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[Podcast Episode] What is Insider Stock Trading? · Uncensored Objection

• 0:00
  SPEAKER_02: You know that feeling when a stock price makes a move that just seems,
• 0:04
  SPEAKER_02: well,
• 0:04
  SPEAKER_02: weird,
• 0:06
  SPEAKER_02: a bit unnatural.
• 0:07
  SPEAKER_02: Like maybe someone knew something the rest of us didn't.
• 0:10
  SPEAKER_00: Exactly.
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  That's sort of the suspicion that brings us to today's deep
• 0:13
  dive looking into insider trading.
• 0:16
  SPEAKER_00: Right.
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  SPEAKER_00: We're really digging into the fairness of the financial markets here.
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  I mean,
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  this is where so many people are putting their savings,
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  their retirement funds.
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  And when that fairness gets questioned,
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  well,
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  it affects everyone,
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  doesn't it?
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  SPEAKER_00: It really does.
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  SPEAKER_00: The ripples spread out.
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  So our mission today,
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  let's say,
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  is to pull back the curtain on insider trading.
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  We want to define it properly,
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  look at some real examples,
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  maybe some surprising ones.
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  SPEAKER_00: And talk about who's actually policing this stuff,
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  SPEAKER_00: how they catch people,
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  SPEAKER_00: what happens when they do.
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  And interestingly,
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  when trading by insiders might actually be OK,
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  when it's legal,
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  And it's crucial,
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  I think,
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  to get that this isn't just some like Wall Street soap opera.
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  SPEAKER_00: Yeah.
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  SPEAKER_00: The health of these markets.
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  SPEAKER_00: It affects the whole economy.
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  SPEAKER_00: Jobs, investment, everything.
• 1:00
  SPEAKER_02: Right.
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  SPEAKER_00: When trust dips...
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  SPEAKER_02: It impacts all of us.
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  SPEAKER_02: It really does.
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  SPEAKER_02: This is info every American should probably understand.
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  SPEAKER_00: Definitely.
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  SPEAKER_02: Okay.
• 1:08
  SPEAKER_02: So let's dive in.
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  When we talk about illegal insider trading,
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  what are we actually pinpointing there?
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  SPEAKER_00: Okay.
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  So at its core,
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  it's about buying or selling securities,
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  stocks,
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  bonds,
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  options,
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  whatever.
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  SPEAKER_01: Right.
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  Based on important secret information,
• 1:25
  information the public doesn't have.
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  SPEAKER_00: And that gives the trader this unfair advantage.
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  SPEAKER_00: Right.
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  SPEAKER_02: An unfair leg up.
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  So what are the key things that have to be there for it to
• 1:35
  cross the line into illegal?
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  SPEAKER_00: There are really two essential ingredients.
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  SPEAKER_00: First, you need what's called material non-public information.
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  SPEAKER_00: MNPI is the acronym you'll hear.
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  SPEAKER_02: MNPI.
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  SPEAKER_00: Got it.
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  And second,
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  there has to be a breach of duty involved in getting or using
• 1:50
  that information.
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  SPEAKER_02: OK, material, non-public information.
• 1:53
  SPEAKER_02: Let's break that down.
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  SPEAKER_02: What makes information material?
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  SPEAKER_00: So material basically means it's information that a typical,
• 1:58
  reasonable investor would likely think is important when
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  deciding whether to buy,
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  SPEAKER_00: sell or hold a stock.
• 2:04
  SPEAKER_02: Something that could actually, you know, move the needle on the price.
• 2:07
  SPEAKER_00: Exactly.
• 2:08
  SPEAKER_00: It's something that could realistically affect the stock price.
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  SPEAKER_00: And interestingly,
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  SPEAKER_00: it's not just about whether it did move the price afterwards,
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  SPEAKER_00: but whether you'd reasonably expect it to.
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  SPEAKER_00: That forward look is key for regulators.
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  SPEAKER_02: OK, so what kind of stuff are we talking about?
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  SPEAKER_02: Give us some examples.
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  SPEAKER_00: Well,
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  think about big news like an upcoming merger or acquisition
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  that hasn't been
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  SPEAKER_00: announced yet.
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  SPEAKER_01: Huge news usually.
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  SPEAKER_00: Definitely.
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  Or significant updates on the company's financial health
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  earnings reports that are
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  SPEAKER_00: way better or way worse than expected.
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  SPEAKER_01: OK.
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  SPEAKER_00: Major product news is another big one.
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  Like for a pharma company getting FDA approval for a new drug
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  or maybe a major
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  SPEAKER_00: setback in clinical trials.
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  SPEAKER_02: Right.
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  SPEAKER_02: That would be huge.
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  SPEAKER_00: Also, big changes in top management.
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  Maybe news about potential bankruptcy or major lawsuits
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  starting or government investigations.
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  SPEAKER_00: All that can be material.
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  SPEAKER_02: Seems like a pretty wide net.
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  SPEAKER_02: Anything else?
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  SPEAKER_00: Oh, yeah.
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  SPEAKER_00: Winning or losing a really big contract.
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  SPEAKER_00: Plans to change dividends or stock buybacks.
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  SPEAKER_02: Even things like stock splits.
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  SPEAKER_00: And remember, it cuts both ways.
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  SPEAKER_00: It can be positive news or negative news.
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  SPEAKER_00: Even something outside the company,
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  SPEAKER_00: like,
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  SPEAKER_00: say,
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  you secretly know about a new government regulation that's
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  going to massively help
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  SPEAKER_00: or hurt a whole industry.
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  SPEAKER_00: That could be material, too.
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  SPEAKER_02: OK, that covers material.
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  SPEAKER_02: Now, what about the non-public part?
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  SPEAKER_02: What makes it secret?
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  SPEAKER_00: Non-public is pretty straightforward, actually.
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  It just means the information hasn't been spread widely to the
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  investing public
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  SPEAKER_00: through the usual official channels.
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  SPEAKER_02: Like a press release or an SEC filing?
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  SPEAKER_00: Exactly.
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  SPEAKER_00: Things like that.
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  It's information that's still confined to a relatively small
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  group of people.
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  It's like knowing the final score of the championship game
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  before anyone else does.
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  SPEAKER_02: Right.
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  SPEAKER_02: Good analogy.
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  SPEAKER_02: So how does information become public then?
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  SPEAKER_00: It needs two things.
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  SPEAKER_00: Broad distribution,
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  getting it out there where investors can see it and enough time
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  for the market to
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  SPEAKER_00: actually absorb it.
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  SPEAKER_02: How much time is enough time?
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  SPEAKER_00: There's no hard and fast rule,
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  but generally people think about maybe one or two full trading
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  days after a wide announcement.
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  Until then,
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  it's still considered non-public and trading on it gives you
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  that unfair edge.
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  SPEAKER_02: OK,
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  SPEAKER_02: so the definition of MNPI is broad,
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  SPEAKER_02: depends on the situation,
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  SPEAKER_02: but it's always about that unfair advantage.
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  SPEAKER_00: That's the core idea.
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  SPEAKER_00: Yes.
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  SPEAKER_02: So we have MNPI.
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  SPEAKER_02: Now let's tackle that second piece, the breach of duty.
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  SPEAKER_00: Right.
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  SPEAKER_00: This is really the ethical heart of illegal insider trading.
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  SPEAKER_00: It's not just having the secret information.
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  SPEAKER_00: It's how you got it or how you're using it.
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  SPEAKER_00: Did you violate a position of trust?
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  SPEAKER_02: OK, explain that like the lawyer example you mentioned.
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  SPEAKER_00: Yeah, exactly.
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  SPEAKER_00: A lawyer has a duty of confidentiality to their client.
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  If they use secret info about the client's upcoming deal to
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  trade stock for themselves,
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  SPEAKER_00: that's a breach of duty.
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  SPEAKER_02: Or the politician you mentioned using info about a trade deal.
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  SPEAKER_00: Same idea.
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  SPEAKER_00: They have a duty perhaps to the public or their office not to misuse that
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  SPEAKER_00: information for personal profit.
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  SPEAKER_00: It's about betraying trust.
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  SPEAKER_02: So who typically owes this kind of duty?
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  SPEAKER_00: Well,
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  SPEAKER_00: the classic examples are company insiders themselves,
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  SPEAKER_00: the officers,
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  SPEAKER_00: the directors,
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  SPEAKER_00: employees.
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  They have what's called a fiduciary duty to the company and its shareholders.
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  SPEAKER_02: Meaning they have to act in the company's best interest, not their own.
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  SPEAKER_00: Precisely.
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  SPEAKER_00: So using confidential company info for personal trades.
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  SPEAKER_00: Clear violation.
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  But it feels like it must go beyond just the folks inside the company,
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  right?
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  SPEAKER_00: Oh, absolutely.
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  SPEAKER_00: The law recognizes temporary insiders, too.
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  SPEAKER_00: Think about lawyers,
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  SPEAKER_00: accountants,
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  SPEAKER_00: investment bankers,
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  SPEAKER_00: consultants,
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  SPEAKER_00: even,
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  SPEAKER_00: say,
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  employees at a printing company handling sensitive documents
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  before they're public.
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  SPEAKER_02: Ah, OK.
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  SPEAKER_00: These people get confidential information to do their jobs.
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  SPEAKER_00: And because of that, they take on a duty not to trade on it or misuse it.
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  SPEAKER_02: So if the banker working on the deal trades, that's illegal too?
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  SPEAKER_00: Yes.
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  SPEAKER_00: They breach that temporary duty of trust.
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  SPEAKER_00: And then there's another layer called the misappropriation theory.
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  SPEAKER_02: Misappropriation?
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  SPEAKER_02: Yeah.
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  SPEAKER_02: Sounds like stealing.
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  SPEAKER_00: That's pretty much the idea.
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  SPEAKER_00: You can be liable if you misuse,
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  SPEAKER_00: eventually,
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  steal confidential information from any source where you owe a
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  duty of trust,
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  SPEAKER_00: even if it's not the company whose stock you trade.
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  SPEAKER_02: OK.
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  SPEAKER_02: Give me an example of that.
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  SPEAKER_00: Sure.
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  Let's say a financial journalist finds out their newspaper is
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  about to publish a
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  SPEAKER_00: really negative story about company X.
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  SPEAKER_00: They know this story will likely tank the stock.
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  SPEAKER_02: Right.
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  SPEAKER_00: If that journalist then shorts company X stock before the story runs,
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  SPEAKER_00: they could be liable under the misappropriation theory.
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  SPEAKER_00: Their duty wasn't to company X. It was to their employer, the newspaper.
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  They misappropriated the confidential information they got
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  through their job.
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  SPEAKER_02: So it's about betraying the source of the information,
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  SPEAKER_02: not necessarily the company being traded.
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  SPEAKER_00: Exactly.
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  SPEAKER_00: It reflects this broader idea that you shouldn't profit by exploiting any
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  SPEAKER_00: confidential information obtained by breaking trust.
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  SPEAKER_02: Okay, this is getting complex.
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  SPEAKER_02: What about people who just get a tip?
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  SPEAKER_00: Ah, yes, tippies.
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  SPEAKER_00: Someone who receives MMPI from an insider, the tipper.
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  SPEAKER_00: A tippy can be liable if they trade on that info and they knew,
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  SPEAKER_00: or really should have known,
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  SPEAKER_00: that the tipper breached their duty by giving them the tip.
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  SPEAKER_02: And the tipper usually gets something out of it.
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  SPEAKER_00: Often, yes.
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  SPEAKER_00: There needs to be some kind of personal benefit to the tipper.
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  SPEAKER_00: But it doesn't have to be cash.
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  SPEAKER_02: What else could it be?
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  SPEAKER_00: It could be enhancing a friendship,
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  SPEAKER_00: maybe doing a favor,
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  SPEAKER_00: hoping for one back later,
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  or even just making a gift of valuable information to a
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  relative or friend.
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  SPEAKER_02: OK, let's loop back to that Washington, D.C.
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  SPEAKER_02: example.
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  SPEAKER_02: A policy shift is coming.
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  SPEAKER_00: Right.
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  SPEAKER_00: A big policy change,
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  SPEAKER_00: not yet public,
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  that will clearly affect certain stocks if someone inside
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  government leaks that info.
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  SPEAKER_02: They're the tipper.
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  SPEAKER_00: Yes.
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  And maybe they leak into a family member or a lobbyist or a
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  friend who then trades
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  SPEAKER_00: on it before the official announcement.
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  SPEAKER_02: That person is the tippy.
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  SPEAKER_00: Correct.
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  And both the tipper and the tippy could be in serious trouble
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  because the tippy
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  likely knew or should have figured out that the info was
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  confidential and came from
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  SPEAKER_00: an improper source.
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  SPEAKER_02: Wow, it really is a web.
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  So,
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  boiling it down,
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  using important secret info you got by breaking trust.
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  SPEAKER_02: That's the core violation.
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  SPEAKER_02: But why is it taken so seriously?
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  SPEAKER_00: Because it just completely poisons the well of market fairness.
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  It lets a few people with special access profit or avoid losses
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  directly at the
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  SPEAKER_00: expense of everyone else playing by the rules.
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  SPEAKER_02: It kills trust.
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  SPEAKER_00: Fundamentally.
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  If people think the game is rigged,
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  why would they invest their hard-earned money?
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  That slows down everything,
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  economic growth,
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  companies raising capital,
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  job creation.
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  SPEAKER_01: Right.
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  SPEAKER_00: Plus,
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  SPEAKER_00: it can create really bad incentives for the insiders themselves,
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  SPEAKER_00: maybe encouraging them to hide bad news or make risky short-term bets.
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  SPEAKER_00: It's just corrosive.
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  SPEAKER_02: Okay, that paints a very clear picture of the what and why.
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  SPEAKER_02: Now let's talk about some actual scenarios.
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  SPEAKER_02: You said it's not always the CEO in a smoke-filled room, right?
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  SPEAKER_00: Definitely not.
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  SPEAKER_00: It happens in all sorts of ways.
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  SPEAKER_00: But the common element is always misusing that privileged info.
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  SPEAKER_02: So give us a classic example.
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  SPEAKER_00: Okay, imagine a chief financial officer.
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  The CFO knows the company's quarterly earnings are going to be
• 9:06
  much worse than analysts expect.
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  SPEAKER_01: Okay, bad news coming.
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  SPEAKER_00: Right.
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  If that CFO sells a bunch of their own stock before the bad
• 9:14
  earnings news hits the public,
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  SPEAKER_00: they avoid the losses everyone else is about to suffer.
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  SPEAKER_00: That's textbook illegal insider trading.
• 9:22
  SPEAKER_01: Stay forward enough.
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  SPEAKER_01: What about those tipper-tippy situations?
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  SPEAKER_00: We see those all the time.
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  An executive is deep in merger talks,
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  maybe mentions it to a buddy over drinks.
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  If the buddy then rushes out and buys stock in the company
• 9:34
  that's about to be bought,
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  SPEAKER_00: that's insider trading.
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  SPEAKER_00: The exec is the tipper.
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  SPEAKER_00: The buddy is the tippy.
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  SPEAKER_02: And professionals handling sensitive info.
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  SPEAKER_02: Lawyers, bankers.
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  SPEAKER_00: Huge area of risk.
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  SPEAKER_00: A lawyer working on a secret deal,
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  SPEAKER_00: an investment banker structuring it,
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  SPEAKER_00: even someone at the print shop making the documents,
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  SPEAKER_00: if any of them trade based on that inside knowledge.
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  SPEAKER_00: Illegal.
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  SPEAKER_02: So it's about the access and the duty that comes with it.
• 9:58
  SPEAKER_00: Exactly.
• 10:00
  SPEAKER_00: And sometimes you don't even need direct access.
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  SPEAKER_00: Remember the misappropriation theory.
• 10:03
  SPEAKER_02: Yeah, the coffee shop example.
• 10:05
  SPEAKER_00: Right.
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  SPEAKER_00: You overhear two execs loudly discussing a huge unannounced contract win.
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  SPEAKER_00: You know it's big.
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  SPEAKER_00: You know it's not public.
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  SPEAKER_00: If you then trade on that overheard info, you could still be liable.
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  You knowingly use material,
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  non-public info,
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  even if it wasn't meant for you.
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  SPEAKER_02: That's wild.
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  SPEAKER_02: What about government folks?
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  SPEAKER_02: They must see a lot.
• 10:27
  SPEAKER_00: Absolutely.
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  A regulator knows about a new rule coming that will hammer a
• 10:30
  certain industry.
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  SPEAKER_00: They can't trade on that.
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  SPEAKER_02: Or tip someone else off.
• 10:34
  SPEAKER_00: Definitely not.
• 10:35
  And this is where things like political intelligence
• 10:37
  consultants come under scrutiny.
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  Are they gathering non-public government info and is it being
• 10:42
  used for trades?
• 10:43
  SPEAKER_02: It seems like family ties can get people in trouble, too.
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  SPEAKER_00: Very common.
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  An employee finds out about upcoming layoffs or maybe a really
• 10:50
  bad result from a drug trial.
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  SPEAKER_00: They warn their spouse or parent who owns stock.
• 10:54
  SPEAKER_02: And the family member sells before the news breaks.
• 10:57
  SPEAKER_00: Yeah.
• 10:57
  SPEAKER_00: Both the employee tipper and the family member tippy could face charges.
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  There's often an assumed duty of confidentiality that extends
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  to close family in
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  SPEAKER_00: these situations.
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  SPEAKER_00: It just shows how wide reaching this can be.
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  SPEAKER_02: It really does cover a lot of ground.
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  SPEAKER_02: OK,
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  SPEAKER_02: so if this stuff is happening,
• 11:14
  who's actually trying to catch the cheaters and how on earth do
• 11:18
  they do it?
• 11:19
  SPEAKER_00: Good questions.
• 11:20
  SPEAKER_00: The main players in the U.S.
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  are the SEC,
• 11:23
  the Securities and Exchange Commission and the Department of Justice,
• 11:26
  the DOJ.
• 11:27
  SPEAKER_02: SEC is the main market cop, right?
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  SPEAKER_00: Pretty much.
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  SPEAKER_00: They oversee the markets,
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  SPEAKER_00: investigate potential violations like insider trading,
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  SPEAKER_00: and they bring civil cases.
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  SPEAKER_02: Civil cases meaning fines, penalties.
• 11:37
  SPEAKER_00: Exactly.
• 11:38
  SPEAKER_00: They can make people pay back illegal profits.
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  SPEAKER_00: That's called disgorgement plus hefty fines on top.
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  They can also ban people from the industry or from being
• 11:46
  executives at public companies.
• 11:48
  SPEAKER_02: And the DOJ, where did they fit in?
• 11:50
  SPEAKER_00: The DOJ handles the criminal side.
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  SPEAKER_00: If the insider trading was intentional,
• 11:54
  SPEAKER_00: a clear act of fraud,
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  SPEAKER_00: the DOJ can bring criminal charges.
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  SPEAKER_02: Which means?
• 11:58
  SPEAKER_00: Much bigger fines, potentially, and prison time.
• 12:01
  They often work together at the SEC and DOJ,
• 12:03
  sharing information on big cases.
• 12:05
  SPEAKER_02: Okay, so how do they actually detect it?
• 12:07
  SPEAKER_02: Like you said, people try to hide this stuff.
• 12:09
  SPEAKER_00: They do.
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  SPEAKER_00: It's a huge challenge.
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  SPEAKER_00: Detection relies on a mix of things.
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  Sophisticated technology,
• 12:15
  deep data analysis,
• 12:17
  and crucially,
• 12:18
  human intelligence tips.
• 12:19
  SPEAKER_02: Tell me about the tech side, market surveillance.
• 12:22
  SPEAKER_00: Yeah, that's a big part.
• 12:23
  SPEAKER_00: Think powerful computers constantly scanning market activity.
• 12:27
  SPEAKER_00: They're looking for anything unusual.
• 12:29
  SPEAKER_02: Like what?
• 12:30
  SPEAKER_00: Sudden spikes in trading volume in a specific stock.
• 12:33
  SPEAKER_00: Big price jumps right before major news comes out.
• 12:36
  If a company stock suddenly sees tons of buying activity days
• 12:40
  before a surprise
• 12:41
  SPEAKER_00: merger announcement,
• 12:42
  SPEAKER_00: alarms go off.
• 12:43
  SPEAKER_02: A sort of digital tripwire?
• 12:45
  SPEAKER_00: Kind of.
• 12:46
  SPEAKER_00: And alongside that is heavy data analytics.
• 12:48
  SPEAKER_00: Algorithms sift through mountains of trading data.
• 12:50
  SPEAKER_02: Looking for patterns.
• 12:51
  SPEAKER_00: Exactly.
• 12:52
  SPEAKER_00: Patterns suggesting maybe traders are coordinating.
• 12:55
  SPEAKER_00: Links between traders and people with inside access.
• 12:57
  Trades that are just suspiciously well-timed and profitable
• 13:00
  given who made them.
• 13:01
  SPEAKER_02: But you mentioned human intelligence, too.
• 13:02
  SPEAKER_02: Tips.
• 13:03
  SPEAKER_00: Hugely important.
• 13:04
  SPEAKER_00: The SEC has a whistleblower program.
• 13:06
  They offer financial rewards and protections for people who
• 13:09
  come forward with
• 13:10
  SPEAKER_00: credible information about securities fraud,
• 13:12
  SPEAKER_00: including insider trading.
• 13:14
  SPEAKER_02: So insiders ratting each other out or just concerned employees?
• 13:18
  SPEAKER_00: Both, potentially.
• 13:20
  These human sources can provide context and specific details
• 13:24
  that the computers might miss.
• 13:26
  SPEAKER_00: They give investigators a starting point.
• 13:28
  SPEAKER_02: So let's say a flag goes up a computer alert or a tip.
• 13:32
  SPEAKER_02: What's the next step?
• 13:33
  SPEAKER_00: The SEC Enforcement Division might open an investigation.
• 13:37
  SPEAKER_00: They can issue subpoenas demanding trading records, emails, phone logs.
• 13:41
  SPEAKER_02: Forcing people to hand over evidence.
• 13:43
  SPEAKER_00: Yes.
• 13:44
  SPEAKER_00: They can also conduct interviews under oath.
• 13:47
  SPEAKER_00: If it looks criminal,
• 13:48
  SPEAKER_00: the DOJ might get involved,
• 13:50
  SPEAKER_00: potentially using tools like wiretaps with court approval,
• 13:52
  SPEAKER_00: of course.
• 13:53
  SPEAKER_02: And what about those legal insider trades, the Form 4 filings?
• 13:56
  SPEAKER_02: Do they watch those too?
• 13:57
  SPEAKER_00: Oh, absolutely.
• 13:59
  While those filings are required for legal trades,
• 14:01
  regulators scrutinize the timing.
• 14:03
  If an insider files a Form 4 showing they sold a ton of stock
• 14:06
  right before bad news hit,
• 14:08
  SPEAKER_00: even if reported,
• 14:09
  SPEAKER_00: it raises questions.
• 14:10
  SPEAKER_02: Especially if the timing seems too perfect.
• 14:12
  SPEAKER_00: Right.
• 14:12
  Often,
• 14:13
  there's no single smoking gun email saying,
• 14:15
  let's do insider trading.
• 14:16
  SPEAKER_02: Huh, probably not.
• 14:17
  SPEAKER_00: So they build cases using circumstantial evidence.
• 14:21
  SPEAKER_00: Trades that are too big,
• 14:22
  SPEAKER_00: too timely,
• 14:23
  SPEAKER_00: too profitable to be random luck,
• 14:26
  combined with proof the trader had access to the MMPI and was
• 14:29
  talking to the right people.
• 14:31
  SPEAKER_00: It's a constant cat and mouse game.
• 14:33
  SPEAKER_00: Cheaters get smarter.
• 14:34
  SPEAKER_00: Regulators have to adapt.
• 14:36
  SPEAKER_02: And speaking of adapting AI,
• 14:38
  artificial intelligence seems like it could be a game changer
• 14:41
  here with all this data.
• 14:43
  SPEAKER_02: Is it being used?
• 14:44
  SPEAKER_00: It absolutely is.
• 14:45
  SPEAKER_00: And its role is definitely growing.
• 14:48
  SPEAKER_00: The current surveillance systems already use complex algorithms,
• 14:50
  SPEAKER_00: many probably based on machine learning.
• 14:52
  SPEAKER_02: But AI could do more.
• 14:54
  SPEAKER_00: Oh, potentially much more.
• 14:55
  SPEAKER_00: Think about identifying really subtle,
• 14:58
  SPEAKER_00: complex trading patterns across different markets that humans might miss.
• 15:01
  SPEAKER_01: Okay.
• 15:02
  SPEAKER_00: AI could also process unstructured data news reports,
• 15:05
  SPEAKER_00: social media chatter,
• 15:06
  SPEAKER_00: company filings,
• 15:07
  and correlate that information flow with suspicious trades by
• 15:11
  people who might have
• 15:11
  SPEAKER_00: gotten the info early.
• 15:12
  SPEAKER_02: Connecting dots that weren't obvious before.
• 15:14
  SPEAKER_00: Exactly.
• 15:15
  SPEAKER_00: It could help map out networks,
• 15:17
  SPEAKER_00: who knows who,
• 15:18
  SPEAKER_00: who talks to who to spot potential insider trading rings,
• 15:21
  SPEAKER_00: maybe even predict high-risk situations based on past patterns.
• 15:25
  SPEAKER_02: And help investigators sort through evidence.
• 15:28
  SPEAKER_00: Definitely.
• 15:29
  SPEAKER_00: AI could help organize the mountains of data in a complex investigation,
• 15:33
  SPEAKER_00: making it easier for humans to build the case.
• 15:35
  SPEAKER_02: But are there downsides, challenges?
• 15:38
  SPEAKER_00: For sure.
• 15:39
  SPEAKER_00: Big ones.
• 15:40
  Data privacy is a major concern when you're vacuuming up this
• 15:44
  much financial and
• 15:44
  SPEAKER_00: communication data.
• 15:45
  SPEAKER_02: Right.
• 15:46
  SPEAKER_00: Bias in the algorithms is another risk.
• 15:48
  SPEAKER_00: Could AI unfairly target certain types of traders?
• 15:52
  SPEAKER_00: And false positives are an issue.
• 15:54
  AI might flag perfectly legal trades,
• 15:57
  requiring a lot of human effort to clear things up.
• 15:59
  SPEAKER_02: And the quality of the data matters, I assume.
• 16:01
  SPEAKER_00: Absolutely.
• 16:02
  SPEAKER_00: Garbage in, garbage out.
• 16:03
  Plus,
• 16:03
  the bad actors will always be trying to figure out how to fool
• 16:06
  the AI.
• 16:07
  SPEAKER_00: It's an arms race.
• 16:08
  So AI is more likely a powerful assistant for the humans,
• 16:11
  not a replacement.
• 16:12
  SPEAKER_00: That seems to be the consensus, yeah.
• 16:14
  SPEAKER_00: AI can handle the scale and complexity,
• 16:16
  freeing up human investigators to focus on the most critical
• 16:19
  leads and make the
• 16:20
  SPEAKER_00: final judgments.
• 16:21
  The cat-and-mouse game continues just on a more technologically
• 16:24
  advanced battlefield.
• 16:25
  SPEAKER_02: It's clear catching them is a priority.
• 16:28
  So if someone is caught,
• 16:30
  what kind of penalties are we actually talking about?
• 16:32
  SPEAKER_02: You mentioned serious.
• 16:33
  SPEAKER_00: They are definitely severe.
• 16:35
  SPEAKER_00: And that reflects how damaging this is seen to be for the markets.
• 16:38
  SPEAKER_00: The rules mostly come from the Securities Exchange Act of 1934,
• 16:41
  SPEAKER_00: especially Rule 10b-5,
• 16:44
  SPEAKER_00: which is a broad anti-fraud rule.
• 16:47
  SPEAKER_02: No single insider trading law.
• 16:49
  SPEAKER_00: Not exactly.
• 16:49
  It's evolved through SEC rules and court cases interpreting
• 16:53
  those broad fraud provisions.
• 16:54
  SPEAKER_02: Okay, so what can the SEC do civically?
• 16:57
  SPEAKER_00: They have a few powerful tools.
• 16:59
  Disgorgement,
• 17:00
  making you give back all the illegal profits or avoided losses.
• 17:03
  SPEAKER_02: Clawing back the money.
• 17:04
  SPEAKER_00: Right.
• 17:05
  Then civil penalties on top of that,
• 17:07
  which can be up to three times the amount disgorged.
• 17:09
  SPEAKER_00: So make $1 million illegally.
• 17:12
  You could end up paying back the $1 million plus another $3
• 17:14
  million penalty.
• 17:15
  SPEAKER_02: Wow, that's $4 million total.
• 17:17
  SPEAKER_00: Potentially, yes.
• 17:18
  SPEAKER_00: They can also get injunctions,
• 17:20
  SPEAKER_00: court orders banning future violations,
• 17:22
  and they can bar people from being officers or directors of
• 17:25
  public companies,
• 17:26
  SPEAKER_00: a career killer for many.
• 17:28
  SPEAKER_02: Okay, that's the civil side.
• 17:29
  SPEAKER_02: What about the DOJ and criminal charges?
• 17:32
  SPEAKER_00: That's where it gets even heavier.
• 17:34
  SPEAKER_00: Criminal fines can be enormous,
• 17:36
  SPEAKER_00: up to $5 million for an individual,
• 17:37
  SPEAKER_00: $25 million for a corporation per violation.
• 17:41
  SPEAKER_02: Per violation.
• 17:42
  SPEAKER_00: Per violation.
• 17:43
  SPEAKER_00: And the big one, prison time.
• 17:46
  SPEAKER_00: Criminal convictions can lead to significant jail sentences,
• 17:49
  SPEAKER_00: potentially up to 20 years for serious securities fraud.
• 17:52
  SPEAKER_00: Totally.
• 17:53
  SPEAKER_02: 20 years.
• 17:53
  SPEAKER_02: That's, yeah, that's a deterrent.
• 17:55
  SPEAKER_00: It's meant to be.
• 17:56
  SPEAKER_02: Yeah.
• 17:56
  SPEAKER_00: And don't forget the collateral damage.
• 17:58
  SPEAKER_00: Your reputation.
• 17:59
  SPEAKER_00: Shredded.
• 18:00
  SPEAKER_00: Professional licenses lawyer, accountant.
• 18:02
  SPEAKER_00: Gone.
• 18:03
  SPEAKER_00: Barred from the securities industry for life.
• 18:05
  SPEAKER_02: Plus, couldn't the investors who lost money sue you directly?
• 18:08
  SPEAKER_00: Absolutely.
• 18:09
  SPEAKER_00: Private lawsuits are another layer of potential financial pain.
• 18:13
  SPEAKER_00: So you add it all up.
• 18:15
  SPEAKER_00: Civil penalties, criminal fines, prison, reputational ruin, lawsuits.
• 18:19
  SPEAKER_00: It shows this isn't just some technical foul.
• 18:22
  SPEAKER_00: It's seen as a major breach of trust.
• 18:24
  Okay,
• 18:24
  given all that,
• 18:25
  it might seem weird that sometimes insider trading is actually legal.
• 18:29
  SPEAKER_02: How does that work?
• 18:30
  SPEAKER_00: Yeah, it catches people off guard.
• 18:32
  SPEAKER_00: But corporate insiders,
• 18:33
  SPEAKER_00: officers,
• 18:33
  SPEAKER_00: directors,
• 18:33
  big shareholders are generally allowed to buy and sell their
• 18:36
  own company stock.
• 18:37
  SPEAKER_02: There must be big butts.
• 18:38
  SPEAKER_00: Huge ones.
• 18:39
  It's all about doing it the right way,
• 18:41
  following strict rules designed to prevent abuse.
• 18:45
  SPEAKER_02: Rule number one must be.
• 18:46
  SPEAKER_00: Don't trade based on material non-public information.
• 18:49
  SPEAKER_00: That's the absolute bedrock.
• 18:51
  SPEAKER_00: If an insider knows MMPI, they have to wait.
• 18:54
  SPEAKER_00: Wait until it's public?
• 18:55
  SPEAKER_00: Wait until the market has absorbed it.
• 18:57
  SPEAKER_00: Trading while you know secrets is always illegal.
• 19:00
  SPEAKER_02: Okay.
• 19:00
  SPEAKER_02: No secret info.
• 19:01
  SPEAKER_02: What else?
• 19:02
  SPEAKER_00: Transparency.
• 19:03
  SPEAKER_00: Insiders have to publicly report their trades.
• 19:06
  SPEAKER_00: They follow something called a Form 4 with the SEC,
• 19:09
  SPEAKER_00: usually within two business days after the trade.
• 19:11
  SPEAKER_02: So everyone can see what they did.
• 19:12
  SPEAKER_00: Exactly.
• 19:13
  SPEAKER_00: Investors watch these filings closely.
• 19:16
  SPEAKER_00: Now,
• 19:16
  SPEAKER_00: why an insider sells can be complicated could be diversification,
• 19:20
  SPEAKER_00: needing cash,
• 19:21
  SPEAKER_00: but the transparency is key.
• 19:23
  SPEAKER_02: You also mentioned pre-planned programs, Rule 10b-5-1.
• 19:26
  SPEAKER_00: Right.
• 19:26
  SPEAKER_00: This is a really important safe harbor.
• 19:28
  An insider can set up a written trading plan at a time when
• 19:31
  they don't have any MNPI.
• 19:32
  SPEAKER_02: So they plan it out in advance when they're clean.
• 19:34
  SPEAKER_00: Precisely.
• 19:35
  SPEAKER_00: The plan specifies future trades, dates, prices, amounts, formulas.
• 19:41
  SPEAKER_00: Once the plan is adopted in good faith,
• 19:43
  trades that happen automatically under that plan later on are
• 19:46
  generally protected
• 19:47
  SPEAKER_00: from insider trading claims,
• 19:49
  SPEAKER_00: even if the insider has MNPI at the time the trade executes.
• 19:52
  SPEAKER_02: Like setting a thermostat, you said.
• 19:54
  SPEAKER_02: It runs on the schedule, not because you just felt a cold draft.
• 19:57
  SPEAKER_00: That's a good way to think about it.
• 19:59
  It breaks the link between having the secret info and making
• 20:02
  the trade decisions.
• 20:03
  SPEAKER_02: Are there other company rules, too?
• 20:05
  SPEAKER_00: Yeah.
• 20:05
  SPEAKER_00: Many companies have their own internal policies,
• 20:07
  SPEAKER_00: like only allowing insiders to trade during specific window periods,
• 20:11
  SPEAKER_00: often after earnings are released.
• 20:13
  SPEAKER_02: When most information is supposedly public.
• 20:15
  SPEAKER_00: Right.
• 20:15
  SPEAKER_00: But even during an open window,
• 20:17
  SPEAKER_00: if you personally know some specific MMPI that isn't out there,
• 20:21
  SPEAKER_00: you still can't trade.
• 20:23
  SPEAKER_00: The core issue is always the abuse of privileged information.
• 20:26
  SPEAKER_00: Legal trading is about transparency and planning to avoid that abuse.
• 20:30
  Okay,
• 20:31
  this has been incredibly helpful in laying out the whole landscape.
• 20:34
  SPEAKER_02: So pulling it all together,
• 20:35
  SPEAKER_02: why is fighting this stuff,
• 20:37
  SPEAKER_02: illegal insider trading,
• 20:38
  SPEAKER_02: so fundamentally important?
• 20:40
  Well,
• 20:40
  like we've discussed,
• 20:41
  it really comes down to exploiting secrets and breaking trust.
• 20:45
  SPEAKER_00: It takes many forms.
• 20:46
  SPEAKER_00: It's hard to catch.
• 20:47
  But the consequences are severe because the damage to market
• 20:50
  integrity is so significant.
• 20:52
  SPEAKER_02: Right.
• 20:52
  SPEAKER_00: And while there are ways for insiders to trade legally,
• 20:56
  SPEAKER_00: the absolute line is drawn at using that material non-public information.
• 21:00
  SPEAKER_02: So why should the average person,
• 21:02
  SPEAKER_02: maybe someone who doesn't even own stocks directly,
• 21:05
  SPEAKER_02: care deeply about this?
• 21:07
  Because fair and trustworthy markets are essential for a
• 21:10
  healthy economy that works
• 21:11
  SPEAKER_00: for everyone.
• 21:13
  When markets are seen as fair,
• 21:15
  people are more willing to invest for their future.
• 21:17
  SPEAKER_02: Like in retirement accounts, 401ks.
• 21:19
  SPEAKER_00: Exactly.
• 21:20
  SPEAKER_00: And businesses can raise the money they need to grow,
• 21:22
  SPEAKER_00: to innovate,
• 21:23
  SPEAKER_00: to create jobs more easily and cheaply.
• 21:26
  But if there's a perception or a reality that the game is
• 21:28
  rigged for insiders,
• 21:29
  SPEAKER_02: People pull back.
• 21:31
  SPEAKER_02: Trust vanishes.
• 21:32
  SPEAKER_00: Precisely.
• 21:33
  SPEAKER_00: Investment dries up.
• 21:34
  SPEAKER_00: It gets harder and more expensive for companies to raise capital.
• 21:37
  SPEAKER_00: And that puts a drag on economic opportunity for everybody.
• 21:40
  SPEAKER_00: So fighting insider trading isn't just about punishing bad guys.
• 21:44
  SPEAKER_00: It's about defending that level playing field.
• 21:46
  SPEAKER_02: It's about maintaining confidence in the whole system.
• 21:49
  SPEAKER_00: Absolutely.
• 21:50
  SPEAKER_00: Strong enforcement shores up that confidence.
• 21:53
  SPEAKER_00: It preserves the integrity that markets need to function well.
• 21:56
  SPEAKER_02: So for listeners,
• 21:57
  SPEAKER_02: understanding this is more than just financial trivia,
• 22:00
  SPEAKER_02: it connects to bigger ideas about fairness and rules in our economy.
• 22:04
  SPEAKER_00: It really does.
• 22:05
  When you hear debates about financial regulation,
• 22:07
  remember,
• 22:09
  a lot of it boils down to this.
• 22:11
  SPEAKER_00: How do we ensure fairness?
• 22:12
  SPEAKER_00: How do we ensure accountability?
• 22:14
  SPEAKER_00: How do we maintain the rule of law when it comes to money and markets?
• 22:18
  SPEAKER_02: And supporting strong oversight,
• 22:20
  SPEAKER_02: demanding accountability that protects everyone's stake in the economy.
• 22:24
  SPEAKER_00: I firmly believe so.
• 22:26
  SPEAKER_00: It protects pensions, jobs, the ability of businesses to thrive.
• 22:29
  We can't just shrug and accept a system where some people play
• 22:32
  by different rules
• 22:33
  SPEAKER_00: because they have secret information.
• 22:34
  SPEAKER_00: We have to insist on fairness.
• 22:36
  SPEAKER_02: This has been a fantastic deep dive.
• 22:38
  SPEAKER_02: Thank you so much for walking us through all the nuances.
• 22:41
  SPEAKER_00: My pleasure.
• 22:41
  It's a complex topic,
• 22:43
  but getting a handle on it is,
• 22:44
  I think,
• 22:45
  really important for everyone.
• 22:46
  SPEAKER_02: Absolutely.
• 22:47
  SPEAKER_02: And for all of you listening,
• 22:48
  maybe the next time you see a stock make a really surprising
• 22:50
  move up or down,
• 22:52
  SPEAKER_02: pause for a second.
• 22:53
  Think about what unseen information might have been driving it
• 22:56
  and what that
• 22:57
  SPEAKER_02: suggests about the fairness we rely on in our markets.
• 23:00
  SPEAKER_02: It has a whole new layer to understanding the economic news around us.