Posts Tagged ‘insider trading’

Even the Most Respected Investors in the World Make Mistakes

Wednesday, May 4th, 2011

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(credit: jmv)

You may not have heard yet, but there’s been some interesting drama in the house of the country’s most-worshipped investor – the Oracle of Omaha, Mr. Warren Buffet. One of the top execs at his company (Berkshire Hathaway) seems to have, well, cheated at the game. David Sokol looked like he was next in line to replace Buffet when he eventually retires. But then he pulled a little thing called insider trading.

He bought a bunch of shares in a company, and then convinced Buffet that Berkshire Hathaway should buy that company, which raised the price of the shares and made Sokol a tidy profit. Unfortunately for everyone, that’s illegal. (For the record, Sokol so far denies doing anything wrong.)

There are many ways the company could have handled it – they could have tried to cover it up, or denied the whole thing and given Sokol a big bonus. But to his credit, Berkshire’s famous leader just fessed up. At the company’s annual meeting, where company executives meet with investors, explain their decisions, and take feedback, Buffet basically said that his top aide had done a terrible thing. He also heaped some blame on himself, saying that he wasn’t skeptical enough when Sokol came to him with the proposal.

Now Sokol is out of a job and the company is moving forward. Easy as that. The truth is, bad things happen all the time. But in business as in the rest of life, all it really takes to make things right again is to take responsibility for what happened, fix what you can fix, and move on.

A Refreshing New Wall Street Scandal

Wednesday, April 27th, 2011

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(credit: REUTERS/ Shannon Stapleton)

Ah, spring! Baby birds stretch their wings, trees release deadly spores, and Wall Street awakens from its long post-Ponzi slumber. You know, Ponzi. Scheme. Ponzi scheme. Madoff?

This guy.

But we digress. Today’s news is about Raj Rajaratnam, the founder of a successful hedge fund called Galleon Group. He’s been accused of insider trading – this is, unfairly using information from outside sources in order to make a big profit for his company (and himself).

Here’s what you need to know about Bernie and Raj:

  • 1. Madoff has already been tried, convicted, and sent to prison for 150 years. Raj is just on trial – and he’s still innocent until proven guilty. If he is proven guilty, though, he’ll be in the clink with Bernard for up to 25 years.
  • 2. Madoff ran a Ponzi scheme – he collected money from new investors and handed much of it over to existing investors, calling it a return on their investment. In other words, he just moved the money around instead of investing it. It involved a huge network of people, funds, customers, billions of dollars, and many, many handshakes.
  • Galleon Group is accused of insider trading by using a small network of tipsters from different companies. These tipsters [allegedly] shared valuable corporate secrets with Galleon, and Galleon [allegedly] used that information to make a killing on the trading floor. All very fine line behavior.

What would you do if someone gave you valuable information about a potential investment win?

Competitive Culture = Cutting Corners?

Wednesday, November 24th, 2010

U.S. officials have been snooping around and raiding the offices of certain hedge funds recently, and there seems to be a cultural connection between them all…

  • Many of the hedge funds being investigated for insider trading were started by former traders for SAC (a private investment management firm).
  • SAC allow its employees to trade small amounts of company money once they’re hired, and if they do well they’re given more power. If they don’t do well, they get the boot.
  • This competitive culture creates a tension – SAC traders want to succeed professionally but don’t want to join Bernie Madoff in the clink for all eternity. Sometimes, the best intentions can land you there anyway.

Facts & Figures

  • SAC employs 800 people, including 20 lawyers and other nitpickers charged with keeping things in line with regulation
  • Level Global Investors LP and Diamondback Capital Management LLC, two hedge funds started by former SAC traders, were some of the first to be raided by federal agents
  • Richard Choo-Beng Lee, another former SAC employee, pled guilty to insider trading last year

Best Quote

“That eat-what-you-kill culture is highly competitive. A set-up where you have traders running their own portfolios instead of feeding into a centralized investment may make it more tempting for them to cut corners.” – Craig Lilly, an attorney at Greenberg Traurig LLP

Congressional Staff Profit From Suspicious Trades

Monday, October 11th, 2010

If you invest because you know a government bill benefiting a certain industry is going to pass soon, does that make you an inside trader?

  • You may be surprised to learn that insider-trading laws don’t apply to Congress. Some lawmakers have tried to change that with the STOCK (Stop Trading on Congressional Knowledge) Act, but there hasn’t exactly been a lot of momentum to get that law passed.
  • The Wall Street Journal went through financial records of Congressional aides and found that many were trading in stocks whose prices were directly or indirectly impacted by the legislative activities of their bosses. The finance and energy sectors were especially popular among Congressional traders.
  • Because aides don’t technically make the decisions that determine whether laws are passed, some say there is no real conflict of interest. But both members of Congress and the highest-paid Congressional aides (about 11% of all aides) are required to make the details of their personal finances public.

Facts & Figures

  • In 2008 and 2009, 72 Congressional aides have traded stock in companies overseen by their bosses
  • Some of the higher-paid aides earn salaries of $170,000 per year

Best Quote

“Congressional staff are often privy to inside information, and an unscrupulous person could profit off that knowledge. The public should be outraged there is no law specifically banning this.” – Vincent Morris, Spokesman for Rep. Louise Slaughter (D., N.Y.)

What do you do if someone gives you insider information?

Wednesday, October 7th, 2009

When someone has privileged or sensitive non-public information about a company that could affect its share price once the information becomes public, they can use that information to either buy or sell stock at the expense of the people they sell to or buy from who don’t have this information. This is called insider trading and it’s illegal. Let’s say you work at a company and know that the company just lost a ton of money, even though the public thinks the company is doing great. If you sell  your stock to the unwitting public, that’s insider trading.

But what if you are just given the information and aren’t actually an “insider” at the company? This is often called “tipping,” and it’s still illegal for you to trade based on that privileged information because the effect is the same – if people think that it’s not safe to invest because they are going to be taken advantage of by sneaky insiders and their friends, they won’t buy stock, and that’s bad for everyone.