Tipping

Tipping is the act of providing material non-public information about a publicly-traded company to a person who is not authorized to have the information. This is an illegal act, as it involves leading to ill-gotten gains for the tippee(s), or those who receive the information, and in most cases the tipper because of arrangements to share in trading profits.

Investment bankers and attorneys working on deals are often in possession of material non-public information that can be used for tipping, although occurrences of tipping are very rare. Mergers and acquisitions (M&A) announcements often result in significant price movements of the stocks of the companies involved in a potential business combination, enabling tippees to set up trades to profit from the advance knowledge. Many of these potential M&A deals are worked on for weeks or months before they are announced to the public. A number of senior bankers, accountants, lawyers and their junior staff (even some administrative staff) have knowledge of these impending deals, but they are bound by strict rules of confidentiality. Divulging information to non-authorized individuals will cause a tipper to get fired and face possibly much worse consequences under the law.

Tipping of material non-public information can also occur prior to earnings announcements. Say a financial analyst within a company who helps compile quarterly earnings reports learns that an unexpected shortfall in EPS will be announced on earnings date. He tells a buddy over a couple of beers at a bar. This individual then buys a large number of put options on the company's stock through his mother's online account. The news hits the tape on the date of earnings announcement and the stock plummets, producing huge profits. The individual hands over a portion of the profits to the tipper. However, a few weeks later the Attorney General's office comes around and wipes the smiles off their faces. They are fired by their employers, sued for insider trading, which eventually results in disgorgement of trading profits, civil penalties and a few months in orange jumpsuits.