Tim Esteben's avatar
$5.6m follower assets
Insider Trading off of a Stock Adviser Newsletter
An IT professional named David Stone was able to access an investment newsletter's stock picks before they were announced to the advisor's paying subscribers. He made ~$3 million from trading these stocks.

While it was certainly wrong for Stone to access the picks without permission, and morally wrong for him to front-run the picks, I am curious as to why this is being prosecuted as securities fraud.

Any securities fraud experts in the room?

If a stock advisor newsletter uses only public information, to make their recommendations, if someone gets hold of those recommendations, isn't the crime that they stole from the newsletter? (And not securities fraud?)

As far as I'm aware, the definition of securities fraud includes 'non-public' information. Here, the non-public information is simply which stock the newsletter chose. Which... how big of a newsletter do you need to have for that to be relevant to move the markets?

Young Money Capital's avatar
Stock research is a closely guarded secret at investment firms. Sell-side and buy-side employees at the same firm are not allowed to talk to each other and are often segregated by different floors or buildings to avoid the appearance of misappropriation of research. Stock recommendations have the ability to move the market and knowing what the recommendation is before it is publicly released is 'non public information'. The non-public part isn't what is written in the report, but that the individual is releasing a recommendation on the security which will move the market. I hope this clarifies your question.
Tim Esteben's avatar
@youngmoneycapital Yes, that is helpful— my follow up question would be: if you paywall your newsletter and then tell me what you are going to recommend before you release it, is that securities fraud?

By paywalling your newsletter you would have created 'non-public' information, but the vast majority of non-public information in non-material (and the vast majority of newsletter picks are also inconsequential).

It sounds like the additional piece that matters is that it can "move the market" but how much does the market have to "move" for for this to be against the law? And how can you know beforehand that it will move the market? Most picks from most stock recommendation services won't move the markets.

Anyway, this was just peaking my curiosity. At the end of the day David Stone shouldn't have done what he did and that's really all that matters.
Young Money Capital's avatar
@tim_esteben That's a great question. I'm pretty sure it would be securities fraud to tell someone what you are going to recommend something before releasing it and they take a position without you disclosing it.

I also believe that even if a newsletter is paywalled, it is not considered non-public, because theoretically anyone could subscribe. Similar idea to theoretically anyone can launch a satellite to count cars in a mall parking lot (which is not illegal).

Unfortunately, securities laws are very vague. The law states that the information has to be material and I think that could be a highly debated point.

It is legal to use non-material non-public information combined with material public information to take a position (mosaic theory), but when someone crosses over to material non-public information that's when it becomes illegal.