Confidentially Speaking – Just As Much Hot Water As MNPI


New York, NY – In the wake of the federal insider trading investigation, many institutional investors have reevaluated the kind of information they use in their research process.  Everyone agrees that collecting and making investments based on “material nonpublic information” is illegal.  However, a growing number of market participants are coming to the conclusion that trading based on confidential company information creates a risk that could land you in just as much hot water with federal regulators.

Growing Concern Over Confidential Information

In the past few weeks we have spoken with executives at both buy-side and sell-side firms that have expressed a growing concern that one recent legal case seems to suggest that collecting confidential information from public company employees could constitute fraud. 

Consequently, these market participants have become increasingly more careful that their analysts, or the analysts of third-party research firms they hire, clearly identify who they are when they speak to their sources, and explain why they are asking the questions they are asking.  In addition, these buy and sell-side firms have also become insistent that their analysts (or the firms they use) verify that their sources don’t have confidentiality agreements which prohibit them from providing them with information. 

Fleischman Case Cited

The recent case which has raised these concerns with buy and sell-side executives was the recent trial of Primary Global Research salesman, James Fleischman.  After only six hours of deliberation, the jury found Fleischman guilty on one charge of conspiracy to commit securities fraud and one charge of conspiracy to commit wire fraud.   

It was clear from the testimony that much of the information that Fleischman helped PGR clients to get access to, was not sufficient by itself to enable an investor to make a trading decision on.  In other words, this information was not “material non-public information”.  In fact, one of the prosecution’s own witnesses, Karl Motey admitted to this fact under cross examination by Fleischman’s attorney, Ethan Balogh.

Instead, much of the information that Fleischman helped his clients access were pieces of the mosaic that investors would need to put together through their own analysis to make their investment decisions.  However, it was clear that this information was all confidential, it was all nonpublic, and it could all be seen to be “material” to the public companies in question as this information was important in their own decision making process.

Unfortunately, the jury in the Fleischman case did not see the distinction between information that was nonpublic and material to the company (confidential information), and information that was nonpublic and material to an investor (MNPI).  This is the reason the jury found Fleischman guilty on both charges.

Impact for Research Analysts

Despite the fact that the jury did not see this distinction, a significant aspect of this trial was based on the “conspiracy to commit wire fraud” charge.  It was alleged that Fleischman was involved in a scheme with various experts and customers to defraud Advanced Micro Devices, Marvell, Dell, Taiwan Semiconductor Manufacturing Company or AT&T of certain confidential information that was deemed to be important to these companies in their own decision making processes. 

Unfortunately, we do not think it would be a terrible stretch to apply the charge that was leveled at Fleischman to a number of research analysts who leverage their own connections of current or former company employees or industry consultants to collect valuable insight and information which, by itself is not enough to make an investment decision on, but which is clearly nonpublic information that could be seen to be important to the company in its own decision making process.

In other words, sell-side, buy-side, and independent analysts will need to be careful that they don’t cross the line by collecting and trading on either MNPI or confidential company information because gathering either type of information could get them into hot water.

Click here for more information on the potential consequences of the Fleischman case to the research industry.


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