I’ve followed The Motley Fool from the early days of the internet. (Or at least my early days on the internet.) From a compliance perspective, I’ve always been fascinated with how their marketing gets passed by the compliance department. Whether you like them or not, their stock picks can move prices. The Motley Fool picks usually come out at noon on Thursday in a combination of the Fool services.
If you you could buy some of that stock before the recommendation was published, you could make a tidy profit by front-running the announcement. That is exactly what the Securities and Exchange Commission is accusing David Stone of doing illegally. They also charged one of his acolytes, John Robson, with the same front-running activity.
The classic crime of front running was the publisher of a newsletter buying the stock just before it announced a buy recommendation (or selling just before a sell recommendation).
The SEC complaint has a detailed account of the timing of the stock buys of Stone and Robson on one hand, and the recommendations of The Motley Fool on the other hand. Stone and Robson were clearly buying stocks just before the Fool recommendations came out for those stocks and sold shortly after. You look at it and clearly looks like insider trading.
The SEC also uncovered some emails between the two that make it even clearer that the Stone and Robson were front-running the Fool recommendations.
“I’m ok with sharing the weekly trades with you. I have used it so far to generate a
significant amount of money and I’m sure you will be able to as well. There is a small
possibility that what we are doing could be considered insider trading. The Motley fool
[sic] uses only public information about [sic] to make its recommendations and even the recommendations are behind a paywall so it is a stretch to call it insider trading but it
certainly behaves like it because it almost guarantees favorable price moves at a certain
time.”
The missing part is how Stone was getting the information. There is no mention in the complaint of how. I would guess that Stone had managed to hack the Motley Fool website to find the recommendations before they went live.
“Looks like tomorrow’s update is in video form which means I can’t see what is in ahead of time.”
I think the question will pivot on how the hack happened. Was the Fool just publishing pages, but not announcing and not publishing the link? In that case, maybe the information was not obtained illegally. It would just be poor security by the Fool. I doubt that is the case. It sounds more like Stone had hacked into the Fool webserver and could see the pages in development for the recommendation.
This looks a lot like the outsider trading cases that the SEC brought against traders who made a big pile of money by hacking into corporate press release websites and trading on the news before it was made public.
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