Gun-Jumping: What it is, How it Works, Prevention

Will Kenton is an expert on the economy and investing laws and regulations. He previously held senior editorial roles at Investopedia and Kapitall Wire and holds a MA in Economics from The New School for Social Research and Doctor of Philosophy in English literature from NYU.

Dr. JeFreda R. Brown is a financial consultant, Certified Financial Education Instructor, and researcher who has assisted thousands of clients over a more than two-decade career. She is the CEO of Xaris Financial Enterprises and a course facilitator for Cornell University.

Diane Costagliola is a researcher, librarian, instructor, and writer who has published articles on personal finance, home buying, and foreclosure.

Gun jumping, or more commonly "jumping the gun," refers to selectively using financial information that has not been publicly announced. At least two illegal methods of jumping the gun can be identified:

• Soliciting orders to buy a new issue before registration of the initial public offering (IPO) has been approved by the Securities and Exchange Commission (SEC).
• Buying or selling stock based on information that has not yet been disclosed to the public.

Understanding Gun-Jumping

Gun-jumping flouts the rule that investors should make decisions based on the full disclosure available to the public in the prospectus, not on information disseminated by the company that has not been approved by the SEC. If a company is found guilty of jumping the gun, its IPO will be delayed.

Key Takeaways

• Gun-jumping, in financial markets, is acting on information that is not available to all potential investors.
• It is illegal if it entails exploiting insider information for financial gain.
• Stock analysis techniques like the "scuttlebutt method" may exploit loose talk but not hard facts.

In order to build market integrity, trust, and confidence, regulators and market advocates discourage the use of private and undisclosed information. In theory, all market participants should be on an equal footing and have equal access to information.

When certain classes of investors, notably those on the inside or in a position of privileged access to information, enjoy the benefits of jumping the gun, it erodes the public's trust in financial institutions. This lack of trust can damage economic growth.

Preventing Gun-Jumping

Many rules and regulations are in place to prohibit or discourage financial actors from jumping the gun, but the incentives can be enticing. Some of these rules may be explicit, such as laws against insider trading.

Others are more subtle, such as the implicit public relations blowback an individual or a company can experience for using private information for personal gain.

Jumping the Gun Legally

Nevertheless, there are a couple of methods of stock analysis that get as close to gun-jumping as it is possible without flouting the rules:

• Followers of mosaic theory analyze a company by examining all of the material they can gather, non-public and public, about the company's performance and prospects. Industry ethics standards require that they disclose the sources of their information to their clients.
• Adherents of the scuttlebutt method talk to industry experts, competitors, and, when possible, employees of a company in an effort to piece together a more accurate view of a company.

There is nothing wrong, for example, with calling wholesalers and retailers to see what brands are selling fastest or slowest. Or talking with people who work for a company to get a sense of how efficiently it is run and whether it seems flush with cash or ready to cut costs.

Importantly, the people who do such research are not obtaining information that no one else has access to. They are trying to get a competitive advantage by asking questions that are not answered in public documents.

The Suspicious Activity Report (SAR) is a tool provided under the Bank Secrecy Act for monitoring suspicious activities not ordinarily flagged under other reports.

Black money includes all funds earned through illegal activity and otherwise legal income that is not recorded for tax purposes.

Fictitious trades, including wash sales and matched orders, are meant to look like market movement in an asset but are fake trades manipulated by a trader.

Bernie Madoff was an American financier who ran a multibillion-dollar Ponzi scheme that is considered the largest financial fraud of all time.

Kiting is the fraudulent use of a financial instrument such as a check to obtain additional credit that is not authorized.

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