Replies to post #2902 on Beyond Inc (BYON)

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Patrick Byrne

When the SEC Leaks, Is the Result Insider Trading?
October 19, 2019


My intent in this piece is not to ask whether or not employees of the SEC trade on inside information.

That’s easy: they do. This fact has been documented by finance academics and published in peer-reviewed academic journals. For example, in “Stock Trades of Securities and Exchange Commission (SEC) Employees”, Journal of Law and Economics (2017), authors Shivarum Rajgopal (Columbia Business School) and Roger White (Arizona State University) summarize their findings:

“We examine the profitability of stock trades executed by SEC employees… [W]e find that a hedge portfolio mimicking such trades earns a positive abnormal return of about 8.5% per year in U.S. stocks…” (emphasis added)

Thus, we can consider two choices:

“The average SEC employee who invests in the stock market is about as good a stock-picker as Warren Buffett”;
“The average SEC employee who invests in the stock market trades on inside information.”
Given those options, I dare to write: “The average SEC employee who invests in the stock market trades on inside information. QED”

Thus, again, my question is not whether employees of the SEC trade on inside information, as I consider that a settled matter. Instead, the meaning of the title of this piece is this: Imagine a situation where the SEC leaks inside information regarding its regulatory intentions towards a company, and does so only to select clients (where, per “The Theory of Economic Regulation” [Stigler, 1971]) the SEC’s “clients” are understood to be bulge-bracket Wall Street prime brokers, and not you, the taxpayer). Is it then Material Non-Public Information?

Fortunately, we have a test case at hand: recent events regarding OSTK and OSTKO.

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 Detailed Quote:OSTK 
 OVERSTOCK COM INC 
 10.8518Down -0.0582 (-0.53 %)AS OF 1:43:58PM ET 10/24/2019 
  
 Last Trade	10.8518 
 Trade Time	1:43:58pm ET 
  
 Change	-0.0582 
 % Change	-0.53% 
  
 Bid	10.83 
 Bid Size	3 
  
 Ask	10.87 
 Ask Size	3 
  
 Open	        10.95 
 Day High	11.0799 
 Day Low	10.58 
 Previous Close 
 10/23/2019	10.91 
 52-Week High 
 09/13/2019	29.75 
 52-Week Low 
 06/07/2019	8.96 
  
 Price Performance (Last 52 Weeks) 
 10/23/2019	-49.54% 
  
 Volume	1,160,911 
 Volume (10 day Average)	2,145,912 
 Volume (90 day Average)	5,898,353 
  
 Market Capitalization	$385.00M 
 Shares Outstanding	35,289,000