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Originally published Sunday, July 19, 2009 at 12:00 AM

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Outsider's guide to insider trading

Oliver Stone won't be making a sequel to "Wall Street" based on this past week's Safeco insider-trading case. No business titans were paying for takeover tips and pocketing millions of dollars, just a Seattle husband pestering his wife for hints about a big transaction.

Times deputy business Editor

Oliver Stone won't be making a sequel to "Wall Street" based on this past week's Safeco insider-trading case. No business titans were paying for takeover tips and pocketing millions of dollars, just a Seattle husband pestering his wife for hints about a big transaction.

Yet personal and legal intrigue bubbles up from the Securities and Exchange Commission's (SEC) lawsuit like the froth from an Ivan Boesky Champagne toast.

What exactly did she say? Did he strike a deal with regulators to avoid implicating her further? What happened between them when she discovered he'd earned $118,245 from the tidbits she let slip?

And how did they feel Friday when billionaire Dallas Mavericks' owner Mark Cuban, who received confidential information directly from a dot-com CEO and promptly sold his stock, got insider-trading charges against him dismissed?

Maybe this could be the first made-for-TV movie on CNBC.

The agency Wednesday charged the husband, Math J. Hipp Jr., with illicitly profiting by trading on "material, nonpublic information" that he "misappropriated" from his wife, the executive assistant to Safeco's executive vice president of insurance operations. She was not charged in the suit, nor is she mentioned by name, though other records identify her as Lorene T. Hipp.

The picture painted by the lawsuit raises as many questions as it answers, and it's unlikely any more information will emerge in court. Math Hipp, without admitting any wrongdoing, agreed to settle the case by paying $239,770 — the profit and an equal amount as penalty, plus interest. Hipp's lawyer said he would have no comment.

As the SEC suit describes it, Lorene Hipp learned in early April 2008, after signing a confidentiality agreement, that potential acquirers would be visiting Safeco and that insurer Liberty Mutual might pay as much as $68.50 a share.

During the 10-day stretch of unusual overtime and weekend work that followed, he "asked his wife daily why she was working late, what she was doing, or when her schedule would return to normal." The suit says she "dodged his questions, stating she could not talk about it or was particularly busy at work and it was a stressful time."

So far so good. The wife keeps the secrets as promised, despite what must be an awkward situation.

But then that image of steadfast confidentiality begins to erode.

She told him "she was concerned Safeco employees would lose their jobs, but she would not tell him why." Hipp, the suit continues, "also learned from his wife that representatives of other companies would be visiting Safeco headquarters on the weekends." She told him she was preparing decorative gift baskets for weekend meetings at the company and ordering food for people working nights "for an event she said was important to her boss."


It's hardly surprising that according to the SEC, Hipp decided " 'something big' was happening at Safeco that would result in an increase in its stock price."

In mid-April, with Safeco shares trading in the $40s, he paid $2,297 for call options that paid off only if the stock went over $50 that month or $55 in May. When Liberty Mutual announced on April 23 it would buy Safeco for $68.50 per share, he was in the money.

The SEC last week also filed two other insider-trading cases over the Safeco acquisition, in each instance charging an alleged tipster as well as a trader. In both, a professional at a company involved in the potential acquisition is accused of tipping off a relative.

If there were an "Outsider's Guide to Insider Trading," Chapter 1 would suggest that you have to be pretty far removed from a pending corporate deal to legally trade based on any hints about it.

"If we saw the Nordstrom cousins giving high fives to each other when we went in to buy socks, there would be nothing in the world to preclude us from buying all the call options in the world," says local securities attorney Dave Simmonds.

That's because there is no direct fiduciary responsibility, or other "relationship of trust and confidence," created by watching exuberant executives.

"You have to have some kind of duty" to the company, or to the source of the confidential information (such as your employer), and then violate that duty by misappropriating the information for your trading, says Jeffrey Coopersmith, a former federal prosecutor and now a Seattle criminal-defense attorney specializing in white-collar crimes.

Chapter 2 of the Outsider's Guide would emphasize that family relationships are an especially dangerous trading platform. "The spousal relationship is by SEC rules a confidential one," writes Duke University securities-law expert James Cox in an e-mail, so there's a presumption that "information passed from one spouse to the other (pillow talk) is within the scope of insider-trading rules."

The SEC is taking an aggressive posture on the reach of insider-trading laws, but its views don't always prevail.

On Friday a federal judge dismissed the SEC's widely watched lawsuit accusing Dallas businessman Cuban of selling his stake in a search-engine company after learning from the CEO that he planned to sell additional stock at a low price, which would have depressed the value of Cuban's holdings.

According to news reports, the judge wrote that the SEC didn't accuse Cuban of promising not to trade based on the confidential information. The agency is reviewing its options in the case.

The final chapter of the Outsider's Guide might note that notwithstanding the SEC's enforcement efforts, insider trading is rampant. "There is ample empirical evidence that there is significant trading in securities markets on the basis of secret advance knowledge," Cox told a 2006 Congressional hearing.

And last year the agency's director of enforcement, Linda Chatman Thomsen, told an industry gathering that while "we are seeing fewer insider-trading cases involving one-off trades," violations — including repeated, systematic ones — were increasingly a problem with "securities professionals, gatekeepers or high-ranking corporate officials."

In other words, for every Hipp, there's a Cuban.

Rami Grunbaum:

Copyright © 2009 The Seattle Times Company

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