“Santonio Holmes is out—four
weeks with a strained hamstring. I
heard Geno Smith will get the start,
and the Jets will keep Kahlil Bell as
their short yardage back. The of-
cial announcement isn’t supposed to
come until later in the week, after
Wednesday’s practice.”
Every year, from September
through January, this type of water-
cooler conversation can be over-
heard, as football fans discuss the
weekend’s games and the latest gossip
about their favorite players.
Such conversation seems harmless.
But could it be a federal crime?
That possibility doesn’t seem so
far-fetched now that Fantex Hold-
ings, a Silicon Valley start-up, has
launched an exchange where in-
vestors trade shares of athletes’
“brands.” It works like this: Fantex
makes a one-time, lump-sum pay-
ment to an athlete in exchange for
a cut of the athlete’s future earnings,
including endorsements and other
revenue from the athlete’s celeb-
rity status. Two athletes have signed
with Fantex so far—Arian Foster of
the Houston Texans will receive $10
million in exchange for a 20 percent
stake in his brand, while San Fran-
cisco 49ers tight end Vernon Davis
will get $4 million in exchange for a
10 percent share.
To nance the lump-sum payout,
Fantex issues a “tracking stock”
linked to the revenue stream of a
particular athlete. For example, the
IPO for the Arian Foster tracking
stock will offer 1,055,000 shares at
$10 each, generating $10,550,000.
(After paying Foster his $10 million,
the remaining $550,000 covers ex-
penses related to the IPO.) Owners
of this stock can then trade shares
on a special exchange that Fantex
hosts. In theory, the value of the
tracking stock reects the value of
Foster’s brand.
Securitizing sports—an industry
already replete with gossip, hype
and speculation—raises interesting
insider-trading implications, par-
ticularly in light of recent enforce-
ment efforts targeting insider trad-
ing beyond the “typical” Wall Street
cases. Fantex provides a thought-
provoking reminder that as nancial
markets evolve alongside changes in
the ways in which investors obtain,
process and use information, so does
the risk of liability under insider
trading law.
Insider Trading: The Basics
The basic prohibition on insider
trading, which is derived from fed-
eral securities laws, is fairly straight-
forward: It is illegal to buy or sell a
security on the basis of inside infor-
mation—i.e., “material nonpublic
information”—in breach of a duty of
trust or condence.
What constitutes material nonpub-
lic information, however, is not always
clear. “Material” information involves
anything a reasonable investor would
want to know when deciding to buy
or sell a security. And information is
“nonpublic” if it has not been effec-
tively disseminated to the investing
public. While these concepts are easy
to dene in the abstract, they can be
difcult to apply in practice.
Moreover, trading on material
nonpublic information is only ille-
gal if it somehow “breaches a duty.”
This duty can arise from a tradition-
al duciary relationship such as an
attorney-client or employer-employ-
ee relationship. But it can also arise
from a duciary-like relationship
such as a business or family relation-
ship where there is an expectation to
keep certain information conden-
tial or to not use that information
for personal gain. However, there
is no hard-and-fast rule as to what
constitutes a relationship sufcient
to trigger liability. Thus, whether
a violation has occurred—that is,
whether information is material and
nonpublic, and the requisite duty
has been breached—is highly de-
Insider Trading: From Fantasy Football
to Federal Prison?
By Justin V. Shur, Eric R. Nitz and Justin M. Ellis
November 13, 2013
From the Experts
pendent upon the facts and circum-
stances of each individual case.
The Next Generation Of
Insider Trading Cases
Traditionally, insider trading cases
have been based on the use of inside
information obtained through corpo-
rate channels (think of Gordon Gekko
from the movie Wall Street, trading on
advance news of a hostile takeover).
But that may no longer be the case.
The nature of insider trading liability
is continually evolving, as illustrated
by recent enforcement investigations
into the use of inside information ob-
tained through government channels,
so-called “political intelligence.”
Political intelligence rms, typi-
cally comprised of lobbyists and for-
mer government ofcials, gather in-
formation and provide insight about
regulatory developments, legislative
initiatives and government policy.
This information can potentially af-
fect the prospects and protability
of individual companies and entire
industries. Thus, it is not surprising
that the use of political intelligence
has become increasingly common
among sophisticated investors.
Recent enforcement activity, how-
ever, has highlighted the risk that
such intelligence may constitute
prohibited inside information under
insider trading law.
Indeed, earlier this year, the Se-
curities and Exchange Commis-
sion launched an investigation into
whether news of an important gov-
ernment announcement regarding
reimbursement rates for Medicare
participants—which caused a run-up
in stocks of major health care com-
panies—was improperly leaked by a
government insider to a political in-
telligence consultant who, in turn,
sold the information to investors who
traded on it. While this investigation
has not resulted in any enforcement
action thus far, it illustrates how the
traditional insider trading case has
evolved, as investors turn to new
sources of information in developing
an investment idea or strategy.
Is Insider Trading For Sports
Fans Next?
With the Fantex exchange up and
running, could “sports intelligence”
lead to the next evolutionary leap in
insider trading enforcement? Sports
analysis is big business. ESPN de-
votes countless hours to specula-
tion about who will play, who is hurt
and what strategy a team will de-
ploy against an opponent. The book
and movie Moneyball glorified the
number-crunching approach that
brought the Oakland Athletics to
the playoffs in 2002 and 2003. And
the prevalence of fantasy sports has
only increased the demand for pre-
dictive analysis and the latest per-
formance information.
The sports analysts producing this
information are like the political in-
telligence consultants. They analyze
numbers and stats, but also pick the
minds of those with rst-hand access
to the locker room. What these sports
analysts lacked, from the standpoint of
insider trading law, Fantex now pro-
vides: a market where investors can
trade on the basis of this information.
So where does that leave our water-
cooler tipper? If he or his co-worker
heads back to his desk and buys $1,000
worth of Geno Smith shares on Fantex
or sells all his Santonio Holmes hold-
ings, has either engaged in insider trad-
ing? Like many things in the law, it de-
pends. Smith’s precipitous rise up the
depth chart could be deemed materi-
al—it is information an investor would
want to know before deciding whether
to buy or sell Geno Smith shares. So is
knowledge of Holmes’s injury.
But is the information nonpublic?
The answer depends on the source. If
disclosed by the team’s coach and pub-
lished in the sports section of the New
York Post, then probably not. But if our
water cooler tipper is a sports reporter
who overheard the tip while attending
a closed practice at the special invita-
tion of the team, then the information
may be nonpublic and any trades on
the Fantex exchange could trigger in-
sider trading implications.
Perhaps a federal criminal probe
targeting fantasy sports tips is a bit
far-fetched. The larger lesson, howev-
er, is that even when the law govern-
ing insider trading does not change,
the world in which it operates does.
New markets arise, enforcement pri-
orities change and information pre-
viously irrelevant to investing deci-
sions takes on new importance. In
order to assist employees and protect
their businesses, buy- and sell-side
rms—and all companies that deal
with condential information—need
to stay abreast of these changes. They
should also continually update their
compliance policies and be vigilant
in identifying and investigating pos-
sible signs of insider trading.
Justin V. Shur is a former federal
prosecutor and a partner at Molo Lamken.
Eric R. Nitz and Justin M. Ellis are
associates at the rm.
Reprinted with permission from the November 13, 2013 edition of
CORPORATE COUNSEL © 2013 ALM Media Properties, LLC.
This article appears online only. All rights reserved. Further dupli-
cation without permission is prohibited. For information, contact
877-257-3382 or [email protected]. # 016-11-13-04
November 13, 2013
