Last week, a securities regulator in Massachusetts fined Citigroup Inc. $30 million for failing to have appropriate procedures in place to keep its research analysts from prematurely releasing confidential information to big investors. The interesting part of this case is that no one -- not the analyst who released the information, not Citigroup, and none of the firms who received the information -- was criminally or civilly charged with insider trading.
According to the New York Times' DealBook blog, a Citigroup research analyst had insider information about a drop in iPhone orders that would affect Apple Inc. and one of its main suppliers. Using what the regulator called "extremely aggressive" tactics, one of Citigroup's largest clients, SAC Capital Advisors, repeatedly emailed the Citigroup analyst and badgered the information out of him. Several other investors, T. Rowe Price, and hedge funds Citadel and GLG Partners also received the advance information. A day later, Citigroup publicly released the information and Apple's stock price dropped 5 percent.
The reason the analyst wasn't charged with insider trading is that he didn't trade. In fact, he never had any dealings with the trading group, and he received no personal benefit from releasing the information (except to stop SAC from plaguing him), and owed no fiduciary duty to investors. He did violate Citigroup's policies, but that's not a crime.
Citigroup was fined because the analyst was acting on Citigroup's behalf and it failed to prevent him from releasing the information early to some investors. He may not even have known what he was doing was wrong.
The recipients of such information, however, didn't necessarily violate a law enforceable by Massachusetts regulators. Considering the aggressiveness of SAC's tactics, however, the Massachusetts regulator commented that he is exploring whether he had jurisdiction over SAC, which is based in Connecticut. If not, he may forward the issue to the Securities and Exchange Commission for review.
Wall Street firms routinely cater to their biggest clients, and a culture may develop which encourages employees to give them extra perks. If researchers are not to give out certain information to top clients -- and they're not -- they need to be trained on exactly what's restricted. As important as it is for all investors to receive the same information at the same time, non-traders can't be held criminally liable if they're not in a position to know the law and aren't properly supervised.
Source: The New York Times' DealBook blog, "The Netherworld of What Constitutes Insider Trading," Peter J. Henning, Oct. 7, 2013
