5

To give some examples of what I have in mind:

  • Let's say a high-level manager at Tesla finds out they're planning to build drones using newly developed batteries that would be a huge leap compared to what's on the existing market. The manager then proceeds to short a few millions worth of DJI stocks as he believes they would crash when Tesla makes the announcement.
  • The very same manager at Tesla finds out that Elon Musk wants to open an R&D center in Bratislava, which would employ 10 thousand highly-skilled employees. The manager then proceeds to purchase real estate in central Bratislava as they rightfully believe that the property will balloon in cost in the coming years.

Given that the manager does not profit in any way from Tesla stocks, would that be something illegal under existing insider trading laws?

  • 1
    As perfectly explained by @Keith, with things like "immigration control" and "insider! trading!" the whole idea is that governent bodies can do what they want, based on political currencies. There is, specifically, no "clear, definite" definition of anything. Some guy wanted to put Martha Stewart in "jail" for a year or two as part of an office run, so they did. There's utterly no connection to reality, definitions, clarity, etc. This is not necessarily a "good or bad thing" (maybe it "helps the little guy" in the long run, who knows), but that's how it is. – Fattie Feb 24 '18 at 19:17
  • It would be like asking about, rofl, college athletic money rules. – Fattie Feb 24 '18 at 19:18
  • Don't forget that insider trading is not the only crime this could fall under. And this would likely pass the "reasonably foreseeable risk of harm" test because if these trades became public, they could result in public backlash against the company. – David Schwartz Feb 24 '18 at 19:23
4

I find it highly unlikely that either transaction would be considered illegal. Illegal insider trading requires "material, nonpublic information about the security." The information in your scenario is nonpublic information about a different company. Unless there is a direct relationship between the information and DHI (e.g. if Tesla would cancel an existing contract because of the new technology) then it is purely speculative that the news would impact DJI at all.

For the second example, again the investment is purely speculative. It would depend, of course, on the laws in Bratislava, but in the US, there are no laws that I am aware of that make real estate investing based on insider information illegal. There are laws that require sellers to disclose information that might affect the value of a property (e.g. if the major tenant of an office complex is planning to move out), but that's more of a breach of fiduciary duty that securities fraud.

  • That's the classic definition I had read as well. However, I believe the misappropriation theory would apply here. It simply requires obtaining information that is not available to the public, through business relationships or corporate espionage, and using it to trade securities. The classic example is a lawyer trading on information he is privy to through his business relationships. I'll look around for some more sources. – Keith Feb 24 '18 at 4:01
  • Seems like things are still a bit up in the air, but here's a brief that has some more information if you'd like to delve deeper: ir.lawnet.fordham.edu/cgi/viewcontent.cgi?referer=http://… – Keith Feb 24 '18 at 4:04
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    @Keith misappropriation involves "insiders" in a company "tipping" nonpublic information to people outside the company, who then trade based on that information, or non-insiders who trade on information that was appropriated to them in confidence (e.g. the printer in the brief you linked). Your example involved trading in one company based on information about a different company. I highly doubt that without some sort of direct connection to the third party that shorting the third party would be considered illegal. But, it may depend on what could be argued/proven in court. – D Stanley Feb 24 '18 at 4:09
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    @Keith - put another way - who's to say that DJI stocks would crash? Tesla's project could be a flop, or DJI could find a different application for their tech, or there could just not be the market disruption that is anticipated. Without a direct connection, the impact on DJI stock would be completely speculative. – D Stanley Feb 24 '18 at 4:14
4

I think you'll find that insider trading is pretty loosely defined, and left up to the SEC to interpret and enforce as they see fit. According to the Securities Exchange Act of 1934: With this Act, Congress created the Securities and Exchange Commission. The Act empowers the SEC with broad authority over all aspects of the securities industry.....

In the example cases you laid out, I think you'd risk being prosecuted under both the Misappropriation Theory and also the aforementioned Securities Exchange Act.

"The securities laws broadly prohibit fraudulent activities of any kind in connection with the offer, purchase, or sale of securities."

Of course, I'd say your chances of actually being prosecuted are probably much higher in case #1. Where it could be fairly obvious if someone disrupted the normal trading of a stock and benefited from (or even contributed to) it crashing. But there's nothing to say that someone wouldn't also discover the real estate scheme and try to get you prosecuted for that as well.

0

If company A plans to do something that affects company B in a major way (good or bad), and you know about this while the general public doesn't, then you have insider knowledge of company B. This Tesla manager may have insider information of DJI that even the supposed insiders of DJI (CEO, management) don't have.

So yes, trading on DJI stock based on this information is insider trading.

For the Bratislava situation, you'd need to know the laws of Slovakia to see if it's considered insider trading and illegal in Slovakia (I have no idea); you'd also need to know whether the USA considers this a crime, and one that the USA would prosecute. They might or might not care about what happens in Slovakia.

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