Insider Trading and CI

December 8, 2016

One of the issues that (erroneously) arises when those unfamiliar with competitive intelligence hear about it is that it might be “insider trading”. The existence of this concept has caused unnecessary confusion, about which I have previously written.[1] Insider trading in fact refers to people trading in the stock of public companies using so-called insider information, which is illegal under federal law. CI is not the same thing. But there is significant confusion which is best exemplified by the erroneous assertion that developing CI on public companies sometime violates the US securities laws.

A recent US Supreme Court decision may help non-CI practitioners make a clear distinction between CI, developing intelligence on competitors, using legal and ethical methods, and insider trading, using non-public “material” information to trade in the stock of a public company.

First, the unanimous decision[2], written by Justice Alito, succinctly defined insider trading:

“Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission’s Rule 10b–5 prohibit undisclosed trading on inside corporate information by individuals who are under a duty of trust and confidence that prohibits them from secretly using such information for their personal advantage.”

Second, the Court pointed out that this duty extends beyond a person who has a “duty of trust”, that is an employee or third party who knows that the information is “inside corporate information” and must be kept confidential. It must be used for trading stock in that company:

“Individuals under this duty may face criminal and civil liability for trading on inside information (unless they make appropriate disclosures ahead of time). These persons also may not tip inside information to others for trading. The tippee acquires the tipper’s duty to disclose or abstain from trading if the tippee knows the information was disclosed in breach of the tipper’s duty, and the tippee may commit securities fraud by trading in disregard of that knowledge. In Dirks v. SEC, 463 U. S. 646 (1983), this Court explained that a tippee’s liability for trading on inside information hinges on whether the tipper breached a fiduciary duty by disclosing the information. A tipper breaches such a fiduciary duty, we held, when the tipper discloses the inside information for a personal benefit. And, we went on to say, a jury can infer a personal benefit—and thus a breach of the tipper’s duty—where the tipper receives something of value in exchange for the tip or ‘makes a gift of confidential information to a trading relative or friend.’”

What does all of this mean to those of us in CI?

  • First, data obtained from public sources is not insider information, as it was not acquired from a person with “a duty of trust”.
  • Second, any data you obtain in developing CI from someone employed by a public company is not insider information unless, I repeat unless, that information was transmitted for trading purposes. Also, the person providing the insider information must receive something of value in exchange for that data. Or as the Court put it, “the disclosure of confidential information without personal benefit is not enough.”
  • Third, if the person receiving such data does not trade on it, there is no insider trading.
  • Fourth, any analysis you develop from this kind of data is not insider information, even if it produces a conclusion equivalent to some piece of insider information.

So, aggressive and insightful CI, legally and ethically developed, cannot be a violation of the US securities laws.

[1] https://diy-ci.com/2012/06/21/insider-information-and-competitive-intelligence-2/; https://diy-ci.com/2015/08/18/competitively-sensitive-data/; https://diy-ci.com/2014/04/23/talk-to-listen-in-on-and-watch-your-competitors/.

[2] Bassam v. United States, https://www.supremecourt.gov/opinions/16pdf/15-628_m6ho.pdf.


One Comment on “Insider Trading and CI”

  1. […] One of the issues that (erroneously) arises when those unfamiliar with competitive intelligence hear about it is that it might be “insider trading”. The existence of this concept has caused unnecessary confusion, about which I have previously written.[1] Insider trading in fact refers to people trading in the stock of public companies using so-called insider information, which is illegal under federal law. CI is not the same thing. But there is significant confusion which is best exemplified by the erroneous assertion that developing CI on public companies sometime violates the US securities laws.  […]


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