A client at a hedge fund calls you up and says that she’d like to talk about a profitable trade they just completed. Unfortunately, they’re not celebrating—they’re breaking out in a cold sweat because they just received an inquiry from the Securities and Exchange Commission. She explains that they shorted the stock of a healthcare company based on information from a firm that the fund pays for market intelligence on healthcare companies.
The intelligence provider told your client that they learned from an insider that the company was going to miss its earnings forecast. The information turned out to be spot on. The stock dropped and her fund cleared $2 million from its short position. But what your client really wants to talk about is whether the government is going to charge her with insider trading.
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