Insider trading is sometimes a family affair

Let's say you are the chief executive officer of a company that is about to announce a big merger that will push up its stock price. And let's say you tell your best friend about it. And let's say he buys stock in the company and makes a lot of money. Is that insider trading? The answer -- to everything - - is "it depends," but I think there are three possible answers.

One is that it is insider trading in a straightforward traditional way: You are the tipper, he is the tippee, and you breached your fiduciary duty to your company and its shareholders by giving him information to trade on. (Normally prosecutors also need to show that you got a "personal benefit" from his trading, though it's a little unclear whether really close friendship can qualify as that benefit. But of course if he gave you sacks of cash, that counts.) You are guilty of insider trading. Your buddy probably is too.

A second possibility is that it is still insider trading, but on an entirely different theory. On this theory, you have a long "history, pattern, or practice of sharing confidences" with your best friend. You told him about the merger in confidence, not because you wanted him to trade on it, but because you wanted to, like, get his advice, or just talk about your day with your best friend who understands you and whom you trust. You were shocked to learn that he traded on it. The breach of duty in this case wasn't yours -- you didn't do anything wrong -- but rather your friend's. He violated his duties to you. (The duties of a friend.) In this theory, he is guilty of insider trading -- because he misappropriated information from you and traded on it -- but you aren't.

The difference between these cases depends on the precise facts, and the same relationship can give rise sometimes to the first theory, sometimes to the second.

So sometimes an executive will tell his golf buddy about a deal, the buddy will trade, and the executive will be charged with insider trading. Sometimes the executive will get away clean, and his buddy will be charged with trading in violation of the sacred duty of golf-buddy confidence.

The third possibility is that it isn't insider trading at all, because you neither tipped him in the expectation that he'd trade and give you a personal benefit, nor talked to him in the expectation that he'd keep it secret and not trade on it. Like if you and he aren't that close, and if you just sort of casually mention the deal, not in a heart-to-heart conversation but also not in a nudge-nudge-wink-wink- where's-my-bribe sort of way, maybe he could trade on it?

This is an odd one; it is hard to see why it's any better than the first two, and also a bit hard to imagine how it would actually happen. I am not quite sure how often it occurs out in the wild. But the theory predicts that it should exist, and it's basically the defense argument in the Salman case, which is up before the Supreme Court. Bassam Salman was convicted of trading on information that a banker gave to his (the banker's) brother. The banker doesn't seem to have gotten any personal benefit for the information, or to have told the brother about the deals in confidence. He just, like, told his brother about the deals, and went on with his day. Perhaps that isn't insider trading at all, though Salman has lost in court so far.

Anyway here's a schematic diagram: I have conflicted feelings about this chart. On the one hand, I must stress that it oversimplifies drastically and is in any case not legal advice. On the other hand, if potential insider traders want to cut it out and keep it in their wallets to remind them of how this all works ... I mean, don't actually do that, but if you do, I cannot deny that I'll be flattered.

Obviously, I know the chart makes no sense. Don't blame me for that! Blame, like, the Supreme Court. It's a weird area of law.

We talked a while back about an insider trading case in which Sean Stewart, a banker at Perella Weinberg Partners, allegedly passed confidential information about upcoming mergers to his father, Bob Stewart, who then passed it on to a friend named Dick Cunniffe. (Disclosure: Next month, my wife will go back to work for the federal defender's office that currently represents Sean Stewart.) Back then, I was impressed by, among other things, Cunniffe and Bob Stewart's use of a golf-based code to talk about their insider trading. If there's insider trading, there is usually also golf, and I respect them for upholding that tradition.