Getting Rich with Superpowers, Part 1: Insider Trading

We’ve previously talked about how immortal beings might find it difficult to amass significant wealth simply by virtue of living a long time.  This post marks the first in a series on how other common superpowers might be used to make money in the short term.

One way to make (or lose) a lot of money is via the stock market, and several superpowers lend themselves to taking advantage of the market: telepathy, enhanced senses, invisibility, and time travel, just to name a view.  Each of these could be used to come across valuable information without necessarily breaking any other laws (e.g. without trespassing).  For example, someone with Superman-level enhanced hearing could easily overhear a boardroom conversation, and an invisible person could similarly overhear sensitive conversations in public places. The question, then, is whether using any of this information would run afoul of insider trading laws.

(Note: do not try any of this at home, at least without consulting a competent attorney in your jurisdiction.)

I. Insider Trading

There are three major theories of insider trading liability.  First, one cannot trade on material, nonpublic information if one owes a fiduciary duty  to other traders in the marketplace. Chiarella v. United States, 445 U.S. 222 (1980).  This covers the most common types of insider trading: corporate insiders who trade on confidential information or who give confidential information to an outsider in breach of a fiduciary duty.  See also Dirks v. S.E.C., 463 U.S. 646 (1983).

The second theory is “misappropriation.”  ”The misappropriation theory holds that a person commits fraud “in connection with” a securities transaction, and thereby violates § 10(b) and Rule 10b–5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information.”  United States v. O’Hagan, 521 U.S. 642, 652 (1997).  This, then, covers the case in which the source of the information is a patsy rather than complicit.  It still requires that the misappropriator owe the source a fiduciary duty, however.

The first two theories are based on applying common law theories of fraud to the SEC rule against fraudulent trading.  The third theory is based on Rule 14e-3, which specifically forbids a certain type of insider trading.  ”Rule 14e-3 prohibits any person who is in possession of material nonpublic information relating to the commencement of a tender offer, acquired directly or indirectly from either the bidder or the target company, from trading in target company securities. It also makes unlawful passing on any such information where it is reasonably forseeable that the recipient will trade.”  Donald C. Langevoort, 18 Insider Trading Regulation, Enforcement, and Prevention § 1:10.  On the one hand 14e-3 is broad because there is no requirement of a fiduciary duty, but on the other hand it is narrow because it only applies to tender offers (e.g. mergers and acquisitions).

So, now that we have a rough idea of what constitutes insider trading, let’s see if any common superpowers can allow someone to acquire material, nonpublic information without running afoul of any of these theories.

II. Superpowered Reconnaissance

The first thing to do is to forget about using insider information to take advantage of a potential merger or acquisition.  Rule 14e-3 would almost certainly apply, so our hero (or villain) will have to stick to other kinds of valuable information (e.g. an R&D breakthrough or a pending product recall), and that’s the context we’ll assume for the rest of the post.

In general, merely overhearing something (e.g. a conversation between company employees) in a public space is not a violation under the first two theories because there is no fiduciary duty being broken: the recipient owes the company and its shareholders no duty, and the employees aren’t improperly tipping off the recipient.  So enhanced senses and invisibility would seem to be a good fit.

Telepathy is more problematic.  As we’ve discussed before, telepathy may run afoul of a person’s right to privacy.  Would discovering information about a company be highly offensive to a reasonable person?  Would it matter if the victim was a regular employee of a giant company or an emotionally-invested founder of a small business?  It’s hard to say how a jury would react.  It is not clear to me whether this kind of privacy violation would be sufficient to trigger insider trading laws, however.  The law prohibits the use of deception to acquire insider information, and telepathy could qualify, though it seems a bit strained. S.E.C. v. Dorozhko, 574 F.3d 42 (2d Cir. 2009) (holding that computer hacking to obtain insider information may be “deceptive device or contrivance” prohibited by Rule 10(b) and Rule 10(b)-5).

Time travel seems to be the cleanest of all: the superpowered schemer could simply wait until the information was public, then travel back in time and use it profitably.  This suggests the scheme in Primer might have been legal.

The previously mentioned prohibition against deception suggests that shapeshifting, psychic manipulation, and other forms of trickery wouldn’t work.

III. Conclusion

With the right superpowers and a little luck it may be possible to profit from the stock market without running afoul of insider trading laws.  Has this ever been tried in the comics?

34 Responses to Getting Rich with Superpowers, Part 1: Insider Trading

  1. I think Emma Frost has been shown to have used the telepathy based approach to insider trading. Of course her personal morality seems to be it is only wrong if they can punish her.

  2. While not necessarily a legal issue, I’ve always thought that sports leagues (NFL, NBA, MLB, NHL, etc.) in the DC and Marvel universes would have to include rules to prohibit people with enhanced speed/strength/whatever from participating. They actually dealt with the ethics of this in Smallville when Clark wanted to play football. His parents finally let him play his senior year in high school, but he decided quit when it came to potentially getting college scholarships.

    • While in Marvel it might be possible to detect the ‘x-gene’ there are still probably plenty of examples where someone could legitimately play but still have a major advantage over other players. Indeed, how would they even define ‘enhanced’? It’s similar to the dilemma on pornography, something that should be self evident but is very difficult to describe in sufficient detail to separate from art.
      On another note it is currently permissible for a man with prosthetic legs to compete in the Olympics.

      • In the Aberrant roleplaying game, superpowers are just beginning to come into existence. The organizers of sports create separate divisions for normals and supers (who are easily identified, as the source of powers is a node in the brain that can be located with a routine scan), and before long, only super sports have any notable following.

        This also seems remarkably similar to the plot of Back to the Future part II, where Biff uses time travel to obtain information about the results of sporting events, then made a fortune wagering on them. (Also of note, Miami over Chicago in the 2015 World Series is remarkably possible, seeing as how there wasn’t even a Miami team when Bttf2 was made,)

    • This same issue is touched upon in The Incredibles, with ‘Dash’ Parr wanting to compete, his mother nor wanting to allow it at all, and his father being in favor of him competing at his full (superheroic) capability.

      In the end he does compete, but uses his powers only to pull off a credible second place. (FWIW, I’ve always thought that ending sequence to be one of the best ever…)

      • Violet Macavity

        In supplementary material on the DVD, it mentions that Frozone had attempted to represent the United States in the Winter Olympics, but was rejected on account of his Super abilities granting him a tremendously unfair advantage. Presumably that set some kind of precedent, and it’s easy to imagine that any chance of super-level competition disappeared public opinion turned against superheroes.

    • “While on a skiing vacation, Northstar is forced to publicly expose himself as a mutant to save a woman’s life. Spectators accuse the retired skiing champion of using his powers to cheat. Realizing that he could not know if he had subconsciously used his abilities in the past, he relinquishes his medals and bitterly turns his back on skiing forever.[Alpha Flight #41]”

      http://en.wikipedia.org/wiki/Northstar#Alpha_Flight

      • Well we already have a sporting model for when a person’s natural abilities put them at an unfair advantage. The Boxing weight categories. And also the handicap system used in horse racing. I would imagine if people started turning up with superpowers and wanting to compete in sporting events then we’d see an expansion of those systems across the sporting world to ensure that people only fight those they are on a rough par with.

        The biggest danger in sport, when talking about super-powered individuals isn’t them using their abilities to win, but all the other athletes going “screw this” and giving up. If there is no chance of them winning no matter how hard they train then there is no point taking part. Which is human nature. And of course, sport being a business to a lot of people (even if a lot of the competitors insist they only do it for the challenge) are going to have a vested interest in making sure it is as competitive as possible and even the biggest champion has a chance of being felled. Brings the punters in the gate.

        Of course it would raise matters of disclosure and privacy. Would it be illegal to force Northstar to out himself as a mutant if he wanted to compete, or would competitive events being voluntary mean that the pre-condition is fine?

      • Here’s a good question. What if Michael Phelps were a mutant telepath? Does being a mutant mean he can’t compete? Does he have to prove that his mutation doesn’t help make him a better swimmer? I think it would be unfair to discriminate against mutants this way. I think mutants would be allowed to compete in the Olympics and use whatever abilities they were born with.

      • Similarly, in the Fathom Comics she competes in Olympics swimming and looses her medals after being accuses of “blood doping”. In the comic even after she proved that her blood cell levels were completely natural, the Olympic committee refused to re-instate her medals on the grounds that it was unfair to the other athletes.

    • It was actually mentioned once that super-powered mutants were banned from the Olympics.

      This was in a Goosebumps book, of all things. “Attack of the Mutant”, IIRC.

  3. Melanie Koleini

    I don’t know of any comics doing this, but the TV series Early Edition had a plot line like this. In the show, the main character, Gary Hobson, gets a copy of the Chicago Sun-Times a day early. In one episode Gary’s best friend, Chuck Fishman, ‘borrows’ the business section and uses it in his job as a stock broker. Chuck get’s carried away with making money and the SEC pays him a visit. I can’t remember how the episode ended but I don’t think Chuck went to jail.

    http://en.wikipedia.org/wiki/Early_edition

  4. I think that comics writers, like other people, would assume that an ability to time travel (or precognition of any type) would best be used profitably in the gambling context… lotteries, sports betting, etc.

    Telepathy might well be an invasion of privacy, but it is, alas, an invasion that leaves no direct evidence (so far as we know, although advanced telepaths in fiction are often able to detect the previous actions of other telepaths. Thus, I suspect that a telepath who tired of blackmail might turn to insider trading but would be impossible to convict.

    • Don’t worry, we’ll address gambling in a future post in this series.

    • Certainly, non-comic example, The Doctor from Dr Who likes to abuse this one to hell and back. It doesn’t seem to be for personal gain though as he gives the lottery tickets away to others (one middle school teacher once had a winning lottery ticket shoved through her letter box at midnight). He did come down fairly heavily on the companion who tried to use time travel for business profit.

    • I think with telepathy it depends a lot on the details of how telepathy works. In some fictions, it is assumed that all people are essentially broadcasting at least their surface thoughts all the time and that a telepath must work to *not* overhear all of it. (This seems to be how Marvel depicts telepaths, at least most of the time.) In that case, overhearing the thoughts is probably much like overhearing a conversation. While it might be polite to ignore it and pretend not to hear, it is very hard to argue that receiving that information is against the law when you have to take unusual and proactive steps to avoid it.

      On the other hand, other fictions seem to require the telepath to make an active effort to examine any thoughts at all (or else to go below surface thoughts). If it requires active effort, even if it does no harm to the other person, then there are any number of theories under which it could be punished, but probably not insider trading. It would take only a tiny step to conclude that actively reading someone’s mind was trespass, which does not require actual damages. It would also be reasonable to call it battery (whether or not you can throw in assault would depend on if the victim could be aware of it prior to it occurring). And, where invasion of privacy is separately recognized, that is probably the clearest invasion of privacy in existence. And that is just for doing the looking, actually using that information, depending on how it is used, could trigger additional causes of actions.

      Of course, in most fictions where telepathy is somewhat common, there are often statutes dealing with it explicitly and sometimes technologies to go along with the statutes in providing protection from telepaths. But that delves far beyond the goal of this blog at looking at Superheroes through the law in existence today.

      • I was assuming the “broadcast surface thoughts” version. More invasive prying would almost certainly be a tort in its own right.

        When there are specific fictional laws in play then we try to consider those (e.g. Watchmen’s Keene Act, Marvel’s SHRA, DC’s 12th Amendment). This post wasn’t aimed at any fictional universe in particular, though.

    • The TV show No Ordinary Family touched on the blackmailing telepath: It fails miserably because the cashier who was swiping from the till points out that it’s his word against an underage girl trying to buy beer.

  5. “In general, merely overhearing something (e.g. a conversation between company employees) in a public space is not a violation under the first two theories.”

    But what if the conversation is occurring in a space that’s private for all but those possessing super-senses? For example, Superman happens to fly by a General Electric board meeting being held in an office on the 52nd floor of Rockefeller Center, and because he has superhearing, he overhears them discussing a revolutionary new power source. He wasn’t actively trying to hear it, and the board members weren’t being negligent—they were conducting the meeting in a closed room 500 feet above the street.

    Could Superman then turn around and buy a whole bunch of GE stock without any chance of violating insider trading laws? Or, to put it another way, can someplace be considered a public space for some individuals, but not for others?

    • The nearest analog is probably plain sight doctrine. It would be lawful for Superman to be outside the Rockefeller Center, as long as he didn’t get there by jumping off a building (assuming NYC has an anti-base-jumping ordinance of some kind). The super-hearing is a tougher case… he isn’t using artificial augmentation, so that probably works, too. The takeaway is that GE should implement more Superman-resistant security methods to keep its board meeetings private.

      In the specific case of Superman, though, there is no need… Clark Kent undoubtedly owns a nicely diversified portfolio, with an aggressive mutual fund position, and a maxed out 401(k) because that’s the type of guy he is… and if he needed some quick cash he could just turn a few handfuls of charcoal into diamonds.

      • That is a good question. In a world where Superman exists, what is a “reasonable” expectation of privacy? How much are you obligated to do to make it look like you are actually intending not to be heard?

        Busiek covered similar material for legal defense in “Astro City” – no invoking extra-ordinary situations without some justification – but I am wondering how it would play out on the Civil side of law. Is it a HIPAA Violation if Emma Frost can read my mind? Am I on the hook for a “hostile workplace” if I don’t screen my employees for Purple Man phermones?

      • As the Supreme Court recently reiterated in U.S. v. Jones, “At bottom, we must assure preservation of that degree of privacy against government that existed when the Fourth Amendment was adopted.” So at a minimum, if something would have been private in the late 18th century, then it must still be private today. That was, more or less, the basis for the holding in Kyllo that a warrant is required to use a thermal imaging camera to indirectly search a house for marijuana growing lights.

        Other Fourth Amendment cases seem to hold that unenhanced vision and hearing can be used without a warrant as long as the listener can legally be where they’re observing from. United States v. Agapito, 620 F.2d 324, 330 (2d Cir. 1980); United States v. Taborda, 635 F.2d 131, 139 (2d Cir. 1980). This can even be done to observe the inside of a home or other private place, as in Taborda. Basically, the police are not required to avert their eyes or ears.

        For a private individual the Fourth Amendment is not the issue but rather privacy laws and the like. These are more complex in some ways. For example, disclosure of private facts can be a tort regardless of whether the information was obtained legally. So while Superman may not be required to “avert his ears,” he may still be required to keep quiet about much of what he overhears.

        Intrusion requires an intentional intrusion, so if Superman overhears something personal by chance that’s not a problem, but if he intentionally focuses his hearing on someone’s bedroom, that’s another matter entirely.

      • James Pollock

        Do people have a reasonable privacy interest in things done in plain view? In 4th-amendment law, your privacy interests change depending on where you are… from very, very low in public spaces, to very, very high in your own home. I could see a situation where a person known to the public to have super-hearing (or telepathy) might have to totally avoid residential areas for fear of drawing an invasion-of-privacy lawsuit.

        And in the 4th-amendment context, what are the ramifications of hiring an officer who has super-sight, super-vision, super-smell, or telepathy? Dog sniffs are not an invasion of privacy… but also “plain sight” doctrine doesn’t extend to “plain smell”. So what if, instead of dog-handling officers, you have officers who have a sense of smell comparable to a dog?

      • Martin Phipps

        It was not in the U.S. and it may not have even been a legal issue but when News of the World was eavesdropping on people’s cell phones there was a public outcry and the paper was shut down. So what would happen if the public learned that Clark Kent was Superman, assuming the public were aware of his super hearing? Clark Kent earns a living as a reporter and it would be very difficult for Clark to assure people that he is not using his super hearing for personal profit. He would probably have to quit his job at the Daily Planet. Of course, he would probably quit his job anyway because there’s no point maintaining a secret identity if it is no longer secret.

        The question of a police officer using telepathy is one that I think has been brought up here before but, if so, I don’t recall what the conclusion was. Certainly there was a telepathic police officer on the TV Show Heroes: in the first season the FBI was using him to question suspects. Surely this is a violation of one’s right to remain silent! Bringing a telepath into the room would automatically mean the perp could go free but -then again- the police might be more interested in the information they can get rather than convicting the perp. The question then, I suppose, would be if the information could be used against someone else. Then it would be heresay because if the perp isn’t going to testify against his boss and all you have is the testimony of a telepathic cop describing what he “heard” the perp thinking and that would be a very slim case indeed. So actually telepathy doesn’t really help that much, not unless it is a question of somebody in imminent danger so you need the information from the perp right away.

        What about the Flash? He works at the crime lab which is part of the police department so if he goes around doing illegal searches then he is a state actor (surely). James and Ryan might want to do a post about that: I don’t read Flash comics but I imagine he doesn’t go to the trouble of getting warrants for searches. The simplest thing for him to do, IMO, would be to let his superiors know about his superpower and then have them call him when a crime is committed or a warrant has been issued and then have him collect his own evidence and have him take it back to the lab himself. It would be much faster and, as far as I can see, perfectly legal. And Barry would surely get a raise in salary for all the extra work he would be doing!

        For that matter, Superman himself would make an excellent crime scene investor with his x-ray vision. If Superman were assisting the police in a legal search, however, I think the warrant would have to include rooms adjacent to the room where the police were actively searching. Or would x-ray vision be covered under “plain sight”?

  6. Booster Gold is the obvious example of someone using time travel to his advantage… although not sure if he ever actually tried insider trading, but he certainly seemed to have the info…

  7. I found this fascinating because I’ve been working on a story where a trader uses a time machine to make a lot of money off the stock market, and when the government wants to charge him they have trouble finding an applicable law. Indeed, his defense is that he saw from the future that he had already done it and it wasn’t illegal…

    • There’s an interesting loophole in consideration of “ex post facto” law there. You didn’t mention if he started in “the future” and went back to tip off himself or started in “the present”, went forward to learn the information, and then returned to where he started from.

      If it’s the first one, the police could seize the time machine, go back to before the first guy left, and advise the legislature to adjust the law.

      If the second, then it’s even easier… the guy goes into the future to obtain information, then comes back, and gets caught… but has he committed a crime? No? Fine… the legislature then passes a law that makes traveling into the past with information about the present for purposes of insider trading a crime. Then, the time traveller shows up from the past, gathers his information, and returns to the past. The police then locate the future version of him (the one who got into that timeframe the usual way) and arrest HIM.

      • Depending on how time travel works in the story it might cause paradoxes and at the least sounds like it could easily create long-running legal battles. It seems easier to me to simply ban any unregulated time travel-related activities (possibly even just put it solely under the power of the government) and look for other ways to get the hypothetical time traveler.

  8. No one can trade on material non public information, you don’t have to be in fiduciary position.

    • Do you have a citation for that? Because I certainly have citations to the contrary, e.g., “except in the tender offer area, one does not violate the insider trading prohibitions unless one is treated as an insider (i.e., a fiduciary vis-à-vis the issuer or the source of the information) or directly or indirectly receives a tip from an insider. As a result, receiving information through simple luck frequently means that one can take advantage of it. For instance, a visitor who overhears a discussion between two executives in an elevator about some impending corporate announcement can probably trade on that information, since they are not “tipping” him.” Donald C. Langevoort, 18 Insider Trading Regulation, Enforcement, and Prevention § 1:12.

  9. interesting it’s not as black and white as I had suggested. However I would cite this from the rest of this particular article, http://www.law.com/regionals/ca/briefing/wilson/wilson21.html:

    The O’Hagan Court also held that the SEC did not exceed its rule making authority when it adopted Rule 14e-3(a) under the Securities Exchange Act of 1934. Rule 14e-3(a) prohibits trading in possession of material nonpublic information concerning a tender offer. The most notable aspect of the Rule is that unlike SEC Rule 10b-5, Rule 14e-3(a) does not require that the trading take place in breach of a fiduciary duty in order to impose liability.

    There is more there that supports your position. I lived in the compliance universe where this would be prohibited out of hand.

    I would however caution anyone who comes into possession of such information against trading on that information. The SEC would be very interested in you and in expanding the interpretation of the law.

    • Yes, 14e-3 doesn’t require a fiduciary relationship, but it has other limitations: “On the one hand 14e-3 is broad because there is no requirement of a fiduciary duty, but on the other hand it is narrow because it only applies to tender offers (e.g. mergers and acquisitions).”

      I definitely agree with the cautionary statement as well: “Note: do not try any of this at home, at least without consulting a competent attorney in your jurisdiction.”

  10. Pingback: Getting Rich with Superpowers, Part 2: Gambling | Law and the Multiverse

  11. Lovely post, but re Rule 14e-3, my understanding (and the plain language of the rule) is that it only applies to tender offers i.e. mergers proceeding by way of a public offer to shareholders.

    Thus a merger proceeding by way of merger agreement voted on by shareholders of the target is not subject to 14e-3.

    See for example the recent indictments of Martin, Conradt and Weishaus, who (allegedly) traded with inside knowledge of IBM’s pending acquisition of SSPS.

    The indictments rely on 10b-5 and don’t mention 14e-3. Thus the prosecution must prove a breached duty of trust – which in this case, say the prosecutors, was a duty owed by Martin (the first alleged tippee), to his roommate (a lawyer who allegedly tipped Martin).

    So I give a big thumbs-up to using your spidey-senses for insider trading on mergers – just make sure the merger isn’t going by way of a tender offer.

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