By Andrew Ross Sorkin
HAVE you heard about the railroad workers charged with insider trading?
Late last month, the US Securities and Exchange Commission brought an unusual and colourful insider-trading case: It accused two employees who worked in the rail yard of Florida East Coast Industries of making more than $US1 million by trading on inside information about the takeover of the company.
How did these employees know their company was on the block? Well, they were very observant. They noticed ''there was an unusual number of daytime tours'' of the rail yard, the SEC said in its complaint, with ''people dressed in business attire''.
The case is raising eyebrows - and some important questions - about what constitutes insider trading at a time when the US government is taking a tougher line against Wall Street and white-collar crime.
And it comes amid a spate of prominent insider trading cases, like a controversial one against Mark Cuban, the billionaire owner of the Dallas Mavericks basketball team, which was dismissed and then recently reinstated.
That case may be a preview of what is to come: ''Illegal insider trading is rampant and may even be on the rise,'' Preet Bharara, the US Attorney in Manhattan, said in a speech last week.
And it is no longer just about prosecuting Gordon Gekkos. ''The people cheating the system include bad actors, not only at Wall Street firms, but also at Main Street companies,'' Bharara said.
Many of the recent cases have one thing in common: an increasingly broad definition of insider trading.
Joel Cohen, a partner at law firm Gibson, Dunn & Crutcher, recently wrote that there had been a ''shift in insider-trading jurisprudence away from its roots in deterring and punishing those who abuse special relationships at the expense of shareholders and into a murkier area where the SEC is policing general financial unfairness that has traditionally been considered beyond its authority to regulate.''
In other words, the SEC is no longer just making sure that employees are not abusing their position and breaching their fiduciary duty; it is focused on making sure that the markets ''feel'' fair.
It may come as a surprise to know that there is no actual language that defines the term ''inside information'' in the legal books. The SEC relies on the Securities Exchange Act of 1934 and its purposely vague provisions that make the purchase or sale of any security through ''manipulative and deceptive devices'' illegal.
It is also a crime to engage ''in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person''.
So, back to the case of the rail workers. Gary Griffiths and Cliff Steffes clearly had a hunch something was up, even though they were never brought into the loop through official channels. The men, and members of their family, bet that a deal was in the works by buying tens of thousands of dollars of call options on the company's shares. When Fortress Investment Group acquired the company in May 2007, the men and their families made more than $US1 million.
The SEC claims that Griffiths and Steffes acted on more than a hunch. The commission says that ''shortly after the tours began, a number of FECR's rail yard employees began expressing concerns that FECR was being sold, and that their jobs could be affected by any such sale''.
The SEC also claims that Griffiths was asked by the company's chief financial officer for a ''list of all of the locomotives, freight cars, trailers and containers owned by FECR, along with their corresponding valuations, which she had never requested before''. Florida East Coast Railway, or FECR, was a wholly owned subsidiary of Florida East Coast Industries.
Without being told directly that a deal was in the works, did the men actually have inside information? What would have happened if there was no deal? Or if the company was sold for a price below its prevailing market value? In most instances, ''if you overhear something and divine from the conversation that Party A is about to buy Party B, and you buy Party B, that's fine. You can do that'', Cohen said in an interview.
But in the case of Griffiths and Steffes, it gets complicated; they both signed the company's code of conduct, which explicitly said they could not trade on or disseminate material non-public information. So, it is possible they breached their fiduciary duty. Or maybe they were just observant.
NEW YORK TIMES