The hedge fund world occasionally crosses a legal line when gleaning information from corporate insiders. Now, a federal investigation into Herbalife and the traders who traffic in the company’s stock reveals that hedge funds themselves produce insider secrets.
Stretching the boundaries of insider trading law, the Securities and Exchange Commission on Tuesday accused two men of possessing confidential information about a hedge fund’s plan to bet against Herbalife. One of the men, Filip Szymik, settled the case; his friend and co-defendant, Jordan Peixoto, did not.
Mr. Szymik’s problems, first detailed in a New York Times article in May, began when he learned that the billionaire William A. Ackman was planning to announce a bearish view of Herbalife, a giant diet supplements company. Mr. Szymik had an unlikely source: his roommate was a junior employee at Mr. Ackman’s hedge fund. The roommate, who did not himself trade in Herbalife, is not accused of any wrongdoing.
The S.E.C. pursued Mr. Szymik, a 29-year-old former collegiate tennis star, even though he did not trade either. Instead, according to the S.E.C., Mr. Szymik shared the insight with another friend, Mr. Peixoto, who placed his own wager against Herbalife. When Mr. Ackman announced a $1 billion bet against Herbalife, a move