Some time ago, I wrote a piece explaining what kind of actions law enforcement might view as insider trading. The purpose was to bring to light the gray area and non-intuitive actions that can cause people trouble they do not want. One of those situations is when a person takes information learned as part of their job and uses it trade securities of another company. The hypothetical I used was of printer toner salesperson that analyzed his sales data to come to conclusions about a client’s business and then traded on that information.
Recently, Mr. Bonan Huang of Philadelphia was found liable for insider trading under similar circumstances. Securities and Exchange Commission v. Bonan Huang, et al., Civil Action No. 2:15-cv-00269 (E.D. Pa.). Mr. Huang and an accomplice worked for Capital One, the issuer of credit cards. Mr. Huang used his access to Capital One data to view purchases by card holders at various retailers. Mr. Huang came to conclusions about the retailer’s sales based on this analysis and then traded on that information.
Here, Mr. Huang broke a duty to his employer, Capital One, who owned the information Huang accessed, when he misappropriated Capital One’s information for his own purpose, to trade securities. This information was not public, was the kind of information that would effect how an investor valued the retailers, and came into Mr. Haung’s hands by stealing it from his employer. Therefore, Mr. Huang’s use of this material non-public information to trade securities was insider trading.
Would the misappropriation theory construct fall apart if Mr. Huang owned Huang Credit Card Company and was reviewing purchase data that he owned? Refresher: traditional insider trading, trading company based on material non-public information learned from inside the company; tipper/tippee liability, trading on material non-public information an insider communicated–both parties are liable; misappropriation theory, trading on information learned in violation of a duty-usually to an employer.
This example of a person completely outside of the of the traded companies being prosecuted under the misappropriation theory illuminates the dangers of trading based information that is not clearly public and that is learned from an employer–even when the information is used to trade securities of other companies.
Pro-tip: If you are in possession of sales data that may play in the mix of information used to value the stock of a company–regardless of how you got that information, do not trade that company’s stock while the sales data is not public. You may not be insider trading, but you may have to litigate the facts and law to find out.
These materials have been prepared for general informational and entertainment purposes only and are not intended as legal advice.