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I work for a publicly traded company, and part of my compensation includes stock. We've gotten a bunch of (recurring) training of what not to do with this stock to avoid insider trading -- for example, if we have advanced knowledge of something bad we shouldn't sell our shares before that news becomes public knowledge, etc.

My understanding is that, basically, my position at my company gives me early information about the company that I shouldn't leverage. But my position gives me early information about the entire industry -- so I'm curious if it means that pretty much any stocks I purchase from my company's competitors in the same industry would therefore be also tainted.

An example. Say I work for Foo Widget Corp. It's the end of the quarter, and I know that my company is going to miss our projections/guidance/etc by a lot: the widget market has unexpectedly cooled. Because I have knowledge based on privileged information (sales numbers and specifics), I know that I shouldn't sell my Foo Corp stock because this is insider trading.

But I also hold stock in Bar Inc, who also manufactures widgets and is Foo Corp's competitor. Since I know that the widget market is in trouble as a whole, can I sell my Bar Inc stock, or is that also insider trading since it's based on my Foo Corp experience and information?

Roddy of the Frozen Peas
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4 Answers4

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The SEC prosecuted Matthew Panuwat of Medivation in 2021 for exactly this. Panuwat learned his company would be acquired by Pfizer, which would obviously drive up Medivation's stock price. Panuwat believed this would drive up Incyte Corporation (a direct competitor) stock also, since people might assume pharmaceutical companies were interested in acquiring other companies in the same niche. The SEC complaint says:

According to the SEC's complaint, filed in the U.S. District Court for the Northern District of California, Matthew Panuwat, the then-head of business development at Medivation, a mid-sized, oncology-focused biopharmaceutical company, purchased short-term, out-of-the-money stock options in Incyte Corporation, another mid-cap oncology-focused biopharmaceutical company, just days before the Aug. 22, 2016, announcement that Pfizer would acquire Medivation at a significant premium. Panuwat allegedly purchased the options within minutes of learning highly confidential information concerning the merger. ...

The SEC's complaint charges Panuwat with violating the antifraud provisions of the federal securities laws, and seeks a permanent injunction, civil penalty, and an officer and director bar.

Jahan Claes
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Insider trading is illegal when you use material non-public information about a company as a basis for trading stock. Just knowing that "the widget market is in trouble as a whole" may not be material enough for a specific company to make trading illegal - especially if that feeling is based on public information. It would be a clearer case if you knew that Bar was about to lose a contract (and that information was not public), but just having industry knowledge may not be material enough to be illegal.

More specifically, just because your company is having a bad quarter doesn't necessarily mean that your competitor is too. And the information that indicates that "widget market has unexpectedly cooled" would have to not be publicly available for it to be insider trading. There's nothing illegal about connecting dots that anyone could see legally.

However, at the end of the day, it matters more what the SEC claims is illegal and what they can convince a judge is illegal.

D Stanley
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I see two possible issues:

If the investment in the competitor is large you may have created a conflict of interest just by the fact of ownership. This could be a concern that your company has.

Insider trading. You are using information from your job to make investment decisions. If the number of shares you trade is large enough it might be noticed by the government regulators. They could determine that you used your inside information to buy or sell shares.

There doesn't have to be an employment link between you and the company. If you were an outside auditor and you sold based on the unreleased audit results you could be in trouble. If you told a friend and they bought or sold shares you both could be in trouble.

And by shares I mean any investment product.

mhoran_psprep
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I would be hesitant.

I've been in that position -- close enough to executive management to be an "insider" for company A, but not close enough to actually know anything important. In my case, I owned some shares in company B. I was never faced with a situation where any information from company A affected how I traded company B.

But, surprise! Not being tight enough into company A, I didn't know that company A agreed to be purchased by company B until it was publicly announced. I couldn't trade shares in either company.

If you are an insider enough with company A to know the details of the sales, and why the sales are (in this case) down, and that isn't something you can read about in the press, and especially if you wouldn't be allowed to write about it in the press yourself, than I would assume that the SEC could make life unpleasant (and expensive) even if you didn't end up serving jail time.

cmm
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