A case of illegal insider-trading made headlines in October, with Galleon Group LLC's co-founder Raj Rajaratnam accused of paying for inside information used to make profitable stock trades. Rajaratnam told the firm's employees that he was innocent, but the case is bringing attention to the issue.
In an article in AOL's Daily Finance, a blogger) suggested that eBay sellers - and even authors of books about eBay - had "the potential to gain access to significant details pertaining to quarterly earnings of some of these companies."
The suggestion seemed preposterous - with millions of sellers in hundreds of categories in many countries, how many sellers would you have to speak to in order to gain access to information that would show in what direction eBay earnings were headed?
However, Wall Street analysts regularly speak not only to eBay sellers, but also trade organizations and vendors who have aggregated sales data from many top vendors, and they do it in the open. I wondered how government regulators would view these discussions, and how sellers and third-party vendors could protect themselves.
A Wall Street analyst I spoke to said analysts feel comfortable speaking to sellers and vendors about their sales. This person said it would only become a problem if a seller or vendor passed along information that an eBay executive had told them about eBay sales. For example, there's no problem in a seller revealing how their sales in a particular category are doing, but if that seller passes along information they obtained from someone at eBay about how the category as a whole is performing - let's say, the category is up 100 percent, that would be a problem.
Here's the definition of insider trading, and you can find some examples on this page:
Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.
eBay and other public companies take steps to avoid revealing material information to individuals, here's a link to information about Regulation FD:
Regulation FD (Fair Disclosure) is a new issuer disclosure rule that addresses selective disclosure. The regulation provides that when an issuer, or person acting on its behalf, discloses material nonpublic information to certain enumerated persons (in general, securities market professionals and holders of the issuer's securities who may well trade on the basis of the information), it must make public disclosure of that information. The timing of the required public disclosure depends on whether the selective disclosure was intentional or non-intentional; for an intentional selective disclosure, the issuer must make public disclosure simultaneously; for a non-intentional disclosure, the issuer must make public disclosure promptly. Under the regulation, the required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.
Some Wall Street firms pay sellers for their time in better understanding the issues. If eBay makes a change, analysts want to know how sellers think it will affect them. They are often shocked, according to the analyst I spoke to, that people spend so much time speaking to them, in many cases for no compensation or no public acknowledgment. (Some firms pay sellers and experts for their time, others do not.)
Why do sellers and vendors speak to analysts? Power, the analyst said. They tell eBay, "if you don't talk to me, I'll go to Wall Street." It is also a way to bring attention to problems at eBay.
And what about cases where eBay does provide information about upcoming changes to certain parties: members of its Voices program (sellers and buyers), and third-party vendors who need to prepare their software to make sure it works with eBay's platform? eBay requires these individuals to sign NDAs (Non Disclosure Agreements), and if someone releases that information and has signed an NDA, eBay could sue them.
An eBay spokesperson replied to our inquiry via email. "We require that NDAs be signed whenever nonpublic information will be disclosed, including but not limited to a requirement that all Voices members sign NDAs. Those prohibit the disclosure of information for any purpose."
The eBay book-author in the above-referenced AOL blog post commented that he had no access to such information, and wrote, "All the consulting firms I work with require consultants to sign agreements stating, among other things, that they will not reveal sensitive financial information that has not yet been made public. I take that pledge very seriously."
Another issue of course is whether it's appropriate for parties who have access to eBay information under NDA (or Amazon.com information, for that matter) to even hold shares, since there could be an appearance of illegal insider trading.
I asked a series of specific questions to David S. Ruder, Professor of Law Emeritus at Northwestern University School of Law who headed the Securities and Exchange Commission from 1987-89. Here's his email response:
Insider trading involves the purchase or sale of corporate securities using non-public material corporate information by persons having a duty to the corporation not to disclose that information. Persons having that duty include corporate officers, directors, and employees and other persons who have entered into confidential relationships with the corporation, such as lawyers and accountants. If the person disclosing the information obtained it from a source other than the corporation, that person may be breaching a duty of confidentiality to the source of the information and, if so, will be violating the insider trading laws by "misappropriating" the information.
A person who purchases or sells a security based upon information received from an individual who is violating a duty not to disclose the information will be violating the insider trading laws as a "tippee" if the person knows or strongly suspects that the "tipper" is violating a duty not to disclose the information.
Regarding eBay, the primary question will be whether the information is material.
The analyst with whom I spoke also said it's common practice for CEOs to meet with analysts and their clients privately and not webcast it. (Not limited to eBay's CEOs or any one industry.) If CEOs or other executives inadvertently disclose non-public material information at these events or at conferences, for example, the company is required to file an 8K (see Regulation FD above). Whether that always happens or not probably depends on the company, the CEO, the nature of the information, and other circumstances.
Professor Ruder forwarded me a primer on insider trading published by Katten Muchin Rosenman LLP that said a person can be a "temporary insider" if he or she enters into a special confidential relationship with the issuer and, as a result, is given access to confidential information.
After doing research, but keeping in mind I'm not an SEC attorney, I come way believing the answer to the headline of this post is no - that seller data obtained from sellers themselves is not considered insider information - but that if obtained from an eBay "insider" - employee or not - then it is, and likewise for any such marketplace.
Updated 10/29/09 to include eBay's response.