“Insider Trading?” Or Just Good Research?

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Recently the U.S. Department of Justice (including the FBI in full field attire) began a crackdown on “insider trading.”  After a week, it’s becoming clear what has upset the Feds.  It looks like they are taking aim at research companies that do mundane stuff like contacting a company’s suppliers to find out what the company might be doing.  Is this insider trading or just good research?

An example may help.  Apple Computer makes iPhones, the iPad, various iPods — and, oh yes, the Macintosh computer on which I’m writing this entry.  Apple’s stock price has gone through the roof over the past year:

Source: http://finance.yahoo.com

Yes, that’s a 50 percent increase in one year.  So there’s a lot of interest in what Apple’s doing.  One way to get an early read on changes is to look at what Apple’s suppliers are doing.  These companies are all over the world, with many in southeast Asian countries.  They produce and assemble many of the parts (and finished products) that Apple designs and sells.  Changes Apple will make in a month or two are reflected in the current production plans of these companies.  Naturally, research focuses on them.  There’s a great article in the Nov. 24 Wall Street Journal (“Supply Data Now A Focus Of Probe“) that describes the process in detail.  That article uses Apple as its example.  The author, Susan Pulliam, gets all the credit for the idea and research.)

Is this insider trading?  There’s always been a very fuzzy line between research and inside information.  After all, the whole point of equity research is to discover information before anyone else gets it.  Until now, the insider trading rules have been fairly narrow, generally limited to company executives and employees who have access to information well before the rest of the market.  The Obama administration seems determined to expand the definition to include activities that were, until now, legitimate research.  Eventually the courts will decide whether this new theory holds up to judicial scrutiny.  In the meantime, the Obama administration should get full credit for yet another anti-business move.  The next time the unemployment rate is released (Friday, December 3) and the president makes some statement about feeling the pain of the unemployed, remember actions like this.

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.