It Remains Insider Trading
The jury deliberating the case of Winifred Jiau took little time in convicting the former employee of Primary Global Research, an expert network firm, with providing inside information to investors. This is another victory for the U.S. government in a wave of insider trading indictments related to the use of expert networks, which recently saw a guilty verdict for hedge fund manager Raj Rajaratnam. Thus far, more than 40 individuals have been changed, with very few of the accused electing to fight their cases in court.
In claiming her innocence, Ms. Jiau took a different approach than the ultimately unsuccessful “mosaic theory” defense adopted by Mr. Rajaratnam. Jiau conceded that she passed along nonpublic information, but claimed that the information by itself could not be considered material. Unfortunately for her, the prosecution’s evidence, including coded instance messages, proved Jiau not only knew that she was passing along nonpublic information, she also understood that the information was material to the investors with whom she was communicating.
In reality, a decision on the “materiality” of a piece of information is always influenced by the subjective nature of the information. That is, there is typically no clear line of what is — or is not — material. One must consider the source and specificity of the new information when determining if a reasonable investor would want to know the information before making an investment decision. Ms. Jiau’s information was described as “perfect” by one witness regarding the accuracy of earnings information on technology companies.
Companies go to great pains to keep their earnings information from being leaked to the investment community. Information on mergers and acquisitions, announcements on new patents, and drug testing results are other common examples of information that are considered material and cannot be used to trade until it is released to the market through appropriate channels.
The insider trading cases brought by the government thus far have highlighted the need for improved conduct by some participants in the investment industry. Warning flags should go up for investment professionals that they are crossing the line of legitimacy, and into the realm of insider trading, when someone asks, as Ms. Jiau did, to “drop some extra sugar to me” in exchange for acquiring the information in question.
