Sunny

Winnipeg, MB

9°c Sunny

Full Forecast

Business

The Canadian Press - ONLINE EDITION

What is insider trading and why are Mickelson, Icahn and Walters under investigation?

Posted: 06/10/2014 12:41 PM | Comments: 0

Advertisement

  • Print

NEW YORK, N.Y. - Few crimes on Wall Street generate more headlines than insider trading.

The definition is straightforward: An investor profits on non-public information 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 looking 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 nothing.

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 employees — can 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 government 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 to invest.

Q: WHAT'S THE LEGAL WAY TO GET INFORMATION OUT?

A: Every publicly traded company in the U.S. is required by law to disclose aspects of its business, so the public can decide whether to invest. This information can be as simple as how much profit a company earned, who was elected to its board of directors, or who made significant purchases of company stock. Companies disclose these important events by filing forms with the SEC. How and when those disclosures happen are factors in many insider trading cases.

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 information" 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 information 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 same.

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 insider trading offences. As often happens in these complicated cases, she was convicted on other charges: lying and obstruction of justice during the investigation.

Milken, the junk bond king of the 1980s, pleaded guilty to tax and securities law violations.

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 trading, but disputes the allegations. He has not been charged criminally.

Q: WHY IS THERE AN INVESTIGATION INTO MICKELSON?

A: A federal official told the AP that Mickelson 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 Mickelson.

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 can rise.

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 themselves, should be considered material information.

___

Business Writer Bernard Condon in New York contributed to this story.

Fact Check

Fact Check

Have you found an error, or know of something we’ve missed in one of our stories? Please use the form below and let us know.

* Required
  • Please post the headline of the story or the title of the video with the error.

  • Please post exactly what was wrong with the story.

  • Please indicate your source for the correct information.

  • Yes

    No

  • This will only be used to contact you if we have a question about your submission, it will not be used to identify you or be published.

  • Cancel

Having problems with the form?

Contact Us Directly
  • Print

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

Have Your Say

New to commenting? Check out our Frequently Asked Questions.

Have Your Say

Comments are open to Winnipeg Free Press print or e-edition subscribers only. why?

Have Your Say

Comments are open to Winnipeg Free Press Subscribers only. why?

The Winnipeg Free Press does not necessarily endorse any of the views posted. By submitting your comment, you agree to our Terms and Conditions. These terms were revised effective April 16, 2010.