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-winkwhere’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 defence 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.

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.

Cunniffe and Bob Stewart have pleaded guilty to insider trading. That’s fairly straightforward: They had inside information, they traded, and Cunniffe ended up working as an informant and recording some pretty guilty-sounding conversations with Bob Stewart.

Sean Stewart’s trial starts next week, and Bloomberg News reports that he has a defence: ‘‘When Bob pleaded guilty, he admitted he got confidential information from Sean but didn’t say Sean knew he was using it.’’ Aha! The prosecution thinks that this is a case of the left-hand side of the chart, where Sean Stewart tipped his father in the expectation that he’d trade. (There are also some alleged quid pro quos — ‘‘ Bob paid $10,000 for a photographer at Sean’s wedding and gave his son an additional $15,000’’ — though I am not sure how important that is in a father-son case? Like, many parents pay for their children’s weddings without expecting illegal stock tips in exchange.) But the defence can argue that it‘s actually the middle of the chart: Sean told Bob about his work in confidence, as father-son bonding, and Bob then betrayed his fatherly duty by trading on it.

From Cunniffe’s recorded conversations with Bob Stewart, there seems to be evidence both ways. On the one hand (‘‘CW-1’’ is Cunniffe):

A few minutes later, when CW-1 once again asked, ‘‘out of curiosity,’’ to ‘‘understand[] the relationship,’’ whether Sean Stewart had offered tips on deals ‘‘out of the goodness and kindness of his heart,’’ or if Robert Stewart had instead ‘‘thrown Sean Stewart money,’’Robert Stewart denied the provision of cash to Sean Stewart. He also claimed that he never told Sean Stewart ‘‘I’ve done anything.’’ That sounds good! On the other hand: In one conversation, at Andrew’s Coffee Shop in midtown Manhattan, Bob allegedly told Cunniffe that his son had scolded him for failing to trade on a tip.

“I can’t believe it,” Bob quoted Sean as saying, according to prosecutors. “I handed you this on a silver platter and you didn’t invest.” That sounds bad! There is precedent for this, by the way, in a case called US v Gansman, in which James Gansman, a lawyer at Ernst & Young, ‘‘repeatedly disclosed material non-public information to Donna Murdoch, a woman with whom he was having an affair.’’ (They met on Ashleymadison.com.) Murdoch traded, and both she and Gansman were charged with insider trading. Gansman’s defence was: No, no, this isn’t a case of my violating my duty of confidentiality to Ernst & Young; this is a case of Murdoch violating her duty of confidentiality to me. I guess it makes sense that she’d have such a duty. Surely, if you are having an affair with someone, you have a history of sharing secrets with her. That, I gather, is how affairs work.

So if Gansman told Murdoch about upcoming mergers, he could have assumed that she would keep those mergers confidential and not trade on them. Ashleymadison.com, like the confessional and the golf course, creates a sacred relationship of confidence that insider trading law should respect. An appeals court endorsed the basic soundness of this argument, and Gansman’s right to submit it to a jury, though it ultimately didn’t work and the jury convicted him. Presumably the father-son relationship, like the golf-buddy and extramarital-affair relationships, can create an obligation of confidentiality that would make any insider trading Bob Stewart’s problem, not Sean’s.

The reason I love insider trading law is that this is all so weird and murky and human. You’d think that what is allowed would be clearer, and would be based on the needs of the capital markets rather than the nuances of family relationships. I like to say that insider trading is illegal, not because it is unfair, but because it is theft. But neither theory quite explains this stuff. If insider trading law is about creating a level playing field for all investors, then it shouldn‘t matter whether Sean Stewart told his father about upcoming mergers in confidence; Bob Stewart‘s trading was ‘‘unfair’’ in either case. If insider trading law is about companies’ ability to control their own information, then it shouldn’t matter whether Sean Stewart expected his father to trade on the information; either way, he shouldn‘t have shared his company‘s information. But those things do matter, because the law is a haphazard accretion of rules of thumb that don‘t quite respond to any higher purpose. And so prosecutors and juries have to pry into the detailed workings of family relationships, to decide whether a son trusted his father and why a father supported his son. As securities law — as a way of regulating the capital markets — it is pretty odd.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

You told him about the merger in confidence, not because you wanted him to trade on it, but because you wanted to 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.