Yahoo Inc.'s shares fell as much as 5 percent on news today that the company agreed to buy back $1.16 billion of shares held by Daniel Loeb's hedge fund, Third Point LLC. Loeb also is resigning from the board along with two other directors who joined with him last year to end a proxy fight.
Yahoo will buy 40 million shares from Third Point at Friday's closing price of $29.11 each, leaving Third Point with about 20 million shares. The stock fell as low as $27.63 earlier today.
That brings this question from Henry Blodget in an article for Business Insider: "How is this huge Yahoo stock deal not insider trading?" He went on: "The information that three important board members are quitting is highly material information -- information that almost any reasonable investor would want to know when considering a Yahoo trade. Trading while in possession of material non-public information, meanwhile, is insider trading."
Here's why it isn't insider trading: Nobody stole anything. Third Point didn't misappropriate any information from Yahoo. The parties knew everything about each other's plans.
By contrast, it would be insider trading if some third party -- such as a Yahoo employee or an outside adviser -- stole the information about the stock buyback before it was released publicly and then sold Yahoo's stock short. That's not what happened.
"The U.S. bases its insider-trading laws on a notion of a breach of fiduciary relationship," said James Cox, a securities-law professor at Duke University. "And so most insider-trading cases are people stealing or misappropriating another person's information."
"Here we find that the fund is selling its shares on knowledge that it created itself. It owns the information that it's trading on -- its own secret intent. And Yahoo knows it, too. If you're the creator of the information then you can freely trade on it."
Cox added: "Our insider trading laws are not based on fairness. They're based on notions of: `Has there been a breach of a fiduciary obligation to preserve the confidentiality of the material nonpublic information?'"
The answer in this case is: No.
(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)