Question about Insider Trading

[Tidybuoy]

I own a stock - GOTT.PK

This company has been on the NYSE for years but was recently delisted due to low price for 30+days and insufficient market cap. It was trading as high as $15 a year ago and closed today at $0.45

The company is in dire straits and is getting very close to Chapter 11 (in my opinion).

The company has found a potential investor (Chinese company) who may invest $30 mil and acquire a controlling % of the stock. The deal has been in the due-diligence phase which was scheduled to conclude 12-15-08

The #3 Officer of the company sold 100% of his holdings (31,200 shares) on 12-05-08.

Today, the company issued an 8k stating that the Chinese deal has been terminated and is a no-deal. In addition, the 10Q issued this week indicates that the company currently does not have enough cash to meet needs thru year-end. This sounds like BK to me.

So, I chit chat on Yahoo Stock Boards and there is a debate about whether or not this sale of stock is illegal insider trading. The argument against it being illegal is because the guy did not make any money.

My argument is that this is illegal because 1) He may have traded on info that was not made public (no company sale & BK) and 2) he did not make money but may have avoided a bigger loss. By the way, this guy acquired the stock over the past 6-month period

I'm just wondering if anyone here knows the rules.

Here's the stock board....

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_G/threadview?m=te&bn=7999&tid=1899&mid=1899&tof=2&frt=2#1899

[1967 R50/2]

True, he made no money by selling, but whoever bought his shares was operating with a different knowledge set and they potentially lost a lot.

However, you could counter argue that nobody was forcing them to buy.

You could go on and on...

[Porsche-O-Phile]

If nobody bought his shares other than a brokerage house which is required to buy them anyway by virtue of the fact that they're a brokerage house, is there really any damage here?

I guess if you're the brokerage house you're not too happy about it, but then again, those guys are all getting handed checks by the feds these days so what do they really care anyhow?

I don't like the sound of it, but I'd tend to doubt it's really illegal...

[masraum]

I always thought, that if you buy or sell based on info that you have due to your position, whether it be to profit, not have a loss, or whatever. But then I'm sure there could be more detail to it than that. THings are rarely that straight forward.

[whippetdave]

A great place to learn more would be FINRA.org

Some of the pertinent provisions are as follows:

Through additions to the Securities Exchange Act of 1934, the civil penalties for insider traders and controlling persons are broadened. The legislation extends liability to firms or other "controlling persons" who knowingly or recklessly fail to take the appropriate measures to prevent the occurrence of insider-trading violations. Controlling persons must establish, maintain, and enforce written policies and procedures "reasonably designed" to guard against insider trading. Interpretation of "controlling persons" will be done on a case-by-case basis, and may include not only employers, but any person with power to influence or control the direction of the management, policies, or activities of another person.

Penalties
Civil: The SEC may impose damages against violators for three times the profit gained or loss avoided and not more than $1,000,000 for controlling persons.
Criminal:
Individuals — Maximum fine increased from $100,000 to $1,000,000.
Non-natural — Maximum fine increased from $500,000 to $2,500,000.
Jail sentences — Maximum term increased from five to 10 years.
The legislation makes all non-natural persons subject to the higher criminal penalty.

[competentone]

Originally Posted by Tidybuoy

The company has found a potential investor (Chinese company) who may invest $30 mil and acquire a controlling % of the stock. The deal has been in the due-diligence phase which was scheduled to conclude 12-15-08

The #3 Officer of the company sold 100% of his holdings (31,200 shares) on 12-05-08.

Today, the company issued an 8k stating that the Chinese deal has been terminated and is a no-deal. In addition, the 10Q issued this week indicates that the company currently does not have enough cash to meet needs thru year-end. This sounds like BK to me.

The question would be whether or not Officer #3 had "material non-public" information at the time he made his trade.

Maybe he just had "concerns" about the possible deal, but had no actual information. An investigation would have to review when the Chinese communicated its potential intentions; if the insider had "material non-public" information about the deal falling through before the 5th, it would likely be insider trading.

With the overall general market, it is entirely feasible that Officer #3 was just "generally worried" about the deal not going through -- it doesn't take insider information to understand that in today's market a lot of deals that were being considered are not being done.

As a practical matter, for the dollar amounts involved, I can assure you that even if there was insider trading, there will be no investigation by the SEC.

Consider, for years the SEC was receiving warnings from creditable sources that something wasn't right with Madoff's trading (his claimed trades did not match the trading that could be seen in the open markets -- some specifically warned that he could be a Ponzi scheme). The SEC did nothing even though billions of dollars were involved.

The SEC will take any report you want to file, tuck it away in their files and never conduct any investigation.

Complain if you like, but you are wasting your time. The best thing to do is just stop "playing" with the con-men of Wall Street. Sell your stocks, buy real assets (to protect yourself against the con-men at the Federal Reserve) and let the criminals on Wall Street try to steal money from just each other.

(Though, with Wall Street stealing trillions through the government, we're pretty much all being forced into being victims of their scams. Might be a good time to buy some guns and ammunition and prepare for a revolution.)

[legion]

Yes, this is insider trading. Maybe he didn't make money, but he did stop a loss, which is no better. I would be willing to bet he was awarded those shares as compensation though, so as long as they are worth more than 0, he did make money.

That aside, he used information he had because he was an officer in the company that the buyer did not to his advantage. (Whether that is making money or stopping a loss in immaterial, he did see a benefit.)

[cstreit]

Most certainly insider trading. THere's no way he WASN'T party to this information.

Hell, even in my sales positions we have a stock blackout period 4 weeks before each quarterly announcement. Our executives have regular sell programs on their stock because any out of the ordinary transaction would be considered "inside".

He's a crook plain and simple and should be in jail.

[Tidybuoy]

The stock dropped 62% today - presumably due to the two releases this week (we're out of money & the Chinese aren't buying the company).

It's possible that this officer didn't know about the Chinese backing out of the deal but he had to know they were out of money - that doesn't happen overnight and I'm certain that vendors have not been shipping as normal because of this. Retail is a tough business and is the toughest during the Fall season.

[competentone]

Originally Posted by Tidybuoy

The stock dropped 62% today - presumably due to the two releases this week (we're out of money & the Chinese aren't buying the company).

It's possible that this officer didn't know about the Chinese backing out of the deal but he had to know they were out of money - that doesn't happen overnight and I'm certain that vendors have not been shipping as normal because of this. Retail is a tough business and is the toughest during the Fall season.

Yahoo is listing the sale as a "non open market disposition." The filing itself says the shares were sold at 50-60 cents per share.

I'm guessing he sold to someone he knows. I'm not sure if a "non open market sale" would be under different rules when it comes to insider selling, but as I said before, the dollar amounts are so small, I don't think this would ever be investigated.

Additionally, it looks like it really wasn't a case of the Chinese deal "falling through," it was just a case of the Chinese company's "due diligence" period expiring on Dec. 15 without them taking any action to acquire the company.

If that Dec. 15 deadline was known by everyone, selling before that date wasn't necessarily trading on "non-public" information. Heck, maybe the officer needed money to pay bills and effectively had to sell his shares; at this point in time, we just don't know if he really had "inside information" when he made his decision to sell.

Here is the filing on the sale:

http://www.pinksheets.com/edgar/GetFilingHtml?FilingID=6293161#PRIMARY_DOC_HTM_F1

[stomachmonkey]

Is this a historic low for the company?

He could have had a long standing sell order in that got triggered.

[Tidybuoy]

Originally Posted by stomachmonkey

Is this a historic low for the company?

He could have had a long standing sell order in that got triggered.

He bought all the stock within the past 10 months.

[stomachmonkey]

Originally Posted by Tidybuoy

He bought all the stock within the past 10 months.

Well that rules that out.

[the]

Selling a stock based on inside info, to avoid a loss, can still be illegal. That's what Mark Cuban is accused of doing, for instance. He hears some bad things about a company he owns stock in, he uses his connections to call the CEO (or someone very high in the company), the CEO says there will be bad news made public soon, and Cuban sells. If that's what happened, it's illegal.

[Zeke]

I think Martha Stewart sold to cut her losses.