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To give some examples of what I have in mind:

  • Let's say a high-level manager at Tesla finds out they're planning to build drones using newly developed batteries that would be a huge leap compared to what's on the existing market. The manager then proceeds to short a few millions worth of DJI stocks as he believes they would crash when Tesla makes the announcement.
  • The very same manager at Tesla finds out that Elon Musk wants to open an R&D center in Bratislava, which would employ 10 thousand highly-skilled employees. The manager then proceeds to purchase real estate in central Bratislava as they rightfully believe that the property will balloon in cost in the coming years.

Given that the manager does not profit in any way from Tesla stocks, would that be something illegal under existing insider trading laws?

Rodrigo de Azevedo
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JonathanReez
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3 Answers3

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I think you'll find that insider trading is pretty loosely defined, and left up to the SEC to interpret and enforce as they see fit. According to the Securities Exchange Act of 1934: With this Act, Congress created the Securities and Exchange Commission. The Act empowers the SEC with broad authority over all aspects of the securities industry.....

In the example cases you laid out, I think you'd risk being prosecuted under both the Misappropriation Theory and also the aforementioned Securities Exchange Act.

"The securities laws broadly prohibit fraudulent activities of any kind in connection with the offer, purchase, or sale of securities."

Of course, I'd say your chances of actually being prosecuted are probably much higher in case #1. Where it could be fairly obvious if someone disrupted the normal trading of a stock and benefited from (or even contributed to) it crashing. But there's nothing to say that someone wouldn't also discover the real estate scheme and try to get you prosecuted for that as well.

Keith
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I find it highly unlikely that either transaction would be considered illegal. Illegal insider trading requires "material, nonpublic information about the security." The information in your scenario is nonpublic information about a different company. Unless there is a direct relationship between the information and DHI (e.g. if Tesla would cancel an existing contract because of the new technology) then it is purely speculative that the news would impact DJI at all.

For the second example, again the investment is purely speculative. It would depend, of course, on the laws in Bratislava, but in the US, there are no laws that I am aware of that make real estate investing based on insider information illegal. There are laws that require sellers to disclose information that might affect the value of a property (e.g. if the major tenant of an office complex is planning to move out), but that's more of a breach of fiduciary duty that securities fraud.

D Stanley
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If company A plans to do something that affects company B in a major way (good or bad), and you know about this while the general public doesn't, then you have insider knowledge of company B. This Tesla manager may have insider information of DJI that even the supposed insiders of DJI (CEO, management) don't have.

So yes, trading on DJI stock based on this information is insider trading.

For the Bratislava situation, you'd need to know the laws of Slovakia to see if it's considered insider trading and illegal in Slovakia (I have no idea); you'd also need to know whether the USA considers this a crime, and one that the USA would prosecute. They might or might not care about what happens in Slovakia.

gnasher729
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