Would this get you arrested?

[imported_bingobazza]

Lets say that you have access to Goldman Sachs stock research reports hours before they are released to the street. You are not employed by goldman Sachs. You notice that upgrades and downgrades usually result in the price moving a percent of two (whether it does or not is not the purpose of this thread). You plan to use that information to trade the stock in question. Will you go to jail if caught using this information in this way?

Bingo

[DesertCat]

First, talk to a lawyer before you take advice from this board. My understanding is the correct answer is "no-one knows". The SEC likes to keep the definition of insider trading vague so they can put the fear of god (and the SEC) into people in situations like this.

If I had to guess, I'd bet they'd prosecute you, who knows if they'd win. Supposedly Martha Stewart wasn't guilty of insider trading, just of lying to investigators. If she had been honest and said she was trading on her broker's disclosure of the CEO's trades, the word is she would have gotten off scott free.

[MrMon]

A lot depends on how you have access. If you found a copy in the gutter, you're probably safe. In this case, you have regular access, so that's different. Regular access, even if not an employee, can make you an "insider". But, the question here is, is this insider info? It's not company info. Goldman Sachs has certainly traded on it, as have their clients. If Goldman Sachs releases this stuff to clients before it hits the street, then you're probably okay. But consult a lawyer first. You might be violating something else, like confidentiality agreements.

[imported_bingobazza]

The first point is that this research would be available before it is disseminated to clients, who would all get it electronically simultaneously. The second point is that

'Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of thier households from owning securities of any company in the analysts area of coverage'. None of this applies to me.

Importantly,

'This research is based on current public information that we consider reliable'.

So this cant be classed as insider trading, even though the very publication of an upgrade may cause the share to climb. Am I right?

Bingo

[squiffy]

There are two problems.
First, you downplay it, but the access itself could get you into trouble. If you do printing work for Goldman, you can certainly be fired by your employer and probably sued by Goldman for theft of proprietary info, possibly forced to disgorge the profits that way. If you are an independent janitor "stealing" Goldman proprietary info, you could possibly be sued. Of course, this would be a civil suit and not necessarily trading on insider information.

So, it's not part of your hypothetical, but the access you assume is a big potential problem.

Second, is this insider trading?

Insider trading. "Insider trading" is buying or selling a security while having material, nonpublic information about the security, in breach of a fiduciary duty or other relationship of trust and confidence. Insider trading may also include "tipping" such information, securities trading by the person "tipped," and securities trading by persons who misappropriate such information. Insider trading is a felony, and the SEC can levy large civil penalties for violations.

Now, you define the underlying info as publicly available information. But you ignore the fact that Goldman's particular compilation of that info and it's analysis of the info, and its advice on whether to buy or sell the stock may be nonpublic proprietary information which the Goldman employees have an obligation to keep confidential until disclosure to clients.

So the employee who tips you off or if you steal the info without inside help, you very well might be committing insider trading, if you use the info to trade.

There was a famous case about 10 years back when the writer or possibly the printer of the Wall St. Journal column Heard on the Street somehow got into trouble for trading on the info prior to its publication. The picks and pans in the column tended to affect stock prices.

But I have to admit, I don't remember if it was insider trading or whether the person was prosecuted for some other state civil violation or criminal violation.

I am a lawyer, but am not all that familiar with federal securities law.

Though if I have some time on Monday, I will try to look it up.

Some general web searches should help provide the legal info. But you need to do the basic issue spotting first and a law school background helps with that.

But good question. Not sure if it is a violation of Federal securities laws against insider trading, or rather trading on inside info.

Note, the person who is tipped off by an insider, who receives the inside info and trades on it or passes it along, seems to be liable too. So not being an "insider" does not necessarily get you off the hook. Otherwise whenever the insider has his friend or family member trade for him, there would be no problem. But if it is inside info, then both the tipper and the tippee can be prosecuted, it would seem.

[squiffy]

A very brief summary of insider trading. You would really need to look at the language of the statute and specific cases. And you would need to provide more specific detail in your hypothetical about how the info is obtained, the nature of the info, from whom, by whom, etc.

Your hypo is probably too general to make a call one way or the other.

http://beginnersinvest.about.com/cs/newinvestors/a/102702a.htm

[squiffy]

A couple of references to the scandal involving the writer of Heard on the Street. His roommate knew about the contents of the article before it came out. And traded on it with a friend, with the writer's knowledge.

http://www.harrybrown.org/articles/Insidertrading.htm

Looks like there were two separate scandals involving two separate authors of the same column. One in 1996 and again in 2002.

http://www.aidsinfobbs.org/articles/wallstj/96/040

But I haven't found any specific legal analysis of the conduct. Nor have I found any article stating what punishment they received.