If a person comes across insider information, how can they share their knowledge so that they could trade the stock in question?

Question

Let's say your stock broker calls you of the blue one day and tells you company XYZ is about to be merged with company ABC. You search on the Internet and there's no mentions of this deal anywhere, so you infer it comes from insider sources. You want to buy more shares of XYZ, but don't want to turn up in jail like Martha Stewart.

What are you supposed to do in this situation? Wait until the merger is publicly announced? Or can you make a public announcement on your own that this merger is happening and then proceed to purchase the stock?

Answer 1

You mention Martha Stewart, but she didn't get the information from her broker, she got the information from the head of the company.

A service many brokers provide is investment advice. You know that even an honest broker doesn't know with 100% certainty that a predicted price movement will happen.

You should ask them how they determined advice. Was it based on analysis of public information, or is it something else?

If you believe that they have knowledge from an insider, and they are basing the investment advice they are selling on this insider information then it might be time to get a new broker.

Answer 2

In this situation, you should ask your broker how he obtained the information. He may have gotten it from a public source you overlooked. If he’s shady about it or not communicating with you clearly, you need to report it. If you don’t feel comfortable reporting it, contact a lawyer for help. He or she can help with the steps you should take.

Answer 3

I am not a lawyer, I'm definitely not your lawyer. Never act on material non-public information (see https://money.stackexchange.com/a/55407/22837 for a good description of what I mean by that).

If you were to provide this rumour (which is effectively all it is - you have no evidence of its veracity but let's assume it's true) to a news outlet of record (as defined in your jurisdiction) and they were to publish it you could safely trade on that information after publication. That is the only totally safe way to trade without being flagged for insider trading.

If information can be shown to be "in the public domain" then this is not strictly necessary. This means that if you published the information yourself on a website (for example) where the information is taken to be more than an opinion or a rumour and where it could be reasonable assumed that a reasonable investor would find the information if they searched for it then you have an argument that the information was public.

As an aside and definitely not advice sharing it with your friends in your local pub would not be sufficient, sharing it with mine in the pub by my office might be. I'm close enough to an exchange that if I went to the right pub at the right time and was sufficiently persuasive it could be argued that a large proportion of market participants had heard the information and had reason to believe it were true. If you shout it loud enough that everyone can hear then it is "common knowledge" - this has a legal definition here (the UK) and in many jurisdictions that is unimportant here.

The key is that in order for material information to become public it must be freely available to any market participant who is looking for the information. It does not matter who publicizes it.

I'll try to enhance this with some references later as this information is coming from experience and the CFA level I guides which are copyrighted information.

Answer 4

The other answers, while good, appear to be missing the point that if you are not a director or significant equity owner of the company in question (specific details vary by jurisdiction) then you are not an "insider", so acting on this information is not actually problematic in and of itself.