Home' Trinidad and Tobago Guardian : June 15th 2014 Contents SBG16 FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt JUNE 15 • 2014
Few crimes on Wall Street gen-
erate more headlines than insid-
er trading. The definition is
straightforward: An investor
profits on non-public informa-
tion at the expense of others.
But proving that someone did it can be
complicated without direct proof that they
cheated. Difficulties have dogged investigations
surrounding high-profile individuals over the
years, from Michael Milken and Martha Stewart
to SAC Capital s Steven Cohen.
That s worth keeping in mind amid the swirl
of news about a federal investigation into
trades by Hall of Fame golfer Phil Mickelson.
A federal official briefed on the investigation
told The Associated Press that the FBI and
Securities and Exchange Commission are look-
ing at stock trades that Mickelson and Las
Vegas gambler Billy Walters made involving
Clorox when activist investor Carl Icahn was
attempting to take over the company. There
have been no charges filed against the three
men and the investigation could lead to noth-
Here are the basics on insider trading and
the Mickelson case:
Q: What is insider trading?
A: It s when investors use confidential or
advanced information that is not available to
the market as a whole to make a profit or
avoid a loss. People with inside information---
such as company officers, directors or employ-
ees---an legally buy or sell their company s
stock, but only after significant information
becomes publicly known. They must report
their purchases or sales to the SEC, the gov-
ernment agency that oversees Wall Street.
Government regulators take insider trading
allegations seriously and often investigate even
if there s just a hint of illegal trades. Insider
trading threatens an essential element of any
financial market: trust that it is a fair place
Q: What's the legal way to get
A: Every publicly traded company in the
US is required by law to disclose aspects of
its business, so the public can decide whether
This information can be as simple as how
much profit a company earned, who was elect-
ed to its board of directors, or who made sig-
nificant purchases of company stock. Com-
panies disclose these important events by filing
forms with the SEC. How and when those
disclosures happen are factors in many insider
Q: How about an example?
A: Let s say ABC Drug Co is working on a
new drug that it believes could bring in big
profits. But the drug is discovered to have life-
threatening side effects when it s under review
by the Food & Drug Administration.
ABC Drug decides this is "material infor-
mation" that investors should have. It files a
document, known as an 8-K, with the SEC
detailing the side effects. It also issues a press
release so the information is spread quickly
through the media.
The drug s side effects are now public infor-
mation instead of insider information, and
investors can sell ABC stock.
That s how the process is supposed to work.
But let s say in the days leading up to ABC s
announcement, the company s CEO sells his
stock and tells his family and friends to do
The CEO, his family and friends could be
investigated for insider trading. All likely knew
that ABC s drug had problems and all were
able to sell ABC shares at a higher price than
if they had no insider information.
If this sounds familiar, it is. Federal officials
accused Stewart of selling ImClone Systems
stock on the eve of bad news about one of
the company s key drugs in 2001.
Q: What happened to Stewart,
Milken and Cohen?
A: Stewart was never charged with criminal
insider-trading offenses. She was convicted
of lying and obstructing justice during the
SEC s investigation of her stock sale. The SEC
brought civil insider trading charges against
her in 2003, and Stewart settled them in 2006
for $195,081 in fines and penalties without
admitting or denying the allegations.
Milken, the junk bond king of the 1980s,
pleaded guilty to tax and securities law vio-
At Cohen s SAC Capital, several employees
of his hedge fund were convicted of insider
trading. The fund was required to pay a record
$1.8 billion fine. Cohen faces civil changes
accusing him of failing to prevent insider trad-
ing, but disputes the allegations. He has not
been charged criminally.
Q: Why is there an investigation into
A: A federal official told the AP that Mick-
elson and gambler Walters bought shares of
Clorox about the same time in 2011. Federal
investigators are looking into whether Carl
Icahn shared information of his takeover
attempt of Clorox with Walters, and whether
Walters passed that information to Mickel-
Why would information from Icahn be
important? He is one of Wall Street s biggest
and most influential investors, someone who
pushes for changes at companies he deems
badly managed or underperforming. As an
"activist shareholder," Icahn has successfully
pressured companies for decades. Whenever
he makes a move against a company, its stock
In this case, Icahn decided to go after Clorox
in July 2011, offering to buy the company.
Icahn s campaign was not successful and he
withdrew his bid in September of that year.
Q: Did ICAHN break any laws?
A: One question is whether Icahn should
be considered an "insider." In this case. Icahn
disclosed in early 2011 that he was starting to
buy shares of Clorox. His bid failed and he
never gained a board seat at the company. As
a result, he had no fiduciary duty to Clorox
or its shareholders.
It is not necessarily illegal for one investor
to tell another investor how they plan to trade,
under insider trading laws. But one could make
the argument that Icahn s activities, in them-
selves, should be considered material infor-
A look at
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