It’s no secret that the Department of Justice has been on the war path to prosecute insider trading cases.  They’ve been very successful at it, ringing up an impressive string of victories over the last decade.  With the passage of the STOCK Act in 2012, insider trading laws apply to the legislative branch as well as the other branches.  Now, both the SEC and DOJ have ramped up their focus on insider trading in the public sector. 

The SEC’s investigation of Brian Sutter, former staff director for the House Ways and Means Committee, has been well-publicized.  Sutter is accused of providing information about unexpected Medicare reimbursement rates to a lobbyist; the lobbyist then passed it along to an analyst, who in turn forwarded it to institutional fund clients 20 minutes before the market closed. 

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Fewer are aware that financial adviser Marwood Group also recently settled an SEC investigation involving political intelligence.  Marwood told its institutional fund clients about upcoming developments in health care regulations obtained from federal agency employees before the information was public.  Although Marwood was not charged with insider trading, it was charged with other securities violations. 

These investigations represent a new front in targeting trades made using political intelligence.  Typically, material confidential information is stolen by someone inside or outside of the company who originally got it under cloak of confidentiality (think corporate espionage).  If the information thief then trades on it or gives the information to another person to trade on it in exchange for a personal benefit (think payoff), the insider may go to jail.  If the tippee trader has reason to think the information is not public and that the insider got some personal benefit from disclosing it, the tippee also may go to jail.

So how do we apply these laws to tips about upcoming legislative or regulatory developments?  The water gets very murky very quickly.  For starters, what exactly is “material non-public” information in the information sieve of politics?  What about political rumors or policy forecasts?  Or staffers disclosing unofficial information – both with other staffers and lobbyists – to coordinate a vote?  And when does something become “public”?  Is it when the government announces something officially, or when media outlets or blogs consider the forecasts valid enough to publish as fact?   What if people outside the agency already knew about the news but simply hadn’t spread it?

And what is a “personal benefit” in the political world?   The law says it must be “a potential gain of a pecuniary or similarly valuable nature.”  In the public sector, this could theoretically include just about anything, including other political intelligence or favors.  And does it matter that those trading had little knowledge about who the original source of the information was, let alone whether that source got a benefit from disclosing the information?  It should, shouldn’t it?

Confused yet?  So are most people.  But there are a few lessons to take from these investigations: 

First, the DOJ and the SEC are on the hunt for insider trading based on political intelligence.

Second, the more likely it is that the information will affect the financial fortunes of a specific industry niche and of specific companies in that niche, the more likely it will be deemed “material” and therefore potentially trigger insider trading issues.  The more diversified the impact of the political information, the less likely it will be considered “material.”  Researchers, analysts, and others contemplating trading on the information should consult their compliance officers before trading.

Third, government sources should take pains to avoid giving information to tippees who may trade on that information or provide it to others who do trade.  Sources can couple the disclosure with a reminder that the information needs to be kept confidential or that the tippee cannot trade on it or tell anyone who might trade on it.  And if the tippee is connected to a political intelligence firm with institutional fund clients, the government source needs to be all the more careful.

Fourth, if the information is scheduled to become public, the source should indicate when that information will be publicly disclosed so that no trading occurs before then.  Again, tippees who are contemplating trading on the information would be wise to ask for a publication date or proof of publication.   

Finally, political intelligence firms and their institutional fund clients should closely review their insider trading policies and procedures, and impose clear oversight by their compliance officers to allow quarantining of possible material non-public information until it is public.

The bottom line:  The lines over insider trading are fuzzier than ever.  One thing that is clear, however:  political insiders and those who trade on political information should pay close attention so they can stay far away from those lines.

Boland is a partner at Foley & Lardner, chair of the firm’s Securities Enforcement & Litigation Practice and vice chair of the Litigation Department. Pence is an associate and litigation lawyer with the firm.