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CNN Live Today

Recent Insider Trading Scandals Raise Larger Questions

Aired July 01, 2002 - 14:48   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
KYRA PHILLIPS, CNN ANCHOR: The closely-followed troubles of Martha Stewart have focused new attention on the topic of insider trading. Stewart is under investigation for a stock sale she made just before the price of the stock plummeted. Investigators are trying to determine whether Stewart made the sale on inside information.

But here's the question: when does what seems like shrewd investing become illegal? Well, we thought we'd run some scenarios with CNN's Alan Chernoff. He joins us live from New York.

Hi Alan.

ALAN CHERNOFF, CNN CORRESPONDENT: Hi, Kyra.

PHILLIPS: Are you ready for a little quiz here?

CHERNOFF: OK, lay it on me.

PHILLIPS: All right, here we go. We're going to go right to it. This, of course, comes from the Sunday "New York Times." We have to attribute the idea to these folks, OK?

Here's the scenario. Broker says to sell a stock because he just got a call from that company's CEO telling him to dump it. You sell the stock. Is that illegal?

CHERNOFF: Well, Kyra, you know, this essentially is the Martha Stewart scenario. And we need to know, did Martha know from her broker if in fact Sam Waksal, the head of ImClone, was trying to dump all of his stock? Did the broker pass that information along? If so, it most likely is in fact insider trading.

The definition of insider trading is if you have material nonpublic information. Material, meaning something that could really move the stock, something important. Nonpublic meaning that nobody else has, that's not out in the public. So if you're trading on important information that isn't publicly available, it probably is insider trading.

PHILLIPS: All right. Second scenario. A friend tells you his wife may be laid off as a top executive. Her company has deep financial problems. You call your broker and ask him to sell short five shares of the stock. Is this illegal? CHERNOFF: Well, she's an executive from the company, an important person. You know that. And in this example, she is conveying that there's a problem at the company. If that is in fact the case, then it most likely, again, is insider trading.

Let's also keep in mind that there is no actual law on the books defining insider trading. It's been interpreted by the courts and that's how the legal system is dealing with insider trading, based on court interpretations.

PHILLIPS: All right, Alan, here's a very common scenario. At your country club you play golf with a member who talks about a great new product that his company is about to introduce. The next day, you buy some of that stock. I think we know the answer to this one.

CHERNOFF: Right. Because the product hasn't yet been revealed to the public. If the product had already been announced, it wouldn't be insider information. But since this is prior to that public announcement, in fact again, this probably would be an example of insider trading.

PHILLIPS: All right. Final scenario, here we go. At a party you overhear an executive you recognize but do not know. He says the company's outlook has taken a turn for the worse but it's not been reported. You sell your interests in the company. Is it legal?

CHERNOFF: Well, it just might be in this situation because you're not exactly sure who this executive is. So you're not sure you really have nonpublic information. So it probably is something you could get away with.

But, again, these are situations that are interpreted by the courts. There is no definitive law. A lot of these areas are gray. So that makes it particularly interesting and particularly tough for the lawyers.

PHILLIPS: So, Alan, I guess next week when I tee off, I'm going to have to tell the guys not to talk about their companies.

CHERNOFF: That's right. Keep it confidential.

PHILLIPS: There you go. I'll take a run for it. All right, Allan Chernoff, thank you.

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