MATT LEVINE: The fine line between insider trading and knowing more than others
'Trading on information that no one else has - even really good information - even "inside" information - is not necessarily illegal'
If you bought short-dated out-of-the-money call options on Bioverativ, Inc. stock, just before its January 22 announcement that it will be acquired for $105 per share (a 63.8 percent premium) by Sanofi, then you did pretty well. According to the Securities and Exchange Commission, someone did:
Defendants' trading in Bioverativ calls is highly suspicious. Between Friday, January 12, 2018 and Friday, January 19, 2018, immediately preceding the Announcement, Defendants purchased 1,610 out-of-the-money Bioverativ calls with strike prices between $65 and $75 and an expiration date of February 16, 2018, despite the fact that Bioverativ shares had never closed above $64.11 per share. On January 22, 2018, after the Announcement made that same day, Defendants sold 732 of those contracts for a profit of approximately $2,518,622.70. Defendants sold an additional 75 contracts on January 23, 2018, netting an additional $207,825 in profits. Based on the last reported sale prices on January 24, 2018, Defendants' remaining options contracts were valued at approximately $2.2 million.
"The identities of the Defendants are not yet known because the options purchase orders originated through a foreign brokerage firm located in Zurich, Switzerland," and the SEC's insider trading complaint seeks to freeze their assets and reveal their identities.
We talk a lot around here about the nuances of insider trading law: how it's not really about fairness but about theft; how simply trading on information that no one else has is not a crime; how the government needs to prove that you got that information corruptly, from someone with a duty to keep it secret, in order to prove insider trading. Trading on information that no one else has - even really good information - even "inside" information - is not necessarily illegal.
On the other hand, if you buy so many out-of-the-money call options right before a merger announcement, you know, come on. Everyone is just going to assume you insider traded. Perhaps you can prove them wrong. If you made all this money trading Bioverativ options in a Swiss account, and the SEC freezes your account, you can always show up in New York and argue that it is all a misunderstanding and nobody misappropriated any information from anyone and you should get your money back. Frankly though everyone will be surprised to see you.
Elsewhere in insider trading, here's some unintuitive legal insider trading: At 3:47 p.m. one day, the U.S. Department of Education publicly announced two winning bidders for a lucrative debt-collection mandate, one of which was a public company. But at 1:30 p.m. it had emailed all the losing bidders to tell them who had won. And the winner's stock jumped, on relatively heavy volume, between 1:30 and 3:47. It is not clear why, but by that point a lot of people knew who the winners were -- and had no duty to keep quiet about it:
In its email to the losing bidders, the department identified the two winning firms but didn’t mandate that the information remain confidential. “If you have information that you know is nonpublic and material, but you have no duty to keep quiet, it’s in the category of information you overhear in a taxi,” says Stephen Crimmins, a former SEC enforcement lawyer who now works for Murphy & McGonigle. “You can trade on it.”
For all I know, when Sanofi decided to pursue Bioverativ, it sent emails to 40 other biotechnology companies saying "hey no deal right now, we're too busy buying Bioverativ." (I mean, it seems unlikely, but you never know.) If it did that, would any of those biotech companies have any duty to keep Sanofi's random blurting of nonpublic information secret? Could they trade on that information? Could their executives buy call options with it?
A final hypothetical that I am just going to leave here as an exercise for the reader. "News Tuesday that Bezos’s Amazon.com Inc., Buffett’s Berkshire Hathaway Inc. and JPMorgan Chase & Co., led by Dimon, plan to join forces to change how health care is provided to their combined 1 million U.S. employees sent shock waves through the health-care industry." CVS Health Corp. closed down 4.1 percent yesterday, Anthem Inc. down 5.3 percent, Cigna Corp. down 7.2 percent, etc.
Those drops were pretty predictable, if you knew that Amazon and Berkshire and JPMorgan were teaming up to disrupt health care, which I did not. But someone did! If JPMorgan had shorted health-care stocks on Monday afternoon: Insider trading? Or what? (Probably a Volcker Rule violation but never mind that.) Or, if a Berkshire Hathaway executive knew about the plans and shorted health-care stocks for his personal account on Monday afternoon: Insider trading? Or what?