When information is property

"You know," a stockbroker told Wall Street Journal columnist R. Foster Winans in 1981, "we could make a lot of money if I knew the day before what was going to be in the column."

“I knew it was wrong,” Winans said later. “I knew it was a bad thing to do.” 

He did not, however, think it was a crime. “It seemed like a college prank at the time,” he explained. “It didn't seem like insider trading. It didn't seem like such a big deal. And I didn't even think it was going to work.”

It did work (for a time). And it was insider trading. But it took a years-long legal process that went all the way to the Supreme Court to figure out exactly why.

The story the Court heard was a comedy of errors.

Despite his patrician name, Winans grew up in blue-collar Doylestown, Pa., where he sometimes stole cars for midnight joyrides (he always returned them).

After dropping out of college and bouncing around the country working at local newspapers, he unexpectedly found himself writing the influential Wall Street Journal column “Heard on the Street.” 

The high-profile job paid $25,000 a year. 

Winans’ stockbroker co-conspirator was Peter N. Brant, a top earner at Kidder Peabody who Winans described as a modern-day Gatsby — free-spending, impeccably dressed, a member of the toniest golf club on Long Island.

In 1983, he booked $2 million of commission for Kidder.

Despite the name, Brant was no patrician, either: he grew up as Peter N. Bornstein, in blue-collar Buffalo.

Still, Winans was dazzled by Brant’s apparent wealth — and envious. When Brant asked, “Wouldn’t you like to be a millionaire?” Winans couldn’t refuse. He agreed to give Brant advanced warning of what he was writing for The Journal. In return, Brant agreed to share a portion of the profits he made front-running the news.

Over 27 trades, Brant made $690,000 — only $30,000 of which he paid out to Winans. Winans didn’t want to know how much the trades were making. He only asked for $15,000 upfront and another $15,000 when he later needed it.

Unfortunately, the trades were easier to make and than they were to hide.

“We cooked from day one,” Winans said later — in part because they were astonishingly bad at covering their tracks.

To avoid a direct connection between the co-conspirators, Brant made checks out to David Carpenter, whom the Supreme Court described as Winans’ “roommate.”

(This was the 1980s, remember, when Sesame Street referred to Bert and Ernie as roommates, as well.)

Unfortunately, Winans and Carpenter had co-habitated for 12 years — long enough to have a joint-bank account together. So the subterfuge did nothing to obscure the money trail between Winans and Brant.

Other subterfuges were similarly hopeless.  

Winans agreed to use the alias "Howard Cohen" when calling Brant from a payphone. Unfortunately, “he was not very good at remembering his false name,” prosecutors later explained. He sometimes announced himself as "Howard Kahn" or even "Howard Winans."

To disguise a $10,000 payment, Brant wrote a check to David Carpenter with the memo "drapes" — which might have worked if Carpenter had been an interior decorator. (He wasn’t.)

When the SEC began asking questions, Carpenter expertly coded a warning to Brant: "The drapes are not hanging right," he said on a call. Prosecutors somehow decoded the message.

Myriad other mistakes were made, including Brant’s decision to bring his deeply depressed lawyer friend David Clark into the scheme, as a way to “cheer him up.” It was a nice gesture: how better to help a lawyer fight depression than looping them into a highly illegal insider trading scheme?

Clark later testified against him.

(To complete the 1980’s tableau, Clark was depressed because he’d been embezzling money from his wealthy clients, including an actor who starred in Porky’s and Porky’s II.)

The conspiracy finally unraveled during a highly emotional dinner meeting at a perfectly 1980’s venue: the Trader Vic's tiki bar in the Plaza Hotel.

Carpenter had been drinking and became "slightly hysterical," according to the SDNY’s complaint. He turned on Brant, threatening him — somewhat vaguely — with “backing from gay and journalistic organizations.” 

Brant, undeterred, told him to stick to the story: that he had deduced the content of Winans’ articles in the normal course of speaking with him and that the payments to Carpenter were for decorating services. 

They did not stick to the story. Winans and Carpenter, deciding they no longer trusted Brant, confessed everything to the SEC.

Still, they pled not guilty in court.

They didn't dispute the facts: Winans had leaked the contents of his column to Brant, who traded on the information.

His defense, though, was that nothing had been “taken” from his employer. The Journal still had its information — the contents of his column, always accurate — and the column was published on time. 

As Winans' attorney put it: "When you use information, unlike a car, you are not depriving the other person of that information either permanently, temporarily, or partially."

At most, they argued, Winans had breached an unwritten rule of workplace confidentiality. Unethical, perhaps. But not fraudulent, because nothing had been “taken.”

The Journal was wholly unaffected by Brant’s trading, they added. 

The prosecution countered with a car analogy of its own. “If somebody takes my car and returns it with a full tank of gas and no dents,” they told the Supreme Court, “it is not okay for them to say, 'oh, nothing happened.’ They have deprived me of my car.”

The Court agreed: Winans and Brant had deprived The Journal of its property.

“The Journal,” Justice White wrote for the majority, “had a property right in keeping confidential and making exclusive use, prior to publication, of the schedule and contents of the 'Heard' column." 

By depriving his employer of that information — for the purpose of trading — Winans and his co-conspirators had committed fraud.

Not against the market. Or the investors on the other side of Brant’s trades. Or the companies whose stocks he traded. They had defrauded the owner of the information: The Journal.

In effect, Winans was convicted of his youthful habit of temporarily stealing cars. The fact that he stole them at night and returned them before morning, unharmed, did not change the fact that he had deprived their owners of their exclusive right to use them.

This remains a foundational principle of modern insider trading law: information can be property, even when it’s only used to trade — and even if it’s only used to trade in prediction markets.

That, at least, is the prosecution’s theory in the case against Michelle Spagnuolo, the Google engineer recently accused of using his access to Google search data to make a killing on Polymarket.

Spagnuolo, the CFTC says, “owed a duty of trust and confidence to his employer to maintain the confidentiality of that information and not use it for personal gain.”

Forty years after Winans, the government's theory is strikingly familiar. The trade is what monetized the offense, but it’s the misappropriation that made it fraud: "Employees who are entrusted with confidential business information cannot misappropriate that information for personal financial gain."

Spagnuolo’s attorneys will presumably argue that his case is different from Winans': because search data isn’t as price sensitive as a WSJ column, perhaps. Or because event contracts aren’t securities, like the stocks Brant traded. Or that search data, passively collected, can’t possibly be property in the way Winans’ columns were.

I’m guessing Winans himself would tell them it won’t work.

“Insiders who cheat commit a crime against their employers,” he wrote in an op-ed for The New York Times.

“I’m an expert on this issue,” he explained. “I stole from my employer.”

— Byron Gilliam