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.


[2] Bassam v. United States,

Competitively sensitive data

August 18, 2015

The SEC announced indictments on August 11, 2015 for insider trading. What was unusual was that these were not indictments of corporate insiders, but rather of “hackers” who had been accessing corporate press releases before they were published.[1] These hackers hacked into information on earnings and arranged for trading on the impacted stocks before the releases were made public.

“In one particularly dramatic instance on May 1, 2013, the hackers and traders allegedly moved in the 36-minute period between a newswire’s receipt and release of an announcement that a company was revising its earnings and revenue projections downward.  According to the SEC’s complaint, 10 minutes after the company sent the still-confidential release to the newswire, traders began selling short its stock and selling CFDs [contracts for difference], realizing $511,000 in profits when the company’s stock price fell following the announcement.”

This case shows the value of sensitive information which is accessed before it is made “public” and also should reinforce the need to protect such information. In this case, there was only a short period of time before the information was made public, but, for those few moments, the non-public data was worth over ½ million dollars.

For those of us in competitive intelligence, there is a similar lesson. Competitively sensitive information must be kept from your competitors, at least so long as its loss would be damaging. However, very few firms work to protect themselves against CI (and, as this series of indictments shows, not always successfully against hackers, either).

Those of us who work with CI should be the most forceful advocates for the creation and maintenance of a business-wide program to defend against the CI efforts of our competitors.[2] Such a program is an invaluable supplement to your own (offensive) CI efforts.

“If I am able to determine the enemy’s dispositions while at the same time I conceal my own, then I can concentrate and he must divide.” — Sun Tzu, The Art of War


[2] For much more on that, see John J. McGonagle and Carolyn M. Vella, Protecting Your Company Against Competitive Intelligence, Praeger, 1998.

Talk to, listen in on, and watch your competitors?

April 23, 2014

A recent article in Entrepreneur[1] suggested that business owners “fraternize” with their competition. One of the key suggestions was “[w]hen speaking about your business with a competitor, [you] should give up 2% more information than you are naturally inclined to give up.” What?

Elicitation of competitors is a valid, even powerful, research tool in competitive intelligence. However, such work should be done very carefully and completely honestly.

First, realize that no one is that interested in what you are doing – unless it is to their benefit to collect your data. Never play games. For example, never use a contact with a competitor as an occasion to engage in disinformation. If you engage in disinformation, it is unethical, possibly illegal, and, in addition, it can mess up your own communications with your personnel, your customers and others.

Second, it is illegal and unethical to seek to appropriate trade secrets. No exceptions here.

Third, if you are dealing with competitors that are publicly traded, there is another obligation you have to respect: certain kinds of “commercial secrets” are protected under the concepts of “insider trading” under the federal securities laws. The scope of this obligation is well beyond a single blog; but as an outsider, you have a duty not to misappropriate such protected information. However, the boundaries of your obligations are not nearly as clear as one would like[2].

Two insider trading examples noted in a recent article in The Economist[3] illustrate how this concept may impact competitive intelligence:

“[One] jury determined that there was nothing wrong with using [such] valuable information overheard when a friend was speaking on the telephone…. [Another] jury found for workers at an Illinois railyard who had bought shares in their company after seeing unfamiliar people in suits looking around. They concluded that a takeover was imminent.”

In other words, if you can develop competitively important data legally and ethically, feel free to and use it. However, do not try to engage in elicitation without proper training and without a clear understanding of the legal and ethical limits.


[1] Ross McCammon, “Behind frenemy lines”, Entrepreneur, May 2014, 28-29.

[2] For more on this, see the interesting article, Stephen J. Crimmins, “Insider trading: where is the line?”, Columbia Business Law Review, vol. 23:2, 330 – 68. For example, he notes that “[i]t has long been recognized that no duty [to avoid trading a stock] arises when material nonpublic information is simply overheard, in an elevator, a taxi, or elsewhere. But…the SEC has charged [in some complaints] that a duty may arise where the insider (who inadvertently discusses confidential information) and the listener happen to be friends.”” P. 338-39.

[3] “Knowing too much”, The Economist, April 12, 2014, p.71-72.

Insider Information and Competitive Intelligence

June 21, 2012

The business press is filled with talk about the fall from grace of Rajat K. Gupta, the retired head of McKinsey & Company and a former Goldman Sachs and Procter & Gamble board member. What he was convicted of doing was passing confidential information to an outsider who traded on that, a violation of the Securities Exchange Act. So what does this have to do with CI?


Thanks for asking. The answer is nothing. But isn’t getting confidential information through, say elicitation interviews, therefore also illegal? No. First, CI professionals do not try and get trade secrets and other confidential information, What they try to do is get enough data to draw a conclusion, that is through analysis. Sometimes, that analysis can be spot on, and produce a startling result. But that is the benefit of CI – using public sources to develop intelligence on which you take action.


Just remember, there are lines out there. They do not apply to sound, ethical CI practices. But, if you are tempted to stray into a grey zone, remember, you have left the world of CI and are entering the world of Rajat Gupta.