A few months ago a hedge fund executive commented casually to Fortune editor Andy Serwer that he wished the U.S. Securities and Exchange Commission would issue guidelines sharply defining exactly what insider trading was, and what it wasn’t. People in his industry wanted to play by the rules, he claimed, but they just weren’t certain what those were. Serwer asked me, as Fortune’s legal correspondent, to look into this situation.
I was skeptical. Among the scores of criminal insider trading cases brought by U.S. Attorney Preet Bharara in recent years, all the indictments I’d seen — including the ones against Steven A. Cohen’s SAC Capital Advisors and eight of its employees — alleged crystal clear wrongdoing. Even the stock analysts and hedge fund managers I began interviewing agreed that those criminal cases alleged conduct well over the line.
But they also explained the gray areas in the law they confront every day — areas that can trigger S.E.C. or Financial Industry Regulatory Authority (FINRA) inquiries and reviews which are not only expensive to defend but terrifying, in that, for a fund, mere suspicion of wrongdoing can trigger stampedes of investor withdrawals, imperiling survival. It also soon became apparent why it was so hard for the government to make a case against Steven Cohen himself, notwithstanding the guilty pleas of six of the portfolio managers and analysts who worked for him. Though Cohen may have seen emails from these subordinates that look like flaming red flags to you and me — and, indeed, to U.S. Attorney Bharara — those same emails might look innocuous or even routine to practitioners of what I came to see as “The Gray Art of Not-Quite Insider Trading.”
The resulting article with that title is the cover story of Fortune’s September 2, 2013, issue. As I explain there, it’s “about the layers of gray that wash over the world in which hedge fund portfolio managers and stock analysts operate, a world of which the general public knows little. It’s about what insider trading is, why it’s so hard to define, why prosecutors and regulators like it that way, and why analysts don’t.” We hope you enjoy it.
