When Market Chitchat Becomes Insider Information

Journalists and PR people know a lot of confidential information and by nature share news, but they risk breaking the law if they aren't careful as several have learned to their regret.

The phone conversation between journalist Adi Ben-Israel and Clal Finances broker Avshalom Weinreb began like this: "I just might have something good for you. ... I know how much, these two numbers from the report. ... I can tell you, by phone so that it stays between us."

That conversation led to Ben-Israel being convicted this week of passing insider information.

"What's going on over there?" asked Weinreb, and Ben-Israel answered, "Quarterly profits - or so I was told - of NIS 889 million, and return on capital of 19.1%." At the end of the conversation Ben-Israel said, "It's not, you know ... this should stay among you guys, decide what to do with it - this isn't going into any newspaper, I can promise you."

That conversation was about Bank Leumi's quarterly results and they were being leaked before the company officially released in its finanical report. When it took place, Ben-Israel, now deputy capital markets editor for the website Globes, was deputy capital markets editor for the website Bizportal.

Weinreb was convicted in January as part of a plea bargain for using insider information. In May he was sentenced to 140 hours of community service and his investment consulting license was rescinded for two years.

Journalists encounter sensitive information on a daily basis, information that could turn out to be from inside sources. They're not the only ones - communications advisers and public relations people also know about significant information about companies well before it is officially released.

The ruling against Ben-Israel exposes the complicated nature of capital market journalists' jobs.

Unaware of the legal risk

Large amounts of information flow under the radar, including significant data that could affect companies' share prices. While people who work in the capital markets know how to spot what's considered insider information, most communications professionals haven't received any training in the matter, and many newspapers or PR firms don't give their employees any specific instructions.

"Journalists often know if someone is leaving or if a big deal is underway. They often find out well before the company's investors do, and certainly before the company makes an official announcement to the stock exchange as required by law," says former journalist Guy Leshem, currently an adviser on information analysis.

"I have tons of insider information, all the time," says media adviser Moshe Debby. "I represent eight to 10 publicly held companies, and I know for example what their reports say before they're released. After all, I have to prepare press releases about these reports."

Other public relations executives confirmed that they have significant insider information, including things that could get companies into nasty affairs, but agreed to discuss the matter only anonymously. "I know we're under a magnifying glass," said one senior communications adviser.

It's not common for journalists or communications advisers to be convicted of using insider information, but it's also not unheard of.

In 2001, former Globes journalist Shmuel Rosenblum was convicted of using information about Elbit that he had obtained through his work. He passed the information on to a friend, who turned a NIS 30,000 profit.

In 2009, PR rep Noam Tepper was indicted on 40 violations of securities law for using insider information relating to four public companies. Tepper had been accused of using this information to buy stocks.

In late 2011, Kwan Communications general manager Zvi Rabin was indicted for using information he received through work to carry out dozens of stock transactions worth hundreds of thousands of shekels. He was also accused of passing on information to a lawyer friend, who then used it to carry out millions of shekels in transactions, as well as a family member.

Non-profit crime

The Israel Securities Authority, for its part, said the rules addressing use of insider information are clear: Any use of such information is illegal.

In 2008, after details of the Israel Electric Corporation's financial reports leaked into the media, the utility warned companies that they could face a NIS 120,000 fine if they had important information hit the media before it was published through the securities authority's online announcement board.

"There's no problem with having that information," said Giora Hartog, CEO of Audit Corporate Governance Services and formerly head of the Shin Bet security agency's investigations department.

"The entire question is what you do with it. For instance, an internal source could give a journalist or media adviser some information as background for an announcement, but the source needs to tell his interlocutor that this is internal information that hasn't been published yet and that it can't be used," he said.

Ben-Israel's conviction wasn't clear-cut. The ruling ackowledges that the journalist had no intention of using the information himself and made no profit from it. His statements were made as part of a friendly conversation, whether as part of his cooperation with Weinreb or to impress him. Weinreb, too, made no personal profit from the information, but rather passed it on to his customers.

Yet Judge Michal Barak Nevo ruled that since Ben-Israel had told Weinreb to "decide what you want to do with it," he realized that the information could be used to turn a profit.

"Any tidbit, good or bad, is considered insider information," said Hartog. "You don't even need proof that someone profited. The moment that insider information is passed along and there's a reasonable basis for presuming someone could profit, that's a crime."

Attorney Navot Tal Tzur, who specializes in white-collar crime and securities cases, counters that the whole field of insider information is unclear, especially when it comes to the relationship between journalists and public companies.

Difficult to define

"Insider information is difficult to define," he said. "Insider information necessitates understanding not only the capital market, but also the company's status, since the legal definition is information meaningful to the company. Therefore the information needs to be well-founded, and the individual has to make some presumptions about how its release will affect the company's future.

"It's also unclear who's considered an insider," he said. "Why can't a journalist who receives information - accidentally or intentionally - presume that this is public knowledge and thus no longer considered insider information?"

"Sometimes people think the offense is only if you used the information to buy securities, but that's not the case," added Prof. Leah Paserman-Jozefov, a lecturer at the Ono Academic College and expert in securities law enforcement.

"It's an offense even if you passed on information to someone whom you could reasonably presume might use it. The moment a journalist calls a broker, it's clear the broker will use the information to buy or sell securities. On the other hand, when a professional calls his wife to tell her about the top-secret deal he's negotiating, he could argue that he was merely telling her about his day and had no reason to think she'd use the information to buy or sell securities - unless she's a major investor in her own right."