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Matt Levine

Fake Insider Trading Is Illegal Too

Also gut biomes and Citi’s $500 million.

Let’s say that you are on the dark web looking for material nonpublic information about public companies, as one does on the dark web. You encounter a guy. He tells you that his name is “MillionaireMike” and he has a hot tip about a company. “This is from my buddy on the inside,” he tells you. You are intrigued. You arrange a small test trade. It works; things look promising. “Okay,” you say, “I will trade on your inside information, and we’ll split the profits.” MillionaireMike comes to you with a can’t-miss tip. “This is totally 100% illegal inside information,” he assures you. You make the trade. It pays off handsomely. You are rich. You send him his share of the profits (in Bitcoin, because this is the dark web and you are doing crimes). You are a satisfied customer.

Later, the Federal Bureau of Investigation contacts you. “Uh-oh,” you think, because you are sure you have been doing big crimes on the dark web. But what the FBI says surprises you. “We believe you have been the victim of a crime,” they say. “You see,” they explain, “when you thought you were getting illegal material nonpublic information on the dark web, you weren’t. The guy who gave you that information didn’t have a secret illegal source inside the company, and his name wasn’t really MillionaireMike. Instead he was an engineer at SpaceX, and he was doing good fundamental research based on public information, becoming informed enough about companies that he was able to predict their stock-price moves without illegal tips. When he shared his predictions with you, sure, you were getting correct stock predictions that made you rich, but you were nonetheless defrauded, because you were hoping to get illegally rich, and you only got legally rich. You had a right not just to correct stock tips based on good research, but also to real, illegal, material nonpublic information. So we’ve arrested him.”