• 11.24.10

Apple Analyst “Channel Checks” Now Under SEC Spotlight as Inside Trading

Apple analysts on Wall Street are under increased SEC scrutiny for insider trading, centered on the “normal” habit of channel checks–working out what Apple may be up to by speaking to its suppliers. Is this unfair? Or are the analysts really cheating?

SEC iPhone

We’re used to reading analyst reports about Apple that cite Apple’s (mainly Far Eastern) suppliers, leading to rumors about how many units of such-and-such an iDevice are being sold, or if components of an upcoming piece of Apple hardware can tell us what capabilities it will have–thus revealing information about how it’ll fare against its competition. Wall Street analysts use these data to form opinions about how Apple’s business will perform in the future, and thereby guide their clients on whether to buy or sell Apple stock. The rest of us use their data to learn about upcoming Apple gear, and you can be sure Apple’s rivals pay attention for the same sorts of reasons.


But the Securities and Exchange Commission is now busily involved in scrutiny of this “channel check” habit, on the grounds that it’s a form of insider trading. The argument runs that Apple’s suppliers should be keeping this information confidential, and are probably breaking their confidentiality agreements with Apple by revealing any facts. By involving themselves in this NDA breaking, the analysts are accessing privileged information in exactly the same way they’d be committing insider trading if they recommended stock activity based on information leaked from inside Apple’s executive team.

Given that speculation about Apple is known to drive its share price, and even misinformed blog publications can wipe billions of dollars off the market value of the high-profile company, maybe the SEC has a good case.

The sore point is that Apple is so very secretive about its plans, compared to its peers, that this sort of data is the only way a detailed view about Apple’s possible future can be crafted. Without it, analysts would be reduced to mere guesswork (albeit informed by expertise), which would place analysis of Apple at a disadvantage compared to some of its competition. Whether or not such analysis should be performed for any company is a matter for lawmakers and economists to squabble over, however, because one thing that’s evident is that the detailed mechanisms that drive the economy do have a shady underside.

The Commission is also apparently investigating “expert network” companies which, in exchange for cash, connect investors to employees of companies of interest (such as Apple) in order to gain access to information which may inform their investment plans.

Is this too much of an expansion of the SEC’s powers? We know Apple’s a hot topic in terms of investment, but we wish that the authorities treatment of intellectual property laws was as sensitive to the intricacies of the dynamic world of high tech as the SEC is–then we’d see less patent trolling, like the anti-Apple cases that are popping up all the time.

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