Expanding the Definition of Inside Information


New York – The latest insider trading arrests suggest that prosecutors are seeking to expand the definition of inside information.  Charges against two of the consultants included in Primary Global Research’s (PGR’s) expert network relate to information about customers rather than the publicly traded firms they worked for.  Further, unlike the previous charges in the cases so far, this information was not financial information per se, but rather production, pricing, and product related information, requiring further analysis.  This is an important development, and one that will bear close scrutiny by security analysts on both the sell side and buy side.

The four additional arrests announced last Thursday involve a salesperson for PGR (James Fleishman), and three PGR consultants.  Mark Anthony Longoria, who at the time was a supply chain manager for AMD, supplied informants with revenue numbers and forecasts, as well as product line detail for AMD products.  He obtained AMD financial information from a contact in AMD’s finance department and disclosed this information prior to public release.

The cases against other two consultants are more interesting.  Walter Shimoon was employed by Flextronics International Ltd, an electronics manufacturer used by Apple for components in the iPhone and iPods (the iPad was under development at the time). Shimoon, then a Senior Director of Business Development at Flextronics, is accused of providing confidential information about Apple, including quarterly sales and forecasts for iPhone sales and forecasts of iPod sales.  He is also accused of providing production information for the fourth generation iPhone (with 2 cameras), and production information for the camera included in the iPod Nano.

Manosha Karunatilaka, an account manager at Taiwan Semiconductor Manufacturing Company (TSM), is accused of providing semiconductor wafer ‘bookings’ information supplied by TSM customers.  Wafer bookings are monthly forecasts of required production, which may or may not correspond with actual orders.  Bookings provide an indication of upcoming demand.  Karunatilaka apparently had access to monthly bookings from TSM’s top 10 customers, which he supplied to government informants.  He also allegedly supplied total wafer bookings for TSM, information on TSM’s inventory, pricing and margins for various customers.

Let’s apply the mosaic theory litmus test to the information supplied by Shimoon and Karunatilaka.  The litmus test is whether a press release of the non-public information received would move publicly traded stock.  On October 1, 2009, Shimoon allegedly supplied third quarter 2009 sales and forecasts for fourth quarter iPhone sales and forecasts of fourth quarter iPod sales.  If this information had been publicly released, it would most likely have moved Apple stock, qualifying it as material non-public information.  The wafer bookings information that Karunatilaka apparently supplied is harder to evaluate.  It is not clear from the complaint that this information would have moved TSM stock or those of its unnamed customers.

The challenge here is that we have moved into the gray area surrounding the definition of inside information.  The gray area depends on judgment on the part of analysts receiving the information, as well as prosecutors and judges and juries.

It is easy to see how prosecutors arrived at their judgment.  The latest complaint features five cooperating witnesses, all searching for instances of wrong doing in return for more lenient terms from prosecutors.  Cooperating witness 2, named by the Wall Street Journal as ex-sell side analyst Karl Motey, signed up as a PGR client at the request of the investigators and reportedly contacted 60 PGR experts searching for instances of inside information.  The other cooperating witnesses included Richard Choo-Beng Lee, a former Galleon trader who had his own small hedge fund when he was flipped by investigators, an unnamed analyst at a hedge fund in New York, an employee at PGR who was the ‘vertical manager’ for semiconductors, and a PGR expert, named in the media as Daniel Devore, a former supply manager at Dell.

Consequently security analysts will be more cautious in their judgments as well.  Whether or not the prosecutors’ views are upheld in the courts, no one will want to chance the scrutiny of prosecutors.


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  1. How many ways are there to spell “entrapment?” I’m not a lawyer but everything I’ve read about this case suggests that the prosecutors are trying to manufacture headline-grabbing offenses. Cf. Sandy’s penultimate paragraph above: …”Cooperating witness 2…signed up as a PGR client at the request of the investigators and reportedly contacted 60 PGR experts searching for instances of inside information.” One wonders why, if there was credible evidence that a crime had been committed, the prosecutors felt the need to send CW2 out on a fishing expedition.

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