee trades...so there is a classic breach of fid duty/nonpublic material info

 

Ignoring the Newman court's ruling that a personal benefit received by a tipper must be "objective, consequential, and represent at least a potential gain of a pecuniary or similarly valuable nature", isn't the insider here arguably currying favor on behalf of the company (i.e., to stop Cooperman from selling and driving the price down)? If so, there was no breach of his duty.

[DonFanucci]

Don,

 

Per your car example, cars are more similar to public companies than not.  Everything about the car that a sales person talks about is public.  This is known information that everyone has access to.  We all can look at this information and make an informed decision.

 

The inside information could be the source code in the car's computer or machine specs about how the car is built.  Maybe these things are important, but maybe they're not.  What you're saying is that 100% of everything should be open.  I can go to Toyota and demand the source code for the chips that control the radio and they should give them to me.  If I find a bug that could cause a crash and others never ask for the source code they deserve to crash because they never asked.  It's a fallacy in my view.

 

I've worked at public companies, private companies, and I own my own company.  Outside investors want everything, they want ALL the information with zero operational risk.  The reason inside information is 'inside' is because it's so much more powerful.  In public companies even the secretaries know more than the best informed investors.  That's why there are rules around trading.  Insiders are so much better informed it's almost crazy.  Outsiders want this info.  The problem is how do you know an outsider is just an investor (who's contributing nothing to the company, just profiting from your work) or a competitor trying to steal information?  In business there is a lot that is secret, and that's normal.  I routinely sign NDA's to work with clients and other companies.  Once an agreement is in place information can be shared.  I think an NDA is very appropriate, some of the information that's crossed my screen is extremely sensitive.  This is information that most employees at a company have access to, but it should not be public.

 

Right, I agree with everything you said here, so I think I was unclear. I definitely don't think everything should be open. My point is that you can ask the seller any question you want, but they have no obligation to give you an answer. If you purchase a product despite this, you are responsible for the risk you've taken. What creates fraud is misrepresentation of fact. You pay for a good/service as defined to you by the seller. If you receive other than what was represented to you, you've had your money taken from you against your will. In a transaction between people with different amounts of information, there isn't fraud unless the seller makes factual misrepresentations about what you're purchasing. Lacking some information is the risk that you have agreed to take by entering into the transaction without total information. In an anonymous transaction for a stock certificate, the only thing that you are getting from the seller is the stock certificate. There's no representation about the company itself or the operations- all of that is a risk you're taking so you'd better do your best to get smart on the company. Buying a new car is different from buying stock only in the representations made by the seller. The dealer tells you, 'This is a new car', which implies the corollary that it's going to drive off the lot in working condition. If it turns out to be a shell over a rusted out chassis, you've been defrauded.

 

I agree about the secretary having access to valuable information etc. But my view is that the information represents a value (hence why people want it) that was created by the company and it belongs to the company accordingly. This is why it's the company's prerogative to have employees sign NDAs and employees that steal valuable information ought to be prosecuted for theft. That info isn't the employee's to do with as he/she pleases. Like all assets of the company, management can make the determination of how to control it. Hielko is right in that if companies just gave out material information willy nilly, the stock would need a larger risk premium and trade at a discount. Hence the huge incentive to control the information in a responsible way that lowers the company's cost of capital.

 

There will be situations such as this where there is an investor who has shown himself to have integrity and be long term oriented, and whose ownership of the company is beneficial. Management should be allowed to give this investor inside information and there's nothing wrong with the investor trading on the information. It could turn out that the dissemination of the inside information has created more of an overhang on the stock rather than an increase in value. For example, the stock is viewed at a discount because there are people trading it who know more than you vs. the stock is trading at a premium because Leon Cooperman is in it and he has done thorough research- or because Leon Cooperman likes it so much he's locked up more of the float causing the marginal sale at a higher price. Either way, management can make mistakes with the allocation of company assets. The point is, there's nothing inherently wrong about trading on inside information and to try to prosecute someone because they knew non-public information communicated to them by management, and tried to balance their separately managed accounts is immoral.

[whiterose]

The inside information could be the source code in the car's computer or machine specs about how the car is built.

 

Maybe, but even simpler as a comparison is the knowledge of an imminent product recall of this specific model, which the seller knows about but the buyer doesn't (yet).

 

In a transaction between people with different amounts of information, there isn't fraud unless the seller makes factual misrepresentations about what you're purchasing. Lacking some information is the risk that you have agreed to take by entering into the transaction without total information.

 

I'm not saying that there is misrepresentation about what you are buying (stock certificate). The seller has no obligation to inform or educate the buyer. It's not about the amount of information rather than the timeliness of dissemination. Maybe one could think of it as front-running on a longer timeframe. The HFTs use fiberglass cables and move their servers in front of the exchanges to eke out some milliseconds to get an advantage. (Which is not illegal, but shows the value of this unevenly distributed information, even if it's useful for only a few ms). The trader who acts on material inside information is doing the same with a (positive) time-shift of a few hours/days/weeks.

 

No, if trading on insider information is legal most market participants without access to inside information would withdraw from the market or request a higher risk premium (to compensate for the risk of trading against more informed market participants). The effect would be lower liquidity and a probably significantly higher cost of capital for all public firms, and as a result the whole economy would suffer.

 

This.

Society as a whole is better off with efficient, fair and smoothly functioning capital markets. That's why the regulators etc. (and ad-hoc-statements, quarterly reports) exist. The upside for the government/society to regulate the used car market in the same way is simply not there.

[Guest cherzeca]

@roark says no written "duty"

 

since when does the duty (not to trade) have to be in writing? exec conditioned the disclosure on coop's not trading...i like pros's chances here.