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Nice Guys, Naughty Information?

Leo Kolivakis's picture





 

Via Pension Pulse.

Nathaniel Popper of the LA Times reports, Major investment firms subpoenaed in insider trading probe:

A number of high-profile investment firms — including two that manage mutual funds owned by millions of Americans — have received subpoenas in a federal probe of alleged insider trading on Wall Street.

Janus Capital Group Inc., a Denver-based mutual fund family, reported in a regulatory filing Tuesday that it had "received an inquiry regarding the recently disclosed insider trading investigation on Wall Street calling for general information."

Boston-based Wellington Management, which invests money for a number of pension funds and mutual funds, also received a government request for information, Bloomberg News reported.

One of the biggest names in the hedge fund world, SAC Capital Advisors, wrote in a letter to clients Tuesday that it had received a government request for information, according to a person who saw the letter.

Another big hedge fund operator, Chicago-based Citadel Asset Management, and at least two smaller hedge fund firms also were reported to have been subpoenaed.

Shares of Janus slumped 2.8% on the news. SAC Capital and Wellington are privately held.

News of the subpoenas came a day after FBI agents raided the offices of three hedge fund firms as part of the insider trading probe. Although a raid requires a search warrant approved by a judge, a subpoena can be issued without judicial approval.

Wellington has $598 billion in assets under management. Janus manages $161 billion. SAC Capital and Citadel manage many fewer billions than Wellington or Janus, but charge much higher fees relative to the size of the portfolios they handle.

The government's interest in SAC Capital caused a buzz on Wall Street because of the firm's successful track record and an air of mystery surrounding its secretive founder, billionaire art collector Steven A. Cohen, who has been called the "hedge fund king" by the Wall Street Journal.

Two of the firms raided Monday were started by alumni of SAC Capital.

Yahoo's Tech Ticker said that according to initial reports, the investigation could ensnare Wall Street's biggest names: Goldman Sachs, SAC Capital, Wellington, Jennison, MFS Global, Maverick, Citadel, and others. (Here's a who's who of who might get nailed.)

For Rolling Stone contributor Matt Taibi, author of Griftopia, there's nothing shocking at all about revelations of possible widespread insider trading on Wall Street (see video below):

"Everybody is trading on the inside somehow or another; so this isn't particularly surprising," Taibbi says. "A lot of sources I talked to suggested this is endemic to the entire culture."

 

The current investigations center around alleged insider trading prior to merger announcements such as MedImmune's takeover by AstraZeneca in 2007 and Merck's buyout of Schering-Plough in 2009, The WSJ reports.

 

While gaming takeovers is a "classic" form of insider trading, Taibbi says it's also evident in high-frequency trading, where exchanges provide a millisecond sneak peak at buy and sell orders, or the practice of clients front-running big orders by institutions.

 

"The real issue here is that it's everywhere," he says. "And the fear is there's no end to it."

 

Taibbi, who became widely known in financial circles in 2009 when he dubbed Goldman Sachs "a vampire squid on the face of humanity," says he is not cynical by nature. "But this Wall Street stuff is overwhelming," he says. "The more you look into it, the less you see the way out. The government seems so completely helpless to do anything positive in this situation."

Finally, Holman Jenkins Jr. of the WSJ reports, Nice Guys, Naughty Information?:

Beating a dead horse in argument is frowned upon, but sometimes it takes a good thrashing to reveal the absurdity beneath the surface reasonability. So it has been with the evolution of insider trading law.

 

Once it was deemed that the person acting on the information was naughty because, however valuable and accurate the information, acting on it involved a betrayal. An executive who traded on inside information betrayed his shareholders. A lawyer who traded on advance word of his client's deal betrayed his client.

 

You could buy or not buy this theory, based on whether you think the benefit of having the information in the stock price outweighs using criminal law to improve the climate of trust between principals and agents. But it was not insane. Insane is what has happened to insider trading law over the past generation, and by all portents may reach its culmination in today's widely leaked FBI crackdown on hedge funds and research firms.

 

Insane is treating the information as the offender. Insane is seeking serially to expand the circle of people who can be criminalized for trading on it, as if it were desirable to keep accurate information out of stock prices.

 

The latest investigation has led to raids on hedge funds and people who run research shops being visited by the FBI and threatened with jail. That much we know. The papers delight in hinting between lines that the climatic target is hedge fund impresario Stephen A. Cohen, whose vast wealth and semi- colorful history you can read about on Wikipedia.

 

The probe may yet reveal something we can properly hold our noses over. Bribes were distributed to betray corporate confidences. Agents were induced to sell out those whom they were duty-bound not to sell out.

 

It may also turn out—many years hence, after careers and lives have been ruined—to be an instance of the dead-horsers at the FBI and SEC running amok.

We can already cite one considerable irony. The effort over many years to police "insider" information has made such information more valuable. From "your bunny has a good nose" (a line that got an investment banker charged with insider trading in the 1980s) to today's crackdown on what leaky investigators describe as an insider information "trading network," the government has injected fertility drugs into a sub-industry of specialists devoted to winkling out whatever corporate information is not yet in the share price.

Lately books have been written debunking the efficient markets hypothesis, claiming it does not account for all known human phenomena. But a hypothesis does not have to be comprehensive to be valuable. And the securities markets, whatever their vagaries, manifestly do finally deliver prices that accurately reflect what an investor can expect back on the money he puts in. Romantic as it may seem, some of us even believe the stock research industry is worth putting up with if it contributes to creating accurate, up-to-date stock prices. Society is served, after all, when investors and management get the best possible feedback on what products and services and business models are most demanded by the public.

 

The SEC has a different view. The logic of insider trading law, taken to its dead-horse extreme, is to keep good information out of stock prices. In the SEC's ideal world, any information originating inside a company will be reflected in stock prices only after the company has publicly announced it to the world's investors simultaneously.

 

As a colleague said of Stalin, there is no way to get the SEC's ideal world without mangling the real world beyond repair. A company cannot do business without revealing itself to its customers, its suppliers, the guy who drives by and sees a parking lot more full (or empty) than the day before. Yet under "misappropriation theory" anyone can be prosecuted for trading on information that the government decides they should have known they shouldn't have known.

 

More ridiculous is the claimed motive: because it's "fair" to small investors.

 

Huh? In a world where hedge funds spend millions so their computers can be a nanosecond closer to the stock exchange, the average small investor is supposed to secure his retirement by betting on his ability to beat the world to some market- moving bit of information? Let us suggest an ironic and contradictory theory: What really improves the small investor's confidence in the market's fairness is when he buys a stock, is blindsided by some corporate announcement, and yet notices the stock barely moves anyway thanks to the sharpies who made sure the information was already in the price.

 

The SEC touts on every possible occasion its political bona fides with blather about its devotion to small investors. But if the agency really had our interests at heart, it would preach daily the unwisdom of most us ever buying an individual stock. We should be free-riding on the efforts of the people the FBI is trying to criminalize. Let the pros do the work of keeping stock prices "right" (a problematic concept, we understand). Let the rest of us sit back on our index funds while this marvelous, greedy, roiling system keeps Corporate America's nose to the wheel.

Mr. Jenkins' argument has merits but he uses twisted logic. The stock
market is rigged and it's ridiculous to hear the SEC is devoted to
maintaining a level playing field between small investors and large
banks and their large hedge fund clients. Joe and Jane Retail can never
compete with the Goldmans, Citadels and SAC Capitals of this world. Not
in their wildest dreams. To even suggest you can create a level playing
field is a farce!

Keep in mind, however, this nonsense has been going on for years. Matt Taibbi is dead right, it's endemic and pervasive across the entire financial industry. Pension funds who invest in these mutual funds and hedge funds are probably very nervous, weighing the reputation risk of being linked to these funds, especially if criminal charges are laid. When the ship goes down, everyone is looking to cover themselves. Also, the prospect of major hedge funds and mutual funds getting redemption notices makes traders on Wall Street very nervous.

This is the type of stuff that makes me nervous too because you don't know how it's going to play out. It might turn out to be nothing, and blow over, or it might snowball and wreak havoc in financial markets. Citadel and SAC Capital are two of the biggest and  best multi-strategy hedge funds. I don't want to blow this up until I hear all the facts, but now might be a good time for pension funds to cut risk across the board and assess the implications of these investigations. I keep asking myself why is this happening now? What else is lurking out there? Is this the beginning of a series of investigations? If so, we're in for a long, tough slug ahead.

 


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Wed, 11/24/2010 - 09:10 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

My apologies, after rereading that Jenkins article, I edited my comment:

Mr. Jenkins' argument has merits but he uses twisted logic. The stock market is rigged and it's ridiculous to hear the SEC is devoted to maintaining a level playing field between small investors and large banks and their large hedge fund clients. Joe and Jane Retail can never compete with the Goldmans, Citadels and SAC Capitals of this world. Not in their wildest dreams. To even suggest you can create a level playing field is a farce!

Wed, 11/24/2010 - 08:21 | Link to Comment Clinteastwood
Clinteastwood's picture

Wall St. runs on insider information.  What could be more obvious?  How else could these boys make such money year after year unless their gig is to obtain the inside scoop before everyone else?

The regulators providing a "level playing field" for the retail investor?  Right.  They are the same yoyos whose deficit enslaves our grandchildren.

Yoyos get all wound up, they spin, and then they go down and back into the drawer.

Wed, 11/24/2010 - 08:17 | Link to Comment AccreditedEYE
AccreditedEYE's picture

"But this Wall Street stuff is overwhelming," he says. "The more you look into it, the less you see the way out. The government seems so completely helpless to do anything positive in this situation."

That just about sums it up Leo. It's like Simon Johnson had said way back when:

"But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them."- Simon Johnson

For any ZH'er that hasn't read this article yet, please do yourself a favor and check it out. A bit dated, but still very, very relevant.  

http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/7364/

Wed, 11/24/2010 - 07:17 | Link to Comment zhandax
zhandax's picture

While I have great respect for Matt for bringing one of our favorite gripes to the masses,

The government seems so completely helpless to do anything positive in this situation.

makes me think we need to invite him over for a ZH-style Friday night kegger.  The boy has some more to learn.  Maybe Marla will spin some tunes.....

Wed, 11/24/2010 - 06:55 | Link to Comment doomandbloom
doomandbloom's picture

I keep asking myself why is this happening now? What else is lurking out there? Is this the beginning of a series of investigations? If so, we're in for a long, tough slug ahead.

 

I know *exactly* what you mean, Leo. Let me tell you why you're here. You're here because you know something. What you know you can't explain, but you feel it. You've felt it your entire life, that there's something wrong with the world. You don't know what it is, but it's there, like a splinter in your mind, driving you mad. It is this feeling that has brought you to me. Do you know what I'm talking about? - Morpheus

Wed, 11/24/2010 - 07:05 | Link to Comment BlackSea
BlackSea's picture

Classic line from a classic movie! I believe Morpheus was destroyed in the end....

Wed, 11/24/2010 - 08:00 | Link to Comment BearOfNH
BearOfNH's picture

... as opposed to Dr. Morbius who -- no, wait, he bought it in the end too. Along with the rest of Altair IV.

Wed, 11/24/2010 - 06:53 | Link to Comment Withdrawn Sanction
Withdrawn Sanction's picture

Im no lawyer (small favors), but it seems pretty straight-forward in principle to me.  Private (non-public) information is a potentially valuable asset of the company involved, and thus rightfully belongs to its owners (all of them).  Managers cannot misappropriate this asset for their own personal use anymore than they can pilfer petty cash for a haircut or bill the shareholders for a shower curtain to be used in their bathroom at home. 

In this connection, Jenkins’s parking lot analogy is a transparent straw man.  By definition, driving by the firm (on a public road) and observing one’s surroundings is a form of gathering publicly available information.  But the analogy does highlight a potential problem:  once information is in the public domain, not everyone has equal access to it, nor can they evaluate it equally well.  So equality in this instance cannot be the standard of justice. 

It really boils down, in my view, to whether the firm’s managers used the material, private information to enrich themselves at the expense of the firm’s owners. 

Wed, 11/24/2010 - 04:11 | Link to Comment ALPO
ALPO's picture

Jenkins casually dismisses the idea that "In the SEC's ideal world, any information originating inside a company will be reflected in stock prices only after the company has publicly announced it to the world's investors simultaneously."

 

What is unthinkable to him is exactly how I want to see the SEC force the markets to work.  Anyone acting on information that originated inside a company that was not made public is breaking the law.

Wed, 11/24/2010 - 02:30 | Link to Comment barliman
barliman's picture

"Mr. Jenkins is absolutely right."

Wow, this is the first time I have been inspired to comment on one of your posts.

This WSJ article is the most amazing piece of self serving propaganda I have ever read. It is completely given over to an amoral outlook without thought to the possible destructive aspects resulting from the disclosure of insider information.

Let's pose a theoretical situation just to make sure I am not missing something. Say I have "insider" information related to the planned multi-billion dollar capital expenditure of a global manufacturing firm that has a new product that bringing to market in advance of their competitors will result in a significant increase in their profits for more than a decade. Am I correct in saying that by Mr Jenkins's logic, and by implication, yours - if I provide that information by some means to the "experts" so they can price it into the firm's share value I would be improving the overall function of the market? Even better! What if I have additional knowledge that rather that a earnings boom the current product has a material flaw that will delay the product? Is the best service to the "market" for me to provide that information to someone other the firm producing the product so I can help people outside the firm better price their shares in the market place?

Just trying to clear up any ambiguity in how you think the markets should function.

barliman

Wed, 11/24/2010 - 02:39 | Link to Comment revenue_anticip...
revenue_anticipation_believer's picture

re: Nice Guys, Naughty Information?

Oh sure!  CLOSED DOORS FROM HERE...confidentiality to protect the presumed innocents....Beware, the net of legalized exclusions/sealed files...all that...no more 'discussions regards items pending trial,  'influencing' outcomes/witnesses...'  the war is over 'outsiders'....FEDS will handle it from here...

 

all THAT stuff...no? yes? Scenario as follows:

"Stand aside everyone, WE the SEC, the Federal Governmental Agency has Total jurisdiction HERE...all you states, cities, civil-law suite.....everybody...YOU just hand over 'what you got..' WE, the FEDS will handle it from here..." "Been way TOO much private disclosure, and malcontents (ZeroHedge and the like bloggers)...passing on false/incomplete information...lacking in 'balance and fairness, and Federal Perspective..'" "Everyone ELSE drop your cases, drop your inuendos 'pre-judgements...presumptions of guilt...'   Let the FEDS handle this please..."

 

Final SEC Judgement scenario: NOT GUILTY

the prevasive myth of 'insider information' that played so well when Joe Kennedy was in charge of the SEC 1934..WAS/IS  a myth - so 'get used to it' ... The stock market is 'rigged', should you like to call it that...insofar as 'relevant information' requires money, manpower, 'connections', organization and full time dedication IE= a BUSINESS OPERATION............it's ridiculous to hear that the SEC is devoted to maintaining the 1934 social/communistic myth of a 'level playing field'.... between small investors, large banks,  large hedge fund clients. "Joe and Jane Retail" can never compete with the Goldmans, Citadels and SAC Capitals of this world. Not in their wildest dreams. To even suggest you can create a level playing field is a anti-capitalistic populistic farce!  in year 2010, 'preposterous'...it has ALWAYS been this way...effectively therefore a matter of settled common law...PRE EXISTING since well before 1934...'not guilty' of conspiracy/collusion to defraud...at worse, merely stupid (with other peoples money)

 

Now...about all the small timers, guilty of aggregious obvious financial white collar criminality....not a problem...just revise the 'charge sheet' to 'mail fraud/wire fraud' ..... the standard Federal Felony catch all charge...for anything that crosses state lines so to speak -> hence federal court.... no problem THATS the standard  procedure....term of punishment dependent on amount of money involved -/+ 10 % judge discretion...cut and driedsimple...a couple of years in a white collar Federal country club and a 10 year levy to pay back the entire amount ..... not a problem, really...

 

 

 

 

 

 

 

Wed, 11/24/2010 - 01:31 | Link to Comment TruthInSunshine
TruthInSunshine's picture

Leo, are you involved in any sell-side activities?

I am asking as a serious question.

This article penned by you insinuates that potential fraud, including but not limited to insider selling/selling on inside information, should be ignored if it has the potential to damage markets or particular investors short term.

The counter-argument is that IF the appropriate authorities do flex any muscles and bring charges and obtain convictions of those who rig and profit from these casino like markets (I think I just insulted Vegas), long term viability of markets and investor confidence increases.

If you are on the sell side, Leo, you should be required to disclose that in EVERY thing you pen for ZH or anywhere else.

Wed, 11/24/2010 - 02:33 | Link to Comment Boilermaker
Boilermaker's picture

Leo is interested in perpetuating his lifestyle.  Even if it means fraud, purse snatching, or short changing mom & pop investors.  The point is to keep it going until HE dies.  Then let the survivors mop up the mess.

Wed, 11/24/2010 - 01:22 | Link to Comment IQ 145
IQ 145's picture

  This is correct; the original motivation was public relations; make it look policed for the retail trade. There is no insider trading legislation in Europe, and obviously things go along quite normally. It's just a fantasy.

Wed, 11/24/2010 - 05:55 | Link to Comment A Man without Q...
A Man without Qualities's picture

"There is no insider trading legislation in Europe"

Say what?  I know there is in UK, Germany and France for a start....


Wed, 11/24/2010 - 01:11 | Link to Comment RockyRacoon
RockyRacoon's picture

To even suggest you can create a level playing field is a farce!

I think the idea may be to tilt the field, not level it.

The big guys will always defeat the small investor on a level field.

Wed, 11/24/2010 - 03:13 | Link to Comment Pondmaster
Pondmaster's picture

When our leadership ( Congress and Senate) have Carde Blanche to trade on inside info at will and whim , why do any of us think for a New York minute that Wall St will be changed . Den of Thieves led by a coven of theives seated in the Offices of power in our nation . Respect the Office - boot out the usurpers seated therein.

Wed, 11/24/2010 - 06:04 | Link to Comment A Man without Q...
A Man without Qualities's picture

Agreed.  The purpose of democracy is for elected representatives to create laws that establish a moral framework in which society can operate according to the ethics of the majority.  When those in power build such a structure, but consider themselves to be exempt from this principals, the society itself will eventually fail.  It doesn't even matter whether it is an actual democracy, most complex societies through history have collapsed as a result of the egregious exceptionalism of those in power.

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