As a recent case against Citigroup shows, advanced disclosure of
research may be prohibited by brokerage firm policies but it is not
Identifying insider trading sometimes seems like a game of three-
card monte: first you see it, then you don't.
A recent settlement by Citigroup with a Massachusetts regulator
over leaking internal research to clients raises question about when
such disclosure crosses the line into insider trading.
Citigroup agreed to a consent order entered by the Massachusetts
Securities Division requiring it to pay a $30 million penalty after
it failed to have proper procedures in place to protect against the
early release of research by the firm's analysts.
One of the analysts, Kevin Chang, gave information to a few
institutional investors, most notably SAC Capital Advisors, about a
decrease in orders for iPhones that would affect Apple and one of
its main suppliers, the Hon Hai Precision Industry Company.
The consent order shows how SAC and other institutional
investment firms badgered Mr. Chang for his analysis when a
competing investment bank issued a research report calling into
question optimistic views about the number of iPhones that would be
shipped. After revising his estimates substantially downward, he e-
mailed those figures to SAC and other large institutional clients on
Dec. 13, a day before Citigroup released his revised research report
on Hon Hai. Apple shares dropped about 5 percent on Dec. 14.
Those actions appear to be a classic insider trading case:
leaking material nonpublic information that will affect the price of
companies to a few favored investors who can trade ahead of the
market. Throw in the fact that SAC, which has been indicted on
charges of insider trading violations, was a recipient, and it seems
like a slam dunk.
One of the largest trades by SAC in its criminal case involves
tips from a doctor to a portfolio manager at the firm about
disappointing results from a drug trial that allowed SAC to avoid
losses and make short sales. So why isn't this case exactly the
The difference is that insider trading based on tipping requires
the source of the information to violate a fiduciary duty when
giving it out. In Dirks v. S.E.C., the Supreme Court said that "the
test is whether the insider personally will benefit, directly or
indirectly, from his disclosure." Mr. Chang was not a tipper because
he made the disclosure in connection with his job as an analyst. He
did not receive anything from the firms that received his
Citigroup prohibits its employees from giving out previews of
research. But violation of an internal policy does not turn this
case into an insider trading issue, unless there was a special
benefit provided by the recipients to get him to release the
That explains why this is a case against Citigroup and not Mr.
Chang and SAC. The Massachusetts regulator asserts that the firm
failed to properly supervise its analyst to prevent advance
disclosure of its research, which means the analyst was acting on
behalf of the firm when he selectively disclosed his conclusions
about iPhone shipments.
This case is similar to a 2012 administrative proceeding brought
by the U.S. Securities and Exchange Commission against Goldman
Sachs, after the firm's research was selectively disclosed before