The NASPP Blog

I never quite know where the world of blogging will take me. This week I planned to blog on a completely different topic (that I will save for another time), when I found myself mesmerized by a recent Forbes article titled “Insider Trading Nightmare, the IBM Trade That Went Bad.” Attention captured, I just had to blog about it this week.

What More is there to Say?

I’ve spent many past blogs exploring the ins and outs of insider trading, including the recent SEC investigations surrounding the issue. So what more could there be to say on the topic? This week, the above mentioned article struck me because it centered on yet another recent SEC investigation, leading to yet another guilty plea. The interesting part? The amount of the profit was small – only $7,900, and there was no “hot” stock tip that led to the insider trading. In fact, the “tip” that started it all began with two friends venting about their jobs over brunch. It was the latter fact – that such an ordinary circumstance, one likely repeated millions of times a week around the country, touched off a sequence of events that included an international manhunt, an extradition, jail time, and a guilty plea. Whoa!

A Venting Session

The intricacies that made up this situation are many, so I will have to summarize. One day two friends met for brunch. Both friends discussed their jobs – one was a research analyst and the other was a lawyer with a firm that handled M&A transactions, amongst other things. The lawyer confided to his friend that he was overwhelmed with a project he was working on – IBM’s acquisition of SPSS, Inc., a Chicago software company. As the Forbes article says – “The partner on the job was tough and the lawyer’s lack of experience, combined with long hours at the office, had led to the open therapy session over brunch. There was no “hot tip”, or “You gotta buy these shares and get some for me;” there were just two kindred souls consoling one another about the misery of working for someone else.” I mean, how many times have employees vented about their jobs over a meal? I’m guessing that’s standard conversation amongst friends, right?

Too Tempting to Resist

A few days later, the research analyst friend realized what he had “learned” from his friend through the venting session – that IBM was acquiring SPSS. Another long story short – he took that information and bought shares of SPSS, Inc. Then, he passed along the information to friends, who shared the information with more friends. Eventually the SEC caught on to the trades (and the series of text messages back and forth between all involved documenting their fears about getting caught didn’t help). The interesting part is that the lawyer who unwittingly provided the “tip” wasn’t involved. He didn’t trade – and he may not have realized at the time that the information he shared with his friend over that brunch set off a chain of insider trading events.

Consequences, Consequences…

Ultimately in the end, the SEC had enough information to pursue charges. The friend who first received the innocent tip and passed it along (profiting $7,900) had fled the country by then (having originally been in the U.S. on a work visa) and was eventually caught in Hong Kong and extradited back the U.S., where he recently pleaded guilty to charges related to insider trading. The lawyer who vented about his job (but did not purchase any stock) lost his job. And the consequences go on.

The Moral of the Story is…

I’m thinking, there must be a moral here. What I’ve come up with is that we’ve got to get employees to equate insider trading to more than just big stock trades. Even though the “tipper” never mentioned trading stock, or made any kind of suggestion that his friend may profit from purchasing SPSS stock (as we typically envision when we think of insider trading), he still ultimately lost his job – presumably because he (even innocently) passed along material, non-public information in the first place. And, the SEC is demonstrating that no amount is too small – they will find you, and in this case hunt you down for insider trading. Surely the cost of finding the insider trading offender and extraditing him back to the U.S. far exceeded the amount that he profited from insider trading. This sends the message that a crime is a crime, and punishment will be pursued.

This lends a prime opportunity and example for employers to use in educating employees. Sharing material, non-public information is very risky – even if you didn’t intend for it to be misused. This is a strong message about safeguarding information – even from close friends and family – because you never know what happens to the information after it leaves your mouth. At the end of the day, even if you don’t act on it, even if you didn’t intend for it to be used for profit, you can still be held responsible. If not by the SEC, perhaps by an angry employer (as was the case here). If you have a hand in employee education about insider trading, contemplate using this example in your message. If you routinely come into contact with material, non-public information, consider this a lesson learned.

We do have many resources in our Insiders portal that can further enhance your understanding or aid in preparing communications.

Next week’s blog will feature photo highlights from our 21st Annual NASPP Conference in Washington, DC. Be sure to check it out!

-Jennifer