The SEC announced yesterday that it had charged two individuals with insider trading in connection with the purchase by one of them of put options in advance of an announcement by Pershing Square Management, L.P. of its negative views about Herbalife. The actions are notable because of the position the SEC took regarding materiality. Among other things, the SEC considered the unannounced opinions of an influential investor — developed by the investor from public sources — to be material nonpublic information. According to the SEC orders, “All information concerning Pershing’s Herbalife research — including its negative view of Herbalife, its thesis that Herbalife was operating as an illicit pyramid scheme, its short position in Herbalife stock, and the timing of its disclosure of that information — constituted material nonpublic information.”
These SEC actions highlight once again the extent to which materiality is a facts and circumstances based concept in U.S. securities law. In this case, Pershing Square’s reputation in the market carried great weight. Fund managers should keep this in mind, particularly when discussing investment strategies with other fund managers and potentially learning about proprietary ideas.