A small cap miner has announced a very significant gold find. The stock has moved from 10c per share to a dollar per share.
The problem is that if the find really is as described it is obvious that stock is worth $5 per share.
It doesn't trade at $5 per share because there is such a widespread history of small cap miners overstating (or even flat lying about) gold deposits. If you regularly bought the stock of small-cap miners announcing big finds you would probably go broke.
Now imagine you are the drilling contractor who drilled the gold. So you know exactly where the drill samples were taken with certainty.
And suppose you took those gold samples to the lab run by your brother without any third party intervention. And so between you you know with certainty that the drill samples are real and the gold in them was accurately measured.
The results have been completely announced to the market. So the market has been fully informed.
But you know one thing with certainty that other people don't know. You know the results have not been faked.
So you buy the stock and it is a five bagger.Note that every piece of information you have is public except one piece. The one piece is that the company is telling the truth.
Your information is meta-information. It is information about the quality of information.
So are you guilty of insider trading?
This is not an idle question. At the moment Herbalife (to pick a controversial example) is a cheap stock if the company is telling the truth. (And that is where my research has been focused.)
If you knew with certainty that the company was telling the truth you would buy the stock.
This situation comes up regularly with controversial stocks and is in background in almost all stocks I buy or short.
I spend a fair bit of my time trying to work out the quality of information given to me. A lot of the time spent stock-picking is spent on the search for meta-information.
Discussion wanted both as to where legality begins and ends and (if anyone is game) on methods of assessing the quality of information.
PS. I am fascinated by edge-cases in insider trading. This one illustrates the difference between American and Australian law.
A gold explorer operating on their own privately owned tenement makes a big gold discovery.
The discovery is alas right on the boundary of their tenement and it is open and spreads (pretty obviously) into the neighbours' tenement.
The neighbours tenement is owned by a listed company (in this case a penny stock).
They go and buy this penny stock aggressively whilst the majority holder of the penny stock sells aggressively thinking nothing is there.
Under Australian law this was found to be insider trading. Under American law I suspect it would be fine. The person owning the private tenement is clearly not an insider in the penny stock - but they do have material non-public information.
Okay - lets extend this. Suppose the drilling contractor works all this out too. And they join in the trading but the owner of the tenement (who hired the drilling contractor) has not freed the contractor to trade the (third party) penny stock. Is the drilling contractor okay under American law?