Professor Bainbridge...on law, politics, religion, culture & food

The Limits of Insider Trading

From the NY Post (HT: Dealbreaker):

The Securities & Exchange Commission is looking into whether Goldman Sachs cheated its way to enormous profits - even as the rest of the financial industry was suffering through a massive downturn.  The central issue, as best I can determine, is whether Goldman had any insight that other firms didn’t have during the May and June period when subprime mortgage securities were deteriorating in value. ...

One person who discussed the matter with the SEC says the investigator seemed curious as to whether the investment banking side of Goldman’s business could have tipped off the trading side of that brokerage firm to the extent of the problems that would soon be encountered by Bear and others.

And there also seemed to be a philosophical discussion as to whether that would constitute insider trading even if there was such a leak. The SEC doesn’t comment on any investigation it might be undertaking. My sense is that the SEC’s interest is preliminary.

Classic disclose or abstain insider trading liability would be premised on Goldman owing a duty to the people on the other side of the deal, which would be absent unless they were dealing with Goldman clients. Misappropriation would require a breach of duty to the source of the information. If the information was developed internally by Goldman’s investment bankers who then tipped the firm’s trading desk, there’d be no breach. Strikes me as an easy case, unless the information about the subprime mortgages came from a source outside Goldman to whom the firm owed fiduciary duties.