Insider Traders Investigated For ETF Stripping, Or How The SEC Is Now Only 10 Years Behind The Curve

Tyler Durden's picture

The brilliant minds as the SEC have finally realized that when it comes to insider trading, they are and will forever continue to be, about 10 years behind the curve. To wit: today, for the first time we learn that the transvestite midget porn fanatics have realized that one can use ETFs, and, gasp, swaps to mask insider trades. So while the SEC brainiacs diligently scour for those who buy massive blocks of stock (or calls) 2 minutes ahead of an acquisition announcement, virtually everyone else has been sneaking by unscathed simply because they have, rightfully, assumed that the SEC are a bunch of retards. Such investigative brilliance deserves to be rewarded with at least one taxpayer funded screening of Long Dong Silver (oh wait, they may realize there could be manipulation in the silver market, and by none other than JP Morgan, if they were to watch that.)

More on this moment of unparalleled SEC serendipity:

The Securities and Exchange Commission is investigating whether Wall Street traders are using exchange-traded funds as a means of disguising insider trading.

ETFs have emerged as a possible mechanism for maximising gains in one stock while potentially masking trading patterns, people familiar with the matter say.

In one scenario, a trader could learn information about a company, buy an ETF that includes the company’s stock, and short sell the other stocks in the ETF.

The practice, known as ETF-stripping, would allow the trader to benefit from movements in the company’s share price without directly buying or selling that stock.

And the money shot, er, line:

Regulators, who work closely with the US justice department, are concerned that traders are adopting this approach, and others, to mask insider trading.

They are concerned about this now, when this has been used by pretty much everyone in the hedge fund community for the past decade? How the hell stupid were all the analysts and traders in the Galleon-SAC insider trading circle to have been caught if the SEC has only figured out about this now???

And it gets funnier:

They are also looking into whether traders are using swaps to stay off their radar. The Dodd-Frank law will require a portion of swaps to trade on exchanges.

The punchline:

Law officials said they needed to use unconventional tactics because traders had become sophisticated.

Actually no, traders have always used these tactics. It is just the SEC that has forever been a bunch of beyond incompetent, porn-addicted rejects from any private jobs that actually pay anything.

But wait: there's more. Hedge funders, even those caught with their pants down, have a prearranged excuse:

The so-called mosaic theory, whereby investors gather large volumes of data to arrive at conclusions that look like they might be derived from insider trading, can be used as a legal defence.

One fund manager charged with insider trading on Tuesday allegedly told an analyst that he need not worry since he was using mosaic theory.

In other words, pretty soon the entire "get-Stevie" affair will fall appart at the seams after it becomes clear that not only is the SEC's enforcement division an evolutionary bottleneck in orangutan to simian evolution, but their lawyers are pretty much pro rata vertically in the whole Darwinian survivial of the dumbest game.