With the decision to overturn the insider-trading convictions of Todd Newman and Anthony Chiasson, the idea of what's considered illegal has just been narrowed significantly. Insider trading has been clearly defined. The two cases were founded on not knowing where the inside information had come from and a lack of clear evidence that the two plaintiffs had any knowledge that the person giving the tip got any benefit from the trades. This is what an insider trader might call: plausible deniability. This has always been the scheme.
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And now people have a blueprint of how to operate within the letter of the law. The less you know the better. Why else have the Feds been unable to pin anything on Steve Cohen from Point72 Asset Management (formerly SAC)? He set up a system where he didn't want to know if something was illegal because that would make him guilty. Wall Street traders who've dipped their toes into the insider-trading pool have always operated on this premise. When I was on the trading desk at the Galleon Group trading for Raj Rajaratnam, I never wanted to know where his information came from. It was too good. My attitude was: Just give me the ticket to buy or sell and don't tell me anything else.
It helped me sleep at night thinking I could plead naiveté.
Here are the new rules:
1.You can't be convicted if you don't know where the insider information came from.
2.You can't be convicted if there isn't any evidence that you knew that the person giving the tip benefited from the trade.
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I spoke with a few of my friends who work at billion-dollar hedge funds after this news came out.
"It's a lot easier to cheat when you know what the rules are," my friend said. His firm has a very strict policy against insider trading. "We dot every i and cross every t," he said. He explained that whenever they're on a call or receive information that might even be considered in the universe of inside information, the protocol is to call and report it to their general counsel. "The stock immediately goes on the restricted list."
He's not sure how these new rules will affect the way his firm operates but he thinks it will certainly increase a trader's ability to get information.