The insider trading laws are made up of a patchwork of judicial opinions that attempt to stretch a very vague statute (Section 10(b) of the 1934 Act) to reach most every type of trading on inside information. As a result, almost without exception, there are really no “repeatable” ways to legally trade and profit off of inside information.

However, every once in a while a scenario or idea arises that would seem to allow for what one might call “legal insider trading” on an ongoing basis.  I’ve seen this twice in the past few years. The first instance of this was brought to us (coincidentally, given his recent re-emergence in the world of SEC enforcement) by Mark Cuban, who in 2006 created a publication called Sharesleuth.com. Cuban hired a business reporter to run the publication, conduct investigations to “identify suspect companies,” and then publish reports showing all of the damning evidence. Most notably, Sharesleuth told the world right up front that Cuban was going to make personal investments based upon the information discovered, and do so prior to the publication of this information on the website.

As I wrote back in 2006,

In short, the business model for Sharesleuth.com is that Cuban takes short positions in advance of the publication of the stories published on Sharesleuth.com with the hope and expectation that the negative stories will be read by other investors. These investors will then presumably sell the stock, drive down the stock price and enrich Cuban. And repeat.

For reasons only a securities professor could love, most people agreed that Sharesleuth’s plan did not violate the law, making it, to my knowledge, the first “replicable-on-demand” business model that avoided the insider trading laws while permitting an investor to trade on nonpublic information. Sharesleuth still exists, but seems to have lost steam with just a few posts in that past year or so.

So Sharesleuth had the distinction of being the only “legal insider trading” business model I was aware of until this week, when I read a story on Dominic Jones’ IR Web Report (click here) about the uneven distribution of PR wire service information. As discussed here previously, Jones states that leading PR wire services used for corporate disclosure do not deliver information simultaneously to all investors, and that “some investors, mostly professionals with access to expensive subscription services, are trading in extended hours on information they receive from companies up to several minutes ahead of most other investors who rely on public sources of information, such as company websites or popular investment websites like Yahoo! Finance.”

The effect of this, according to Jones, is that a small group of investors who have direct access to newsfeeds (via Business Wire’s proprietary NX system or a wholesaler) receive earnings and other information ahead of most others and can profit almost at will by trading minutes before the masses.

Jones offers the example of Google Inc.’s Q3 earnings announcement which was issued by the company at at 4:01pm ET on October 16. Jones writes that some traders received Google’s news release almost two minutes before the release was posted to Yahoo! Finance at 4:03pm, by which time Google’s stock was already trading up almost 9% in the after-market.

Even more so than with Sharesleuth, it is difficult to argue that people trading based on PR wire service information they legally receive (albeit before the rest of the public) have violated the insider insider trading laws. Jones says that until the quirks in the PR wire services are eliminated, the SEC should simply instruct NIRI, the National Investor Relations Institute, to have its member corporations post corporate disclosures on their websites simultaneously with the release on the PR wire services. Until this situation is rectified one way or the other, however, those with the access described above would seem to have an opportunity to do some serious “legal insider trading” of their own.

I am trying to get the SEC’s view on this practice, so stay tuned.