Great populist

and opponent of corporate greed, he may be. But Howard Dean may also have an insider trading problem. Deborah Orin of the New York Post, reports that “Dean acknowledged that he sold $15,000 in stock in five Vermont banks in 1991 after getting ‘inside information’ from a state banking regulator soon after he became Vermont governor.” Dean contends that the sale was as a bid to avoid a conflict of interest – not an attempt to profit from inside information. However, Orin points out that, as governor, Dean held onto investments in IBM worth $39,000 as of last May, even though it has a large plant in Vermont, according to the Wall Street Journal.
Meanwhile, Hugh Hewitt directs our attention to Professor Bainbridge, an expert in this area of the law, who believes that Dean may, indeed, have an insider trading problem. The professor analyzes the issue as follows:
“What would have to be shown to say that Dean committed insider trading? Key issues: First, that he had a fiduciary duty to the source of the information – presumably the state of Vermont – not to use information learned in his official capacity for personal gain. There is precedent for imposing such a duty. Second, that he traded while in possession of material nonpublic information. The information evidently was nonpublic, but was it material? Information is material where there is a substantial likelihood that the reasonable investor would consider it important in making decisions. Dean’s people claim ‘the regulator’s report was innocuous.’ We’ll need some enterprising reporter to track down the regulator’s report to find out (unless it’s buried away in Dean’s sealed records). Third, in some circuits it is not enough to trade while in possession of material nonpublic information. Instead, you must trade on the basis of the information – in other words, there must be a causal link between the information and the trade. Dean claims that he sold to avoid a conflict of interest. Possible, maybe even probable. A claim that the sale was made to avoid a conflict of interest rather than on the basis of inside information, however, would be an affirmative defense with the burden of proof on Dean. As the Post points out, moreover, he didn’t sell other stocks that also presented at least some potential for similar conflicts of interest. Finally, he must have made a profit or avoided a loss. Did he? According to the Post article, the AP is reporting that the bank stocks were headed down, which suggested he avoided a loss. Dean’s people are claiming that long-term the bank stocks went up, but the long-term is irrelevant for this purpose.
“Based on what we know so far, which admittedly isn’t much, it looks like a plausible case could be made. The main issue would be the contents of the report. Was the information material? There is no way of knowing without seeing the report. The other key issue would be whether Dean can make out an affirmative defense that he traded to avoid a conflict of interest rather than on the basis of the information in question.”


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