Defining the Insider

Who is a Wall Street insider? Under the Securities Exchange Act of 1934, insiders are defined as officers, directors and major stockholders of corporations, and are sternly prohibited (maximum sentence: two years and $10,000) from using inside information for private gain on the stock market. But the law does not reach thousands of people who are not really in but are far from out: financial reporters who are often the sole outside possessors of inside information before the story is published, friends who get tips from directors, securities analysts whose research allows them to become privy to company secrets. Last week, in a decision written by its new Kennedy-appointed chairman, William L. Gary, the Securities and Exchange Commission made an unprecedented move toward bringing the in-betweens within the law. The case turned around Robert Gintel, 33, a partner in the Wall Street brokerage house of Cady, Roberts & Co., and his role in a well-timed sell-off of Curtiss-Wright Corp. shares on Nov. 25, 1959. Two days earlier, Roy Hurley, then chairman and president of Curtiss-Wright, had held a much ballyhooed press confer- ence in which he displayed a revolutionary rotary combustion engine that he said C-W was going to produce. On the strength of this promised new product, C-W shares jumped 8 1/4 points in the next two days, to reach the year's high of 40 3/4. But at the C-W directors' meeting on the 25th, the decision was made to cut the quarterly dividend from 62 1/2-c- to 37 1/2-c-.

Call to the Office. According to the rules of the New York Stock Exchange, the dividend reduction should have been flashed at once to the Exchange and the Dow-Jones ticker service. Through a series of secretarial slipups, the messages were delayed by nearly an hour. Unaware of this, J. Cheever Cowdin, who was both a C-W director and a partner in Cady, Roberts, telephoned his office and left a message for Gintel about the dividend reduction. For a few moments, Gintel was the only outsider with the news. Instinctively, he sold--and made for his clients and his wife's account a fat profit.

In the ensuing investigation of Hurley and the strange behavior of C-W shares, Gintel was singled out for having acted on insider information and was severely reprimanded by the Exchange and fined $3,000, which was the same profit he had made for his wife's account by selling 950 shares short.

Something to Live With. Though Gintel argued that he simply acted to protect his customers, the SEC last week suspended him for 20 days from the New York Stock Exchange. The ruling: since Gintel had acquired inside information through a special relationship with an insider, he was bound by the same rule as insiders. Said the SEC: "Clients may not expect of a broker the benefits of his inside information at the expense of the public generally."

Though most Wall Street houses already follow the principle that if one partner is an insider, all other partners in the firm must be prepared to behave like insiders, hardly anyone, including Gintel, doubted that the SEC had correctly used the episode to lay down a needed ground rule. Said one young broker: "If I know what the law is, I can live with it."

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