I shouldn’t write this post, because the SEC surely wants me to write at least part of it. I mean, they don’t care about what I write; I can promise you that. But they want somebody to cover it because of the message they hope to send to people out there who are thinking about doing just a little bit of insider trading. And the message is, don’t do it, or you’ll end up like this guy. It seems like piling on to use his name, so I won’t.
But here’s what allegedly happened. Person A’s spouse worked at GSI Commerce, an e-commerce company whose stock traded on the NASDAQ until it was acquired by eBay in 2011. Spouse told “A” about the impending acquisition, in late January of that year. “A” knew the information was material and nonpublic, but on February 21, allegedly told Person “B” in confidence about the eBay deal for GSI. Critically for purposes of holding this insider trading case together, “A” and “B” had “a long-standing relationship of trust and confidence built on years of sharing personal and professional confidences about their lives which they understood were to be maintained confidentially.” You may not think about your personal relationships in these terms, but believe me when I say it matters that the preceding sentence says what it does.
“B” then allegedly told her good friend “C” about the acquisition – and that she learned about it from “A” – at some point before March 15th, when “C” bought 100 shares of GSI. As the order alleges, “B” “intentionally tipped that information to [“C”] and obtained a personal benefit.” On March 28th, eBay and GSI announced the merger, and GSI’s share price jumped more than 50% from the prior day’s close. “C” then “allowed his GSI shares to convert to cash at the close of the deal on June 21, 2011 for a profit of $1,083.”
I have two main thoughts here. First – oh, man, that is not a lot of money. Believe me, I would like to have $1,083, and I will take yours right now. But I wouldn’t risk a career or even a job for $1,083 and you shouldn’t either. Stay in school. Don’t do drugs. Don’t insider trade if you can help it. I sometimes warn clients that the SEC will occasionally bring a dinky insider trading case just to show there’s no floor or de minimis level it thinks is okay. And to look at this case, there’s not a lot of room to go down. I’ve never heard of a lower disgorgement figure, and am prepared to declare this case the smallest one ever. Please write if you’ve seen one that’s dinkier.
Second, the Commission sort of blows past the personal benefit issue here. “A” and “B” supposedly had a relationship of such trust and confidence that misuse of the eBay information by “B” could be characterized as a misappropriation by “B”. The order doesn’t have to get into whether “A” merely tipped “B” and therefore had to have received a personal benefit for “A” to be liable for illegal tipping. The order does characterize the second transfer of information – from “B” to “good friend” “C” – as a tip and not a misappropriation by “C”. So there does have to be a personal benefit being kicked back to “B”. And the order assures us that there is one. It says so right there in Paragraph 12, that “B” “obtained a personal benefit.” But what was it? The order doesn’t say. Would it have been enough to get past the standard set in United States v. Newman in the Second Circuit? We don’t know. And because the Commission brought this case as a settled administrative proceeding, we’re not going to know. It is unreviewable. At a time when the personal benefit issue is currently on review before the Supreme Court, I’m not sure it’s a good look for the SEC to be ducking it entirely by filing a settled case in an administrative forum. But here we are.
P.S. “B” isn’t charged in this case, but got hers in another case filed on Tuesday.