Inside Game: Understanding How Inside Information is Gathered
Welcome to the August edition of our newsletter! In this issue, after another insider information case was decided by the nation’s highest court, we’ll examine the role of friendships in such schemes, and how to understand and identify those networks of connections.
Friends in All the Right Places: How Parties Profit From Inside Information
Numerous inside information cases have been prosecuted in the last decade or more, typically involving some variant of the same basic scheme: an investor or hedge fund analyst meets an expert involved in a clinical trial, a senior executive at a company, or someone else in a position to know high-level information about a company’s operations or forecasts. In many instances, the insider is an acquaintance or friend of the person receiving the tip, although in an increasing number of cases the insider was recruited to provide information as part of an “expert network.” We’ll focus on the former group, of more informal connections.
Although more informal in nature than retained experts, the social network of insiders and information recipients can be even more important. The possibilities for connection are vast: In-laws, college roommates, fraternity brothers, parent-teacher association members. By examining a person’s social network as closely as possible, via social media, alumni newsletters, corporate affiliations and other publicly available sources, a researcher can better understand who a subject knows, and begin to infer how and why they may know a relevant information source. Then we can understand how that source can help someone benefit from the information.
Gray Areas: What Constitutes Inside Information
The aforementioned court case did not establish clearly what information is considered a “tip”, with prosecutors in that case arguing that a “gift of confidential information” should be enough to constitute insider activity. As the existing cases, including appeals of previously obtained convictions, work their way through the courts, one issue to be resolved is the role of casual relationships – how strongly must the prosecution prove the connections between an insider and the recipient of the information. Whether investigating internally after law enforcement make such allegations, or conducting a review to determine how susceptible your company may be to such conduct, it may pay to understand who your company’s senior executives know – and the risks those relationships may pose at a later time.