Dear Dr. Mossman: My patient is an officer in a large corporation. During therapy, he sometimes talks about how the company is doing. Would I risk malpractice liability if I used this information in managing my retirement investments?
Submitted by "Dr. B"
As most physicians find out within a short time of finishing medical school, doctors learn all kinds of useful things from their patients, including information that can help them manage personal matters outside their practices. But are you allowed to use nonpublic business information to make investment decisions?
As this article explains, legal rules and case law suggest that if psychiatrists or therapists act on potentially profitable business information incidentally mentioned by a patient during treatment, they may be subject to serious legal problems. To explain why, we'll begin with a brief overview of business terms, including "securities" and "insider trading." Then, to answer Dr. B's question, we'll look at what kind of legal consequences may result if mental health professionals are found guilty of "misappropriating" confidential business information.
Securities and security rules
Approximately one-half to two-thirds of Americans have money invested in the stock market--either through their retirement plans, by owning mutual funds, or by holding stocks of individual companies.' Stocks are a type of financial instrument, or security, that companies issue to raise capital. Companies also raise money by issuing debt, typically in the form of bonds that pay interest to the holder, who in buying the bond has in effect loaned money to the company. Derivatives refer to securities that have prices that move up or down depending on the value of some underlying asset, such as stock prices. (2)
Stock prices fluctuate in reaction to general economic developments--changes in the unemployment rate, in the cost of basic materials (eg, oil or metals used in manufacturing), or in government policies that influence consumers' purchasing decisions. But the key factor in determining the price of a company's stock is investors' beliefs about the company's future earnings. (3) Because investors usually have to make educated guesses about a company's future, actually knowing something about a company before the general public finds out would give an investor a huge--but possibly unfair--advantage over other investors.
Making markets fair for all investors is the key purpose of U.S. laws on trading securities. In the 1930s, Congress created the Securities and Exchange Commission (SEC), a federal agency charged with ensuring that companies report the truth about their financial situation and that potential investors receive full, fair disclosure of available public information. (4) Among the many ways that the SEC does this is by enforcing regulations concerning "insider trading."
Corporate "insiders" (eg, directors or employees) often know a lot about how their businesses are doing, and they buy or sell stock in their own companies. Such trading is legal if the insiders follow federal regulations about the timing of their investments and report them publicly.
Insider trading is illegal, however, if an individual acquires material, nonpublic information about a corporation through a relationship that involves trust and confidence and then uses that information when buying or selling a security The SEC has prosecuted corporate employees who traded securities after learning of confidential developments in their companies, friends and family members of corporate officers who bought or sold securities after getting such information, and employees of law firms who misused information they received while providing services to corporations whose securities they traded. (5)
To be guilty of insider trading, a person must:
* buy or sell a security based on information that the person realizes is material and nonpublic, (6) and
* have received the confidential information under circumstances that create a duty of trust or confidence. …