Analyst notes are the latest front in the battle against insider trading

October 4, 2013
October 4, 2013

Citigroup this week agreed to pay $30 million to settle allegations that analyst Kevin Chang improperly revealed inside information about Apple’s supply chain to clients at at four different firms before his report was publicly available. It’s the latest installment of a war on “insider trading 2.0,” in which regulators are trying to eliminate advantages firms offer only their best clients.

In a speech last week, New York Attorney General Eric Schneiderman said that his department will go after firms and individuals who release analyst research early to certain clients. “Analyst sentiment is market-moving information,” he said at a conference. If Citi’s fine is any indication, then Massachusetts is on board with the plan as well.

According to a consent order (pdf) filed by the Secretary of the Commonwealth of Massachusetts, Chang did research on-site at one of Apple’s main suppliers, Hon Hai, in late December of last year. There he had access to information which caused him to cut his assessment of how many iPhones Apple would sell in the first quarter by 26.7%. His conclusions echoed those of a just-released report by Macquarie. Shares of Apple fell 5.2% in the time between when Chang spoke to clients and when his report was published.

The problem, as regulators see it, is that Chang shared his conclusions before actually writing them up in a note. Notes go out to Citigroup’s clients and occasionally the media, but conceivably anyone else could buy them. That’s the way Chang should have released nonpublic confidential information, the order says.

But Chang said in emails disclosed in the consent order that his estimates were based on his own analysis, not numbers given to him directly by Hon Hai. Clients of research firms pay for the ability to call up an analyst and ask questions.

This is all part of a greater question about what constitutes information that should be available publicly and what is truly confidential. You can expect this debate to play out as regulators continue their war on “insider trading 2.0.”

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