Skip to comments.If You Hate Insider Trading, You Also Despise Dating
Posted on 09/05/2013 9:34:01 AM PDT by SeekAndFind
Martha Stewart. Raj Rajaratnam. Albert H Wiggin. Dennis Levine. Jeff Skilling. Do any of these names ring a bell? They're all people who've been accused of insider trading. Some of them have been convicted, while others have not (there were no laws against insider trading when Wiggin made his money). Today, the Securities and Exchange Commission (SEC) publishes a running total of the insider trading cases it pursues. But should insider trading even be a crime? In a word: no.
In some cases, the SEC takes action based on a combination of breach of contract and insider trading. In these cases, it's important to tease apart the issues because there is more than one thing going on.
Take the case of Stephen B. Gray, former CEO of a Houston-based investor relations firm. Gray violated a contract with his company. Per the terms of his employment, he was prohibited from using sensitive client information for anything other than business purposes. In other words, his firm's internal policy explicitly prohibited insider trading. He is also accused of the somewhat more "classical" notion of insider trading - namely that he used non-public, material, information to invest in companies ahead of other people.
In other cases, there's no breach of contract. For example, a former systems administrator at Green Mountain Coffee Roasters was recently charged with insider trading. The accused, Chad McGinnis and Sergey Pugach, used quarterly earnings reports (before they were released to the public) to buy stock options in the coffee company - making $7 million in the process.
These two cases seem quite similar but are, in fact, very different from one another. Gray is guilty of breaching a contract with his employer. Breach of contract is the same as breaking a promise because a contract is a particular kind of promise - the employee promises to abide by the terms set forth by the employer, and the employer makes other promises about salary and job responsibilities.
In Gray's case, shareholders, and possibly even the firm itself, should be able to sue Gray for damages associated with his breach of contract.
Now consider Chad McGinnis and Sergey Pugach. McGinnis, Pugach, and Gray all used non-public information as the basis for making investments but, unlike Gray, McGinnis and Pugach didn't violate a contract with anyone. The essence of their wrongdoing is that they used non-public information to make make money ahead of anyone else. This "unfairness" is deemed illegal.
However, it's only in the financial markets where an "unfair advantage" is criminalized. For example, suppose a journalist is about to break a story about some political scandal. This is the scandal of the century. It implicates the President, and several cabinet members, and could radically change politics forever. To get his story, the journalist had to rely on secret contacts. He also had to keep the story "hush, hush" for several months while gathering and verifying all of the details. He scooped all of his peers.
Is he sent to jail? Hell no. He wins the Pulizter Prize. Yet, if this were the financial world, and he had used non-public information to scoop other investors, he'd be guilty of the crime of "insider trading."
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$1000 invested and friendly brokers assigned others loss and her all the gains to miraculously make $100,000k in cattle futures.
and Terry McAweful
Rodham was given some big “favors”...........
The biggest “insiders” are those in government.
how else are all the congress leeches going to get rich without being caught doing insider trading, if we don’t make insider trading legal and call it ‘a good thing’?
why, you must be against dating then, you troglodytes.
The Hillary episode should be remembered by all.
But, it wasn’t insider trading. It was “bucketing”, or trade allocation. I’d wager a lot that for every winning trade Hillary made, her advisor lost the exact amount. We’ll never know, because the account records were old and “lost.”
Right, back in the day when there was no instant computing to put investment results into the proper accounts.
Back them the broker at the end of the day could falsify what happened and play favorites with those they choose.
If you immediately text your broker to sell the company short, are you engaging in insider trading?
Have we criminalized the powers of observation?
Allocation is still an issue.
Yes, no. Insider trading doesn’t criminalize observation, it criminalizes taking advantage of people who cannot possibly have the data you have. Observation is available to all, inside information is not.
I know of a graduate student of finance who worked as a waiter in a high class restaurant to help pay for his tuition.
He happened to befriend several hedge fund managers who frequented the place where he worked and overheard their discussions on the latest mergers, acquisitions and other information not known to the public.
A few of these managers even got a little drunk and spilled some beans while talking to him. He made quite a bundle from the knowledge he gained and was able to pay of his tuition.
Should he be criminalized for this?
Really? In this day and age I would require instant transaction and allocation logs to verify in actual time what occurred.
In these modern times allocation problems should be tough to pull off in a non-third world nation.
Jeff Skilling and the Enron crowd were not just insider traders that benefited themselves....they used massive crooked schemes to defraud many, many people.
The CFO (who went to jail w/ his wife for tax fraud—among other things) “hid” debt in countless entities set up to lull investors into thinking the company was solvent.
Their accounting firm was aiding and abetting the frauds-—and was later dissolved.
The Calif energy fraud alone was contrived to artificially boost the bottom line..... a shocking fraud.
Ann’s description is exactly the way it happened. The broker, “Red” Bone, was later sanctioned by his regulators for doing exactly this sort of trade allocation in some other accounts.
This incident happened while the Clintons were in Arkansas, so I heard about it very early in Bill’s term. Soon afterwards, I learned of the Billy Dale travel office incident. Those two things were all I needed to fix my opinion that the Clintons were corrupt.
(If you don’t know about Billy Dale, look it up. Basically, Hillary wanted a friend to take over his appointment. Bill had the right to put that friend in Billy’s job, because it was a political appointment. But, worried about appearances, Hillary decided to accuse him of embezzlement—even though it was completely and obviously untrue. So she used the power of the government to falsely accuse and persecute someone for the sake of appearances.
CASE IN POINT---When he went to jail, investigators found Ponzi King Bernie Madoff had stashed billions offshore---into a labyrinth of financial entities.
COLLUSION AND CONSPIRACIES GALORE Some $8.9 billion was funneled to Madoff through a dozen so-called feeder funds based in Europe, the Caribbean and Central America......a labyrinth of hedge funds, management companies and service providers that, to unsuspecting outsiders, seemed to compose a formidable system of checks and balances.
But the purpose of this complex architecture was just the opposite: the feeder funds provided different modes for directing money to Madoff in order to avoid scrutiny and generate more fees.
WIKI.COM Stanley Chais, a philanthropist who invested heavily with Mr. Madoff, and Carl J. Shapiro, one of the money manager's oldest friends, are among at least eight Madoff investors and associates being scrutinized by the U.S. attorney's office in Manhattan. Prosecutors are continuing to probe Madoff family members and employees.
Others include: Frank Avellino, a Florida accountant who ran an investment fund that invested client money; Noel Levine, a real-estate investor who works out of a two-room office on the 17th floor, next door to Madoff's fraudulent investment operation, and Palm Beach investor Robert Jaffe, a son-in-law of Mr. Shapiro who referred potential investors to Madoff. 
Madoff Securities International Ltd.----In 2008, about $1 billion was transferred last between Madoffs U.S. firm and Madoff Securities International Ltd. in London.  On March 24, 2009 Judge Louis L. Stanton granted power of attorney to Irving Picard, trustee, over Madoff's controlling stake in London.
Authorities in the U.K. are seeking evidence of money laundering involving the London business, Madoff Securities International Ltd., which opened in 1983 as a separate legal entity from Mr. Madoff's U.S. New York office. He allegedly sent more than $250 million beginning as early as 2002, from his New York-based firm, Bernard L. Madoff Investment Securities LLC, to the U.K. office and then back to accounts in the U.S.
In 2000, Madoff began to add staff and expand the operation, and loaned the business $62.5 million. He had a staff of 25, including traders, managers and support. Instructions to staff was that they communicate with Madoff Securities through personal e-mail accounts, not through company e-mail.
There were nine directors. Family members with shares included Mark and Andrew Madoff, Peter Madoff, and Bernard himself. Ruth Madoff, Bernard Madoff's wife, also held shares.  Non-family members with shares included Maurice J. "Sonny" Cohn. Madoff and Cohn were shareholders in Cohmad Securities, which steered investors to Mr. Madoff's advisory business.
In 1987, Mr. Cohn had shares of Madoff Holdings Ltd., a predecessor to the current London firm. In 1998, Mr. Cohn held 35,624 non-voting shares, some of which he transferred to "BL Madoff" in 1998, and the rest that he "disposed of" in 2004.
Paul Konigsberg, a New York City accountant and a longtime friend for more than 25 years, prepared two Madoff Family Foundation tax returns, and received the non-voting shares, valued at $35,000. He did work for the London office when it was first opened.  A general ledger of Madoff accounts listed Konigsberg, of the reputable accounting firm of Konigsberg, Wolf & Co., as receiving $30,000 a month to advise the MSIL operations, and funnel client checks to the London office for Madoff's own use.
Clients were often directed to Mr. Konigsberg by Mr. Madoff and his family. Mr. Konigsberg prepared the tax returns of foundations of six other families, many of which have lost millions, even hundreds of millions, of dollars. He also represented scores of individual Madoff investors.
Mr. Konigsberg's firm has received a civil subpoena from the SEC. His Madoff-related clients included Carl and Ruth Shapiro, Boston philanthropists whose foundation lost $145 million, and whose son-in-law, Robert M. Jaffe, under investigation, is a Madoff business partner.
Konigsberg held Madoff accounts under his name including two in the name of the Westlake Foundation. Paul J. and Judith Konigsberg are officers and directors of the foundation. He owns homes in his wife, Judith's name in Greenwich, Connecticut and Palm Beach Gardens, Florida.
On April 20, 2009, Steven Leber filed a $4 million lawsuit against Konigsberg and his accounting firm for negligence, and breach of fiduciary duty. Konigsberg answered the charges with affirmative defenses.
Evidence is being gathered by investigators on a U.S.-U.K. task force that Konigsberg and Levy, a real-estate mogul and philanthropist are believed to be involved in an international transfer of money. Levy is believed to have helped Paul Konigsberg funnel checks to London. And investigators in New York say there were billions of dollars worth of checks going back and forth between Madoff and Levy.
Ruth and Bernie Madoff had an intimate relationship with Levy and his wife, Betty. Madoff was long known to have been Levy's "fixer," obtaining everything from choice restaurant reservations to emergency medical care. Levy had offices one floor below Madoff's in New Yorks Lipstick Building. It was Levy who introduced high-profile investors to Madoff.
Jeanne Levy-Church's losses forced her to shut her JEHT Foundation and her parents foundation, the Betty and Norman F. Levy Foundation, lost $244 million. JEH helped the less fortunate, especially ex-convicts.
He violated the law, but the witnesses were drunk.
No. Contrary to what the article says, it is not a crime, or even a civil violation of the securities laws, to trade based on information not known to the general public. Insider trading applies only if the information is obtained in violation of a contract, or a violation of some other legal duty (e.g., a lawyer's duty to maintain the confidence of information disclosed to him by his client).
In these modern times allocation problems should be tough to pull off in a non-third world nation.
Would it not depend upon your firm's trade allocation policy for block trades? Suitability, for example, is often a judgement call.
It is not insider trading because he was the general public not someone who was obliged to keep the companies or his customer's secrets.
Now the people he over heard could be in trouble. And if he gave them part of his gains then they all are in trouble.
But other wise nobody is doing anything criminal
No. A shareholder meeting is a public meeting. That the rest of the public chose not to attend is of no concern.
I’m not sure if the same act taking place in a private meeting would rise to an “insider trading” claim, but I know that as presented it would not be.
Expanding on that, you could use wikipedia’s definition:
“In the United States and many other jurisdictions, however, “insiders” are not just limited to corporate officials and major shareholders where illegal insider trading is concerned but can include any individual who trades shares based on material non-public information in violation of some duty of trust. This duty may be imputed; for example, in many jurisdictions, in cases of where a corporate insider “tips” a friend about non-public information likely to have an effect on the company’s share price, the duty the corporate insider owes the company is now imputed to the friend and the friend violates a duty to the company if the corporate insider trades on the basis of this information.”
Thus someone who is not directly obligated can still be prosecuted for insider trading if they get information from someone who was obligated.
I agree in part with “Harmless Teddy Bear”, but think it is more complicated, as most laws are.
If you overhear something in public, then you are just part of the public, and the information is “public” — it isn’t your fault that most of the public was NOT listening.
If however it was shown that you KNEW these people had information, and purposely took action to obtain the insider information from them, knowing it was insider information, and then acted on it, you could be prosecuted, and might be convicted. Intent and action matter as far as this law is concerned.
Insider trading as strictly defined should be illegal, because it is not about “fairness” — there are winners and losers in a stock trade, and using insider information to gain an advantage in the contract of a stock trade would be little different than entering into any fraudulent contract — like a contractor substituting an inferior product without your knowledge.
In many cases, insiders have an obligation to stockholders which is violated if they gain an advantage in stock trades.
My best example of this is Enron. The Enron employers, and their democratic enablers, complained repeatedly that they were “cheated” by the officers of the corporation, because the officers did not disclose to them how bad things were, so the employees got stuck with worthless stock in their 401K plans.
But in fact, if the officers HAD told the employees, and the employees had used that information to sell their 401K stock, the employees would have been guilty of insider trading — because the employees would have been doing to non-employees exactly what they were accusing the officers of doing, cheating people out of their money under false pretenses.
In fact, the “proper” thing at Enron would have been that the officer HELD their stock, announced the problems, and then ALL of them would have lost their money in the market. There was no way that the employees could ever legally have come out with the money in their stock.
Of course, legality didn’t stop Obama from paying off the automobile unions when they should have lost their money because of bad investments in their companies — instead, Obama gave them the money just like if they had traded with insider information before the public knew the stock/bonds were worthless.
True, but only if the tipper was acting illegally in giving the tip and the tippee knew that. Overhearing executives talk in the elevator and trading on that information is not illegal.
I believe that the bold part alone would be sufficient for a conviction. If you learn inside information and you KNOW that it is inside information unavailable to the general public, how you got it shouldn't matter. It would be easier for a prosecutor to get a conviction if it could be shown that the information was obtained through manipulation but even if the information is obtained innocently, it cannot be used if it is known to be prohibited information.
I could agree with that — which would cover the case where you get information from someone who first got it from an insider.
I guess my point was that the information, at some point, had to have come from an insider in order to be “inside” information; which is why the case of observing a terror attack would not qualify, since you as the observer are not an “insider”, and can act on what you observe.
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