Bureaucracy Runamok - Insider Trading Case

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Bureaucracy Runamok - Insider Trading Case

Postby Gilbert B Norman » Wed Oct 27, 2010 2:40 pm

If you've ever heard of the "long arm of the law", read this:

http://www.tradingmarkets.com/news/stoc ... 01982.html

Brief passage:

    Sep 30, 2010 (SECURITIES AND EXCHANGE COMMISSION RELEASE/ContentWorks via COMTEX) --
    The Securities and Exchange Commission today charged a pair of freight railway employees and four family members with perpetrating an insider trading scheme that garnered more than $1 million in illegal profits.
    The SEC alleges that W. Gary Griffiths and Cliff M. Steffes learned confidential information in early 2007 about the upcoming acquisition of Florida East Coast Industries
    Inc. (FECI), which owned the freight railway where they worked in Jacksonville, Fla. Griffiths and Steffes tipped family members with the non-public information. The traders collectively purchased more than $1.6 million in company stock and options ahead of the May 8, 2007 announcement of the acquisition of FECI by an affiliate of Fortress Investment Group LLC.
    "We allege these individuals exploited their personal and family relationships for monetary gain and that their misuse of confidential information gave them an illegal advantage over other traders in the market," said Merri Jo Gillette, Director of the SEC's Chicago Regional Office.
Now in all fairness to the SEC investigators, it does appear that Mr. Griffiths was Chief Mechanical Officer of the FEC, but Mr. Steffes was a Trainman.

I had not been aware of this matter until reading New York Times' columnist Andrew Ross Sorkin's Tuesday column:

http://dealbook.blogs.nytimes.com/2010/ ... r-trading/

Brief passage:

    Have you heard about the railroad workers charged with insider trading?

    Late last month, the Securities and Exchange Commission brought an unusual and colorful insider-trading case: It accused two employees who worked in the rail yard of Florida East Coast Industries and their relatives of making more than $1 million by trading on inside information about the takeover of the company.

    How did these employees — a mechanical engineer and a trainman — know their company was on the block?

    Well, they were very observant.
You know, if this action brought by the SEC results in criminal charges or any sanction (fired) against these FEC employees for simply being observant, then I shudder the consequences for any employee of a publicly traded company who is simply observant.

Naturally it is against applicable Security Trading laws for an insider, such as the CEO or any employee, even if a Secretary, to trade securities based on information gained in the performance of duties. But a Trainman holding a Yard job and observing unusual comings and goings?

Come on.

It would appear that even railfans should not be too quick to call their Broker and take positions on the strength of observations made in the pursuit of their hobby.

All told, based upon facts of which there is public knowledge: "over the top".
Gilbert B Norman
 
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Re: Bureaucracy Runamok - Insider Trading Case

Postby jbvb » Thu Dec 09, 2010 1:42 am

This is what trials are about. The accused aren't canonical insiders (board members, officers, financial/legal staff). However, if they saw a discarded letter, overheard an office conversation or even looked at the license plates on visitors' cars, they had information which wasn't available to the general public, which the law forbids you using in your trading. The accused will have to demonstrate that they only used public info, which may be tough to prove. The size and apparent leverage of their investment hints that they felt very secure in making it.

And yes, though I'm not a lawyer, I've had my name in an IPO prospectus.
jbvb
 
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Re: Bureaucracy Runamok - Insider Trading Case

Postby Gilbert B Norman » Thu Dec 09, 2010 10:41 am

I certainly respect your views regarding this matter Mr. JBVB; and obviously the SEC concurs.

But somehow this case seems to parallel one of the more successful security positions I once held - namely Andheuser Busch from Feb 1990 (BOT @ !!.11) to June 2002 (SLD @ 50.00). During this twelve year period the position appreciated at an annualized rate of 39.35%.

During that period, I became good friends (they were never a client, but I gave 'em freebies along the way) with the owners of a 7-11 franchise that resulted in my "hanging around' and sipping coffee along with joshing with the owner and his "not bad looking fiftysomething' wife. While not my lifestyle, and it is not my place to denigrate those for whom such represents theirs, I was astounded at the number of customers that walked in for their "case and a carton' (and dropping the change on a Lottery ticket). Since Bud products kind of outsell those of Miller, I figured "why not" and called my broker.

I don't think there is anything unlawful about being observant in this life, but maybe the SEC thinks otherwise. Oh well, they know where to find me.
Gilbert B Norman
 
Posts: 12934
Joined: Fri Mar 12, 2004 6:52 am
Location: Clarendon Hills, IL (BNSF Aurora Sub; MP 18.71)

Re: Bureaucracy Runamok - Insider Trading Case

Postby jbvb » Thu Dec 09, 2010 6:24 pm

Your information didn't come from the company, which is key. Your holding period was also long; it's difficult to get in trouble with something you've held a year or more unless the date of sale is shortly before some disaster is admitted by management.
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