Tipping and Misappropriated Information: What Did the Source Get in Return?

Tipping and misappropriated information can let a trader act on news the market has not seen. The information might be an unreleased earnings number, a pending acquisition or another customer’s sell order. If you work inside a fund, brokerage or corporate finance team, you may know who supplied it and why. Our broader insider trading page explains the trading conduct. Here, the focus is the relationship behind the tip: what the source owed, what the recipient understood and what the source expected in return.

What Makes Information Misappropriated?

Misappropriation in securities trading means using confidential information while betraying the person or business that entrusted it to you. The Supreme Court’s explanation of that betrayal focuses on the source of the information. A company employee may hold information through work, and an accountant or consultant may receive it while serving the company. The business relationship explains both the access and the obligation to keep the information confidential.

A person entrusted with confidential information can misuse it by trading on it themselves. A tip can also carry that information to another trader. Inside a brokerage, a customer’s order can itself be valuable confidential information. The Securities and Exchange Commission’s ImClone trading complaint, discussed below, tied the broker’s alleged breach to his employer’s client-confidentiality policies.

What Does the Tipper Get in Return?

The personal-benefit question asks what the person supplying the tip expected to gain or give. The benefit can appear as a financial return, an improved business relationship or a gift of information to someone expected to trade. The Supreme Court has recognized a gift to a trading relative or friend as a route to personal benefit. Galleon’s alleged reciprocal trading and the ImClone broker’s alleged effort to improve a client relationship show how different that benefit can look in practice.

The recipient’s knowledge belongs beside the source’s purpose. When information travels through several people, we examine what each person said about where it came from and why it was being shared. For an insider who knows the conversations behind the trades, the concrete facts are the promised return, the relationship being cultivated and what the recipient understood about the exchange.

Galleon’s Alleged Payback Was a Trade in the Source’s Account

Galleon Management’s alleged tipping network supplied confidential earnings and takeover information to a hedge fund manager through friends and business associates. The Securities and Exchange Commission’s October 2009 charging announcement described more than $25 million in alleged illicit gains. The announcement traced the information through corporate sources and fund personnel into particular trades.

The Securities and Exchange Commission alleged that an Intel Capital managing director supplied information about Intel quarterly earnings and a pending Clearwire joint venture in which Intel had invested. Galleon’s manager allegedly used that information to trade for the fund. As payback, the manager or someone acting for him allegedly executed trades in the source’s personal brokerage account using inside information about Hilton and PeopleSupport. Those trades allegedly produced nearly $250,000 in illicit profits for the source. The alleged thank-you was another inside trade.

Another path ran through a portfolio manager at New Castle. The SEC alleged that an Akamai Technologies executive supplied her with inside information, which she used to trade for a New Castle fund and also passed to Galleon’s manager. He allegedly traded for Galleon on that information. The intermediary was both a trader and a source for the next trader.

The Securities and Exchange Commission also alleged tips from a McKinsey director and an IBM senior vice president about pending deals. Someone inside those businesses may recognize the information’s origin before anyone looking at the trading account can explain it.

A Broker Allegedly Turned Client Sell Orders Into a Tip

The Securities and Exchange Commission’s ImClone trading complaint alleged a different source of confidential information: orders placed by other brokerage customers. As the market awaited the Food and Drug Administration’s decision on ImClone’s cancer drug Erbitux, a Merrill Lynch broker learned that ImClone’s chief executive and his daughter wanted to sell all their ImClone shares held at the firm. According to the complaint, the broker instructed his assistant to pass that information to another client, who then ordered the sale of her own ImClone shares.

The complaint alleged that those orders were nonpublic and that the broker knew the firm’s confidentiality policies. It identified his signed acknowledgment of those policies and quoted the restriction on sharing client orders:

The Securities and Exchange Commission alleged that the broker benefited by improving his relationship with an important client. He handled her personal accounts and pension, as well as business connected to her company. The complaint also alleged that she knew the information was confidential and that the broker had betrayed Merrill Lynch by sharing it, or recklessly ignored those facts. We see the bargain in that allegation: one client’s confidential order became another client’s service perk.

For a brokerage employee, the relevant records reach beyond the stock sale. The customer order, the instruction to the assistant, the message to the recipient and the policy acknowledgment each describe a different part of the alleged conduct. The employer’s rule and the employee’s understanding of it sit alongside the trade.

An Earnings Release Has a Private Window Before It Becomes Public

An earnings tip can exploit the period when a company is compiling and checking information for public release. A 2018 paper in the Wisconsin Law Review argues that periodic reporting deliberately allows time to analyze and verify significant information. Selective trading during that interval can divert the benefit of that work to a few people.

For someone preparing financial results, the confidential number has a history: when it became available internally and when the company released it. Galleon’s alleged earnings tips put that interval into a trading context. The numbers were being prepared for everyone. The alleged head start was private.

What Evidence Connects a Tip to a Trade?

Evidence connects a tip to a trade by joining the information, the duty, the communication, the recipient and the transaction. The communications and trading records become more useful when an insider can explain what the information meant in the business. A confidential earnings figure and a client’s sell order have different origins, different reasons for being protected and different paths to the trader.

The Galleon allegations show why the source’s account can matter as much as the fund’s account. The fund allegedly traded on the source’s tips, while the source allegedly benefited from trades made in his own brokerage account. In the ImClone complaint, the asserted benefit instead sat in the broker’s relationship with a valuable client. We examine the return to the source alongside the recipient’s trade.

A person several conversations away from the original source may have received only part of the explanation. Messages identifying the source, instructions to an intermediary and the content of the call can help show what the recipient understood. We work through those connections with the person who knows the relationships behind them, including which parts they saw themselves.

SEC Enforcement and the Whistleblower’s Information

The Securities and Exchange Commission investigates insider trading and brings civil enforcement actions. Its Galleon announcement described a civil case and acknowledged assistance from the U.S. Attorney’s Office for the Southern District of New York and the FBI. We assess the authorities relevant to the information with you.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. For insider trading reports, the Securities and Exchange Commission’s separate whistleblower program can pay 10% to 30% of sanctions collected in an action with sanctions over $1 million. We assess a securities fraud report with you, including the information’s source and the enforcement it can support.

You Know Who Passed the Information

If you know how confidential earnings, deal news or a client’s orders reached a trader, speak to one of our whistleblower experts. We work with you to connect the source, the exchange and the trading records, and bring in securities fraud whistleblower lawyers who understand tipping cases. You bring the knowledge of what happened inside the business, and we stay beside you through every step.