Bronte Capital's John Hempton has a post and another here in defense of the Pershing Square analyst, the analyst's roommate, and the analyst's roommate's friend. The roommate and the friend are in trouble with the Securities and Exchange Commission for trading in Herbalife options after learning from the analyst that Pershing's Bill Ackman planned to announce a negative view of Herbalife. Mr. Hempton calls it "a bad case of SEC over-reach" and says "it is not a case which should involve the SEC. It is not insider trading." He adds: "Bill Ackman's presentation was as far as I know sourced entirely from public information. ...All the room mate knew is that Bill Ackman was going to publicize public information and his analysis of it. It is a stretch of insider trading rules to deem as insider trading the future publication of already public information."
The mind reels at the logical contortions necessary to outlaw this sort of thing. If it was insider trading for the roommate's friend to trade on the information that Mr. Ackman was going to speak negatively about Herbalife, would it be insider trading for Mr. Ackman himself to have traded before he went public with his view? If not, how does it make sense for the first-hand person (Mr. Ackman) with the information to be able to trade, but the fourth-hand person (the analyst's roommate's friend) not to be able to trade? And how famous does a hedge fund manager have to be before news of his impending announcement becomes market-moving information that it is forbidden to trade on? What if Mr. Ackman's pronouncement hadn't moved the market, and if the analyst's roomate's friend hadn't made money on the option trade? Would that have been illegal? Does the SEC have a public list of people whose future pronouncements are considered market-moving enough so that their employees' roommate's friends are banned from trading on them? Who is on the list besides Mr. Ackman?
I'm not saying that the analyst's roommate's friend's behavior is admirable, and Mr. Hempton suggests that the analyst may have breached his obligation to confidentiality to his employer. But what I am saying is that the rules about these things are so vague (see the Hurricane Carter and Michael Steinberg post) that even a professional hedge fund manager like Mr. Hempton can publicly disagree with the SEC about what constitutes insider trading. It starts to be a problem with the rule of law, which is supposed to be clear, so that people can understand it and obey it.