Old-Fashioned Pumps…
Though regulations change over time as technology changes and as regulators develop more effective ways to ensure fair and transparent markets, some fraudulent tactics have been around for as long as capital markets. In a recent case filed last week, the Securities and Exchange Commission (SEC) charged an individual with engaging in what investigators called “an old-fashioned pump-and-dump scheme”. The SEC alleges that Robert Murray produced a phony press release claiming that his company, Trillium Capital, was offering to buy Getty Images, which Murray had amassed a position of stock and options in. When the phony buyout offer caused Getty shares to spike, the SEC claims Murray immediately unloaded all his shares of Getty, without waiting for a response from Getty and despite having claimed in the bogus press release that he would hold his shares.

MNPI
Insider trading is another common fraudulent tactic. Insider information is knowledge about a company that is not publicly available and that has a significant impact on the value or performance of the company. Insider information is often called material nonpublic information (MNPI). While pump-and-dump schemes involve releasing false and misleading information in an effort to cause a movement in the price of a stock, insider trading involves using factual information that is unavailable to the public to benefit from price moves that will occur once the information is publicly released. As trading on MNPI is an unfair advantage over other investors, company insiders with access to MNPI, as well as any investors who obtain it, are restricted from using it when making investment decisions.

Fam
Despite a long-standing ban, multiple insider trading cases are filed every year. The SEC appears to cast a wide net that snares all sizes of fish, holding both large finance firms and smaller, individual investors accountable. Perhaps surprisingly, insider trading cases often involve individuals who don’t work in finance, aren't top executives at public firms, and may not even work for the company they trade. In February, the SEC charged Tyler Loudon of Houston, Texas with insider trading. The SEC alleged that Loudon misused MNPI he obtained from his wife, who was a mergers and acquisitions manager for London-based oil and gas company BP. Overhearing his wife’s work-related conversations about a merger she was working on remotely, Loudon bought shares of TravelCenters of America before BP’s acquisition of the company was announced. After the deal was revealed, and TravelCenters stock rose over 70 percent, Loudon unloaded all his shares, making $1.76 million in illegal profits.

Friends…
Last March, the SEC announced insider trading charges against Roy Cook, a former board member of Tallgrass Energy, and four of his friends. When Cook learned that Blackstone Infrastructure Partners was planning to make an offer to acquire Tallgrass, he began sharing information about the deal with four of his friends and business associates. The SEC alleges that more than $700,000 in illegal profits were made from trading shares and options in Tallgrass. All five of the defendants agreed to a total of $2.2 million in settlements. So, for any readers who might consider asking someone they know who works at publicly-traded company for information that will help them make profitable short-term stock trades, keep in mind that anything they know - markets already know too. If they actually do know something of material impact that markets don’t know, they should not share it with you. After all, friends should not let friends trade MNPI.

June 5, 2024