A London, England court has sentenced a former trader at a hedge fund there, AKO Capital LLP, who has pleaded guilty on insider trading charges. The trade, Anjam Ahmad, must pay about 287,000 pounds ($421,000) in fines and restitution.
There are as many as twenty two different companies involved in the trades that are the subject of the prosecution.
Judge Geoffrey Rivlin suspended his sentence, so and Ahmad, who is 39 years old, will serve no jail time.
Judge Rivlin at the sentencing June 22 said: "You cooperated immediately with the authorities and were very frank about the part you played in all this.”
The Financial Servcies Authority (FSA) has gotten a good deal more aggressive in such matters recently. Regular readers of this blog will probably understand that I believe that is unfortunate not only for Ahmad but for the economy and general public of the British isles.
Regulators and prosecutors are interested in trophies they can put on their walls. They aren't interest in what is best for the people paying their salaries. It isn't in their job description to be interested in what is best.
Showing posts with label insider trading. Show all posts
Showing posts with label insider trading. Show all posts
Monday, July 5, 2010
Tuesday, June 29, 2010
Rorech/Negrin victory, Part II
Let's pick up where we left off yesterday.
Judge John Koeltl has entered judgment in favor of the defendants, Rorech and Negrin, in an insider-trading enforcement action brought a little over a year ago. He ruled in the SEC's favor on the jurisdictional issue, but after that point in the opinion things are all downhill for the agency.
The Judge found, as a matter of fact, that Deutsche Bank has policies in place designed to keep its "public side" employees from obtaining information from its "private side" employees unless they need it and are aware of the importance of confidentiality. Further, the compliance office is to be notified when a "wall-crossing" does occur. Members of the sales force, including Rorech, are on the "private" side of this wall.
Mark Fedorcik, DB's global head of leveraged debt-capital markets (who, I should say at once, was not accused of anything in this matter) plays a critical role in the judge's reasoning, because it was Fedorcik's job, as the judge describes it, to straddle the wall, to "control the flow of information from the private side of the bank to their sales and trading colleagues ... and to potential investors." On the government's theory of the case, Fedorcik shared critical non-public information with his colleague, Rorech, in confidence. Roreck then went and blabbed out of school, to Negrin, who traded on this information.
At the trial in April, Fedorcik testified that he had not initiated any of these "wall-crossing procedures" in the period of July and early August 2006. That is when the bank was marketing VNU's bond offering, which in turn supposedly generated the "insider trading" in CDSs at the heart of the case.
Why didn't Fedorcik initiate any such procedures? A defense counsel asked him whether it was because he didn't believe that he was "in possession of confidential information that was being shared with any salesman?" Fedorcik replied: "That's correct."
Yet on the government's theory Fedorcik was the source of the information. The judge accepts Fedorcik's own account that anything he discussed with Roreck about VNU was already public information, which is fatal to the SEC's case.
As the judge writes, "Information that Deutsche Bank's investment bankers were advising the sponsors on the deliverability issues in general, ands that the sponsors were likely to address the investor demand for deliverable bonds was widely discussed in the marketplace in July 2006."
The takeaway, for investment managers, is that documented walls, procedures related to wall-crossings, anmd so forth are very good. The more thoroughly you can document such matters, the more credibility you buy from a finder-of-fact later if the question arises whether nonpublic information made it across the wall and then out to a trader.
Judge John Koeltl has entered judgment in favor of the defendants, Rorech and Negrin, in an insider-trading enforcement action brought a little over a year ago. He ruled in the SEC's favor on the jurisdictional issue, but after that point in the opinion things are all downhill for the agency.
The Judge found, as a matter of fact, that Deutsche Bank has policies in place designed to keep its "public side" employees from obtaining information from its "private side" employees unless they need it and are aware of the importance of confidentiality. Further, the compliance office is to be notified when a "wall-crossing" does occur. Members of the sales force, including Rorech, are on the "private" side of this wall.
Mark Fedorcik, DB's global head of leveraged debt-capital markets (who, I should say at once, was not accused of anything in this matter) plays a critical role in the judge's reasoning, because it was Fedorcik's job, as the judge describes it, to straddle the wall, to "control the flow of information from the private side of the bank to their sales and trading colleagues ... and to potential investors." On the government's theory of the case, Fedorcik shared critical non-public information with his colleague, Rorech, in confidence. Roreck then went and blabbed out of school, to Negrin, who traded on this information.
At the trial in April, Fedorcik testified that he had not initiated any of these "wall-crossing procedures" in the period of July and early August 2006. That is when the bank was marketing VNU's bond offering, which in turn supposedly generated the "insider trading" in CDSs at the heart of the case.
Why didn't Fedorcik initiate any such procedures? A defense counsel asked him whether it was because he didn't believe that he was "in possession of confidential information that was being shared with any salesman?" Fedorcik replied: "That's correct."
Yet on the government's theory Fedorcik was the source of the information. The judge accepts Fedorcik's own account that anything he discussed with Roreck about VNU was already public information, which is fatal to the SEC's case.
As the judge writes, "Information that Deutsche Bank's investment bankers were advising the sponsors on the deliverability issues in general, ands that the sponsors were likely to address the investor demand for deliverable bonds was widely discussed in the marketplace in July 2006."
The takeaway, for investment managers, is that documented walls, procedures related to wall-crossings, anmd so forth are very good. The more thoroughly you can document such matters, the more credibility you buy from a finder-of-fact later if the question arises whether nonpublic information made it across the wall and then out to a trader.
Monday, June 28, 2010
Rorech/Negrin victory, Part I
The Securities and Exchange Commission's case against Jon-Paul Rorech of Deutsche Bank and Renato Negrin of the Millennium hedge fund -- a case that the Manhattan federal court derailed Friday -- attracted a good deal of attention when it was first filed, in May 2009.
Here is the Reuters coverage from that time, for example.
The man-bites-dog reason for the interest is that this was the first insider trading case involving what had only then become a headline-worthy sort of instrument in the mainstream media, credit default swaps (CDS). In this case, the CDSs' were bets for or against the solvency of a Dutch media company, VNU, which was a client of Deutsche Bank.
The case was a test of a new theory of jurisdiction for the SEC based upon the Commodity Futures Modernization Act of 2000, which extended the SEC's enforcement authority to "securities-based swap agreement[s]."
Here's an analysis that Law360 did in August.
Those of you who have a PACER subscription can read Judge Koeltl's decision dismissing the case Friday. Be assured, there is no charge for viewing opinions. But be warned, this one is 122 pages long.
The Wall Street Journal this morning has headlned it on p. C1 (the prime real estate for real finance wonks -- let the 'casual reader' look to A1!): "SEC Loss Shows Difficulty of Insider Cases," with the byline to Kara Scannell.
Frankly, I think that headline itself exhibits exactly the wrong emphasis. (Scannell of course can't be blamed for the headline.) We shouldn't worry about the costs imposed upon the poor SEC as it brings tricky enforcement actions pushing the boundaries of its jurisdiction. They'll be all right, the world is full of porn whereby they can console themselves. We should be concerned, rather, by the individuals whose lives are disrupted by the very act of bringing such a case. Courtroom vindication a year later doesn't give you that year of your life back.
The court conducted a non-jury trial of the case from April 7 to April 28 of this year. It has now issued its findings of fact and of law.
The only good news from the pro-enforcement point of view (never my own) is that the court agreed with the SEC about what Congress had meant to do with that CFMA language I quoted above. Koeltl writes, "[The] CDSs at issue in this case are security-based swap agreements for the purposes of section 206B of the Gramm-Leach-Bliley Act and are subject to 10(b)'s antifraud provisions...."
The bad news for enforcers? He didn't buy anything else they tried to sell him.
I hope to come back to this tomorrow.
Here is the Reuters coverage from that time, for example.
The man-bites-dog reason for the interest is that this was the first insider trading case involving what had only then become a headline-worthy sort of instrument in the mainstream media, credit default swaps (CDS). In this case, the CDSs' were bets for or against the solvency of a Dutch media company, VNU, which was a client of Deutsche Bank.
The case was a test of a new theory of jurisdiction for the SEC based upon the Commodity Futures Modernization Act of 2000, which extended the SEC's enforcement authority to "securities-based swap agreement[s]."
Here's an analysis that Law360 did in August.
Those of you who have a PACER subscription can read Judge Koeltl's decision dismissing the case Friday. Be assured, there is no charge for viewing opinions. But be warned, this one is 122 pages long.
The Wall Street Journal this morning has headlned it on p. C1 (the prime real estate for real finance wonks -- let the 'casual reader' look to A1!): "SEC Loss Shows Difficulty of Insider Cases," with the byline to Kara Scannell.
Frankly, I think that headline itself exhibits exactly the wrong emphasis. (Scannell of course can't be blamed for the headline.) We shouldn't worry about the costs imposed upon the poor SEC as it brings tricky enforcement actions pushing the boundaries of its jurisdiction. They'll be all right, the world is full of porn whereby they can console themselves. We should be concerned, rather, by the individuals whose lives are disrupted by the very act of bringing such a case. Courtroom vindication a year later doesn't give you that year of your life back.
The court conducted a non-jury trial of the case from April 7 to April 28 of this year. It has now issued its findings of fact and of law.
The only good news from the pro-enforcement point of view (never my own) is that the court agreed with the SEC about what Congress had meant to do with that CFMA language I quoted above. Koeltl writes, "[The] CDSs at issue in this case are security-based swap agreements for the purposes of section 206B of the Gramm-Leach-Bliley Act and are subject to 10(b)'s antifraud provisions...."
The bad news for enforcers? He didn't buy anything else they tried to sell him.
I hope to come back to this tomorrow.
Sunday, December 6, 2009
The Charges Re: Galleon Go Way Back
This week, a federal district court in California unsealed documents indicating that Raj Rajaratnam received confidential information, wrongly forwarded to him by an employee at Intel, in 1999.
That is of course a full decade before insider-trading charges were brought against Rajaratnam this October.
Roomy Khan was a products marketing manager at Intel. It appears that she faxed confidential sales and pricing information to Raj's hedge fund, Galleon, in 1998. She was charged with, and in time (in 2002) pleaded guilty to, wire fraud in this connection.
I have to wonder: how material is such information? Obviously in principle sales and pricing information could lead a trading in receipt of such a leak to the conclusion that Intel's latest sales are in excess of projections -- and that when this fact becomes public, the price will rise to reflect it. Or the other way around. Such information could then inspired buying or selling, respectively. But how big a piece would her leak have been without the over-all mosaic of information relevant to whether the price of Intel stock will rise or fall on a given day?
Imagine just for the sake of a hypothetical that Intel made the following two announcements on the same day: it is planning a new stock issuance, and it had just sold more chips than it had expected. If these two announcements are the only bits of news relevant to Intel's value that day, and if there is nothinng industry-wide or economy-wide that swamps their effect, then the relative size of the two developments will presumably determine whether the dilutive effect of the former announcements sends the over-all stock value down, or the value-enhancement of the latter sends it up. It isn't like looking at the back of the book of the teacher's edition of a textbook to cheat on your homework.
In the market, there is no teacher's edition, except for the actual passage of time, and the real movement of that stock.
That is of course a full decade before insider-trading charges were brought against Rajaratnam this October.
Roomy Khan was a products marketing manager at Intel. It appears that she faxed confidential sales and pricing information to Raj's hedge fund, Galleon, in 1998. She was charged with, and in time (in 2002) pleaded guilty to, wire fraud in this connection.
I have to wonder: how material is such information? Obviously in principle sales and pricing information could lead a trading in receipt of such a leak to the conclusion that Intel's latest sales are in excess of projections -- and that when this fact becomes public, the price will rise to reflect it. Or the other way around. Such information could then inspired buying or selling, respectively. But how big a piece would her leak have been without the over-all mosaic of information relevant to whether the price of Intel stock will rise or fall on a given day?
Imagine just for the sake of a hypothetical that Intel made the following two announcements on the same day: it is planning a new stock issuance, and it had just sold more chips than it had expected. If these two announcements are the only bits of news relevant to Intel's value that day, and if there is nothinng industry-wide or economy-wide that swamps their effect, then the relative size of the two developments will presumably determine whether the dilutive effect of the former announcements sends the over-all stock value down, or the value-enhancement of the latter sends it up. It isn't like looking at the back of the book of the teacher's edition of a textbook to cheat on your homework.
In the market, there is no teacher's edition, except for the actual passage of time, and the real movement of that stock.
Wednesday, October 14, 2009
Cioffi and Tannin on trial
The trial of Cioffi and Tannin on charges of securities fraud, while managing hedge funds operated under the brand of the late Bear Stearns broker-dealer, has begun.
As I have indicated before in this blog, I believe that this prosecution is misguided and hope for a defense victory. But the usual conflict is playing itself out here. I believe I owe this considerable attention, but I just do not have the time to pay it that attention right now. What to do? When all else fails ... link farm.
Here's an account that appeared in the New York Times more than a year ago, of the prominent role e-mails play in the prosecution's case.
The wonderful blog "Houston's Clear Thinkers" was on the case in those days (though its presiding genius, Tom Kirkendall, seems to have been distracted since): here's what you can find there.
For more recent news, here is a discussion of a crucial evidentiary hearing.
Bess Levin has used the case as a vehicle for some humor at the expense of the defendants' former bosses, Cayne and Schwartz at Dealbreaker.
And then there is jury selection, which hasn't gone all that smoothly.
And let us not forget the Wall Street Law Blog.
Gee, I hope some of these guys link to this blog some day. Is that so much to ask?
As I have indicated before in this blog, I believe that this prosecution is misguided and hope for a defense victory. But the usual conflict is playing itself out here. I believe I owe this considerable attention, but I just do not have the time to pay it that attention right now. What to do? When all else fails ... link farm.
Here's an account that appeared in the New York Times more than a year ago, of the prominent role e-mails play in the prosecution's case.
The wonderful blog "Houston's Clear Thinkers" was on the case in those days (though its presiding genius, Tom Kirkendall, seems to have been distracted since): here's what you can find there.
For more recent news, here is a discussion of a crucial evidentiary hearing.
Bess Levin has used the case as a vehicle for some humor at the expense of the defendants' former bosses, Cayne and Schwartz at Dealbreaker.
And then there is jury selection, which hasn't gone all that smoothly.
And let us not forget the Wall Street Law Blog.
Gee, I hope some of these guys link to this blog some day. Is that so much to ask?
Wednesday, July 8, 2009
Insider Trading: Cioffi's Motion to Dismiss
A motion to dismiss is pending with regard to count four of the indictment of Ralph Cioffi (Eastern District, NY, case #08-cr-00415 FB).
Cioffi, as my readers may remember, is one of two men arrested last year in connection with the collapse in 2007 of two hedge funds within Bear Stearns that had made huge bets on subprime mortgages.
Both Cioffi and his alleged co-conspirator, Matthew Tannin, are charged with securities fraud, in that they continued to present their funds to the investing public as an "awesome opportunity" even while privately concerned about their sustainability.
Cioffi, but not Tannin, is also accused of insider trading (Count Four) in that he "sold shares he owned in the Enhanced Fund while in possession of material non-public information regarding the Funds' liquidity," etc.That is the count with which this motion to dismiss deals.
The motion to dismiss itself seeks to make a distinction between the hedge funds themselves as an entity and their investors. Inside trading, it contends, is not an offense against the public at large but against a particular entity with which the insider has a fiduciary relationship. If the hedge fund in question had been a public corporation, Cioffi would have had a fiduciary duty to its shareholders. But as it was a hedge fund, his duty runs to the fund as such, not to its investors, so the government's case is "flawed as a matter of law."
Filing #116 includes this motion (May 22) and its supporting memorandum.
Filing #133 gives the district attorney's reaction (July 7). The DA accepts the defense characterization of Cioffi's duty as running to the fund, and claims that this is the duty that was criminally violated. The violations vis-a-vis the other investors are derivative of that.
Although I oppose the whole idea of "insider trading" as a criminal offense, thinking "within the box" of established legal concepts, I have to say the defense counsel's point seems a bit weak to me here.
Cioffi, as my readers may remember, is one of two men arrested last year in connection with the collapse in 2007 of two hedge funds within Bear Stearns that had made huge bets on subprime mortgages.
Both Cioffi and his alleged co-conspirator, Matthew Tannin, are charged with securities fraud, in that they continued to present their funds to the investing public as an "awesome opportunity" even while privately concerned about their sustainability.
Cioffi, but not Tannin, is also accused of insider trading (Count Four) in that he "sold shares he owned in the Enhanced Fund while in possession of material non-public information regarding the Funds' liquidity," etc.That is the count with which this motion to dismiss deals.
The motion to dismiss itself seeks to make a distinction between the hedge funds themselves as an entity and their investors. Inside trading, it contends, is not an offense against the public at large but against a particular entity with which the insider has a fiduciary relationship. If the hedge fund in question had been a public corporation, Cioffi would have had a fiduciary duty to its shareholders. But as it was a hedge fund, his duty runs to the fund as such, not to its investors, so the government's case is "flawed as a matter of law."
Filing #116 includes this motion (May 22) and its supporting memorandum.
Filing #133 gives the district attorney's reaction (July 7). The DA accepts the defense characterization of Cioffi's duty as running to the fund, and claims that this is the duty that was criminally violated. The violations vis-a-vis the other investors are derivative of that.
Although I oppose the whole idea of "insider trading" as a criminal offense, thinking "within the box" of established legal concepts, I have to say the defense counsel's point seems a bit weak to me here.
Wednesday, February 25, 2009
Three brief items
1. Delaware state bar discussing corporate law change
The Delaware State Bar Ass'n has under consideration a proposal to amend the famously-influential Delaware General Corporate Law. If the bar association approves of them, the changes will be submitted to the General Assembly.
The proposed amendments include the creation of two new DGCL sections, Sections 112 and 113, that would (I quote a memo available through the website of Schulte Roth & Zabel) "greatly increase access to a corporation's proxy statement and the right to reimbursement for nominating directors to the corporation's board."
2. The Mark Cuban case
Mark Cuban is the defendant in an insider-trading complaint brought by the SEC in the US district court, northern district of Texas last fall. The SEC's theory of the case pushes at the outer boundaries of what had been considered 'insider trading,' or even 'tippee' status. That's enough reason to send a cheer or two his way.
I discussed the case when it was filed and won't repeat myself unduly.
Instead, I'll simply note that the judge hearing the matter, Sidney Fitzwater, has signed a scheduling order.
The parties have until July 1, 2009 to join other parties.
The party with the burden of proof on a given issue has until September 1 to designate its expertwitnesses, and the other party has until November 1 to designate its rebuttal expert witness.
They have until March 1, 2010 to file their motions for summary judgment.
After all that is disposed of, if nobody gets a summary judgment, the judge will consider the question of a date for trial.
3. Rambus antitrust case
The U.S. Supreme Court, on Monday, rejected a request by the FTC to review an appeals court ruling in favor of Rambus Inc. and against FTC's antitrust allegations. This should put an end to the controversy, underwy for seven years now, about whether Rambus, the owner of the patents to certain memory chips, had improperly manipulatred an industry standards setting group with anti-competitive intent.
The standards setting group was known as the Joint Electron Device Engineering Council (or JEDEC), and the allegation was in essence that Rambus' participation in the deliberations of JEDEC was that of a classic "mole." JEDEC was trying to enable its members to avoid patent hold-ups, and enable members of the industry to move ahead with common standards and without a lot of litigation. Rambus supposedly hid information about its own plans to patent certain technologies, so that in time it could say "aha!" to firms that had acted in the belief they could rely upon JEDEC standards.
In April 2008 the appeals court sided with Rambus, not because it rejected the general view that anti-competitive conduct could take that form but because the FTC had failed to show that Rambus's behavior gave it unlawful monopoly power.
The Delaware State Bar Ass'n has under consideration a proposal to amend the famously-influential Delaware General Corporate Law. If the bar association approves of them, the changes will be submitted to the General Assembly.
The proposed amendments include the creation of two new DGCL sections, Sections 112 and 113, that would (I quote a memo available through the website of Schulte Roth & Zabel) "greatly increase access to a corporation's proxy statement and the right to reimbursement for nominating directors to the corporation's board."
2. The Mark Cuban case
Mark Cuban is the defendant in an insider-trading complaint brought by the SEC in the US district court, northern district of Texas last fall. The SEC's theory of the case pushes at the outer boundaries of what had been considered 'insider trading,' or even 'tippee' status. That's enough reason to send a cheer or two his way.
I discussed the case when it was filed and won't repeat myself unduly.
Instead, I'll simply note that the judge hearing the matter, Sidney Fitzwater, has signed a scheduling order.
The parties have until July 1, 2009 to join other parties.
The party with the burden of proof on a given issue has until September 1 to designate its expertwitnesses, and the other party has until November 1 to designate its rebuttal expert witness.
They have until March 1, 2010 to file their motions for summary judgment.
After all that is disposed of, if nobody gets a summary judgment, the judge will consider the question of a date for trial.
3. Rambus antitrust case
The U.S. Supreme Court, on Monday, rejected a request by the FTC to review an appeals court ruling in favor of Rambus Inc. and against FTC's antitrust allegations. This should put an end to the controversy, underwy for seven years now, about whether Rambus, the owner of the patents to certain memory chips, had improperly manipulatred an industry standards setting group with anti-competitive intent.
The standards setting group was known as the Joint Electron Device Engineering Council (or JEDEC), and the allegation was in essence that Rambus' participation in the deliberations of JEDEC was that of a classic "mole." JEDEC was trying to enable its members to avoid patent hold-ups, and enable members of the industry to move ahead with common standards and without a lot of litigation. Rambus supposedly hid information about its own plans to patent certain technologies, so that in time it could say "aha!" to firms that had acted in the belief they could rely upon JEDEC standards.
In April 2008 the appeals court sided with Rambus, not because it rejected the general view that anti-competitive conduct could take that form but because the FTC had failed to show that Rambus's behavior gave it unlawful monopoly power.
Wednesday, November 19, 2008
A few words about Mark Cuban
I can't say I've admired Mark Cuban in recent years. His public persona is that of the standard-issue billionaire big-mouth, a real-like Tony Stark without the titanium suit, and the ideas behind Cuban's "Sharesleuth" project seem to me entirely misguided.
Gary Weiss explained the problems with Sharesleuth welll in several items posted on his blog in 2007, when that project (supposedly a new model for finance journalism) was at its peak. I'll just link you to one of those items, thereby taking that task off my own shoulders.
Instead I'll say this: unimpressed though I am with Cuban, I suspect he is in the right in his latest fight. The SEC has chosen him as its newest target for its intermittent anti-insider campaign.
I've never been impressed with the idea that punishing insider trading makes sense. Some deterrent for breaches of fiduciary duty is appropriate of course, but that's rather hard to find here.
So I'm rooting for Cuban. Fight the power, MC!
Joe Nocera’s recent book, Good Guys & Bad Guys, makes a related point. It’s in a reprinting of a story Mr. Nocera wrote for GQ in December 1992, concerning Drexel Burnham and Michael Milken.
For the record, Mr. Nocera occupies a ‘moderate’ position on the spectrum of reactions to Mr. Milken [who was in prison when the story was first written]: Nocera argues that the infamous financier was guilty of some crimes, but not of the worst of those of which he was accused, and that his sentence was excessive.
But that isn't what intrigued me about the article. The passage I have in mind quoed an unnamed associate of Milken's saying: “”When a Drexel salesman heard that the corporate-finance department was buying a stock – for what reason he didn’t know – and then advised a client wanting to sell that same stock that he might be better holding on to it, was that an example of insider trading? Or was it something more innocent?”
Good question. Indeed, it’s a better question than Mr. Nocera (who soon drops the query) may understand. There is nothing extraordinary about such an instance, and since given existing law and prosecutorial practices there is no good answer to that question, then the courts and prosecutors who punish insider trading are in effect telling traders, brokers, bond salesmen, etc. that they have to drive 55 miles per hour or below – and that they can’t use a speedometer, because none are available.
That’s wrong.
Personally, when I use the phrase “free markets,” I don’t mean the word “free” as an adjective. I mean it as a verb. Let’s free markets.
Gary Weiss explained the problems with Sharesleuth welll in several items posted on his blog in 2007, when that project (supposedly a new model for finance journalism) was at its peak. I'll just link you to one of those items, thereby taking that task off my own shoulders.
Instead I'll say this: unimpressed though I am with Cuban, I suspect he is in the right in his latest fight. The SEC has chosen him as its newest target for its intermittent anti-insider campaign.
I've never been impressed with the idea that punishing insider trading makes sense. Some deterrent for breaches of fiduciary duty is appropriate of course, but that's rather hard to find here.
So I'm rooting for Cuban. Fight the power, MC!
Joe Nocera’s recent book, Good Guys & Bad Guys, makes a related point. It’s in a reprinting of a story Mr. Nocera wrote for GQ in December 1992, concerning Drexel Burnham and Michael Milken.
For the record, Mr. Nocera occupies a ‘moderate’ position on the spectrum of reactions to Mr. Milken [who was in prison when the story was first written]: Nocera argues that the infamous financier was guilty of some crimes, but not of the worst of those of which he was accused, and that his sentence was excessive.
But that isn't what intrigued me about the article. The passage I have in mind quoed an unnamed associate of Milken's saying: “”When a Drexel salesman heard that the corporate-finance department was buying a stock – for what reason he didn’t know – and then advised a client wanting to sell that same stock that he might be better holding on to it, was that an example of insider trading? Or was it something more innocent?”
Good question. Indeed, it’s a better question than Mr. Nocera (who soon drops the query) may understand. There is nothing extraordinary about such an instance, and since given existing law and prosecutorial practices there is no good answer to that question, then the courts and prosecutors who punish insider trading are in effect telling traders, brokers, bond salesmen, etc. that they have to drive 55 miles per hour or below – and that they can’t use a speedometer, because none are available.
That’s wrong.
Personally, when I use the phrase “free markets,” I don’t mean the word “free” as an adjective. I mean it as a verb. Let’s free markets.
Wednesday, September 10, 2008
Freedom for Waksal
ImClone founder Sam Waksal walked out of prison last month and took up residence in a halfway house in the Bronx.
Waksal was locked up for insider trading, on a sentence of seven years and three months.
Here's an argument to the conclusion that he should never have been prosecuted from Reason.
Martha Stewart was allegedly one of the individuals whom Waksal tipped off about inside market-moving information. She went to prison herself of court, but on much lighter terms than his.
Waksal was locked up for insider trading, on a sentence of seven years and three months.
Here's an argument to the conclusion that he should never have been prosecuted from Reason.
Martha Stewart was allegedly one of the individuals whom Waksal tipped off about inside market-moving information. She went to prison herself of court, but on much lighter terms than his.
Sunday, June 1, 2008
Insider Trading: A speculation
Paul Rose, an assistant professor of law at Moritz College of Law, Ohio State University, has circulated a draft of a paper, it seems, will be published later this year by the North Carolina Law Review, simply entitled “Sovereigns as Shareholders.”
As that title implies, the article deals with "sovereign wealth funds" (SWFs) and their investments, especially their equity investments, and discusses a variety of legal puzzles that may arise.
One scenario briefly addressed in that article is that of a peculiar sort of insider trading. An SWF, as the arm of sovereign nation Z, could learn that another arm of said sovereign is about to bring an enforcement action against, or impose a costly regulation to the disadvantage of, company X. The SWF may then sell (or short) its company X stock, and/or increase its investment in the equity of one of X’s competitors.
My own take, frankly, is that this is the sort of speculation (Mr. Rose doesn’t adduce any example of such an event in the fifty-plus years during which SWFs have operated) that helps stoke irrationality on the subject.
But, hey, let's speculate. Assume away my usual caveats about why 'insider trading' itself is considered problematic. Would it be possible to keep such maneuvers a secret? It seems to me that what Z and its fund were doing in such a case would be very visible, and would work against the fund’s long-term return as diversified investors, while also undermining Z as a desirable business climate.
These are probably two good reasons why it hasn't happened.
Go, Buckeyes! Go, Tarheels!
Of course, ideally I'd rather not have sovereigns investing in US equity. I'd rather all the equity of private-sector entities be truly private in character. For that matter, if ideally I'd rather not have sovereigns. Period.
But the world does have sovereigns, and one of them, the US, owes a heck of a lot of money to many of the others. Those others are naturally going to re-invest that money somehow, and it is in general a good thing that they invest much of it back in the US, in forms which subordinate themselves to market principles. This isn't a situation that should cause hysteria.
As that title implies, the article deals with "sovereign wealth funds" (SWFs) and their investments, especially their equity investments, and discusses a variety of legal puzzles that may arise.
One scenario briefly addressed in that article is that of a peculiar sort of insider trading. An SWF, as the arm of sovereign nation Z, could learn that another arm of said sovereign is about to bring an enforcement action against, or impose a costly regulation to the disadvantage of, company X. The SWF may then sell (or short) its company X stock, and/or increase its investment in the equity of one of X’s competitors.
My own take, frankly, is that this is the sort of speculation (Mr. Rose doesn’t adduce any example of such an event in the fifty-plus years during which SWFs have operated) that helps stoke irrationality on the subject.
But, hey, let's speculate. Assume away my usual caveats about why 'insider trading' itself is considered problematic. Would it be possible to keep such maneuvers a secret? It seems to me that what Z and its fund were doing in such a case would be very visible, and would work against the fund’s long-term return as diversified investors, while also undermining Z as a desirable business climate.
These are probably two good reasons why it hasn't happened.
Go, Buckeyes! Go, Tarheels!
Of course, ideally I'd rather not have sovereigns investing in US equity. I'd rather all the equity of private-sector entities be truly private in character. For that matter, if ideally I'd rather not have sovereigns. Period.
But the world does have sovereigns, and one of them, the US, owes a heck of a lot of money to many of the others. Those others are naturally going to re-invest that money somehow, and it is in general a good thing that they invest much of it back in the US, in forms which subordinate themselves to market principles. This isn't a situation that should cause hysteria.
Monday, April 7, 2008
CSX/TCI
One lawsuit deserves another?
Last month, the railroad company CSX sued one of its large shareholders, the hedge fund TCI, claiming that it hadn't properly disclosed the nature and extent of its stake in the company.
So Friday, April 4, TCI filed its answer to that complaint, along with its counterclaims.
The answer is, simply: Yes, we did too disclose. Or, in language sounding a bit less like it comes from a playground: "All of the material information regarding TCI's investment in CSX is public," referencing in particular the Hart-Scott-Rodino notice that TCI sent CSX more than a year ago, and that CSX in turn included in its SEC filings.
The most newsworthy of the counterclaims is that CSX and its chief executive, Michael Ward, have engaged in insider trader, through the mechanism of the timing of certain stock grants to executives eleven months ago.
Last month, the railroad company CSX sued one of its large shareholders, the hedge fund TCI, claiming that it hadn't properly disclosed the nature and extent of its stake in the company.
So Friday, April 4, TCI filed its answer to that complaint, along with its counterclaims.
The answer is, simply: Yes, we did too disclose. Or, in language sounding a bit less like it comes from a playground: "All of the material information regarding TCI's investment in CSX is public," referencing in particular the Hart-Scott-Rodino notice that TCI sent CSX more than a year ago, and that CSX in turn included in its SEC filings.
The most newsworthy of the counterclaims is that CSX and its chief executive, Michael Ward, have engaged in insider trader, through the mechanism of the timing of certain stock grants to executives eleven months ago.
Wednesday, March 5, 2008
Melnyk and a Comeback
On February 28, Eugene Melnyk wrote the board of directors of the company he founded, Biovail, indicating that he's unhappy with their current direction.
He was the chairman of that board until last June, when he quit as part of a settlement with Canadian regulators over insider trading allegations.
Eight months of idleness appears to have been wearying, though. Melnyk, who owns 18.2 million shares (about 11% of the outstanding) writes: "I am at this juncture formally informing the Board that I have decided to explore, and am exploring, various options available to me in connection with my interest in Biovail, including the possibility of joining with a partner or partners to acquire the remaining shares of Biovail, selling all or a portion of my current Biovail shares to a third party, continuing to hold my shares for investment, or seeking changes to the composition of the Board of Directors."
Biovail is a pharmaceutical company specializing in making time-release versions of medicines (or, as their website puts it, "drug-delivery technologies.")
Between May and mid-July of last year, Biovail stock was trading in the neighborhood of $25. There was a sharp downward move in July, when the US FDA refused to approve a once-daily salt formulation of an anti-depressant. In August it found a floor at $16.
It fell trough that floor in December, when it announced it expected to settle a class-action lawsuit in the federal courts by making a payment of $85 million. The settlement, as is customary, includes no admissionof wrong-doing.
The stock price didn't find its new floor until mid January 2008, when it reached $12. It has rebounded a bit since then. But so far as I can tell, Melnyk believes that his successor has been inadequately aggressive as a litigant, leading to his 'decision to explore options.'
My own guess? (Just a guess folks, and don't take anything I say as investment advice -- if you do, you're an idiot!) My guess is that Biovail is better off without him, and ought to resist any "options" he explores that might put him back in a decision to make decisions. Melnyk was part of the problem, he isn't part of the solution. They can work their way through the tough times they've encountered.
"Once you went away, I was petrified/ Kept thinking I would never live without you by my side ... I will survive/ I will survive."
He was the chairman of that board until last June, when he quit as part of a settlement with Canadian regulators over insider trading allegations.
Eight months of idleness appears to have been wearying, though. Melnyk, who owns 18.2 million shares (about 11% of the outstanding) writes: "I am at this juncture formally informing the Board that I have decided to explore, and am exploring, various options available to me in connection with my interest in Biovail, including the possibility of joining with a partner or partners to acquire the remaining shares of Biovail, selling all or a portion of my current Biovail shares to a third party, continuing to hold my shares for investment, or seeking changes to the composition of the Board of Directors."
Biovail is a pharmaceutical company specializing in making time-release versions of medicines (or, as their website puts it, "drug-delivery technologies.")
Between May and mid-July of last year, Biovail stock was trading in the neighborhood of $25. There was a sharp downward move in July, when the US FDA refused to approve a once-daily salt formulation of an anti-depressant. In August it found a floor at $16.
It fell trough that floor in December, when it announced it expected to settle a class-action lawsuit in the federal courts by making a payment of $85 million. The settlement, as is customary, includes no admissionof wrong-doing.
The stock price didn't find its new floor until mid January 2008, when it reached $12. It has rebounded a bit since then. But so far as I can tell, Melnyk believes that his successor has been inadequately aggressive as a litigant, leading to his 'decision to explore options.'
My own guess? (Just a guess folks, and don't take anything I say as investment advice -- if you do, you're an idiot!) My guess is that Biovail is better off without him, and ought to resist any "options" he explores that might put him back in a decision to make decisions. Melnyk was part of the problem, he isn't part of the solution. They can work their way through the tough times they've encountered.
"Once you went away, I was petrified/ Kept thinking I would never live without you by my side ... I will survive/ I will survive."
Monday, January 21, 2008
Insider Trading and mergers
About a year and a half ago, Gretchen Morgenson of the NY Times wrote a story with the lead, "The boom in U.S. corporate mergers is creating concern that illicit trading before deal announcements is becoming a systemic problem."
It wasn't merely US mergers she was concerned about, though, despite the wording of that lead. She cited a study by the UK's answer to the SEC, their Financial Services Authority: that showed that in 2004, 29% of companies involved in mergers experienced abnormal trading before public announcements. The FSA also said that in 2001, the comparable figure had been 21%.
What accounts for the increase? Perhaps it simply became more difficult to keep a secret between 2001 and 2004.
Ms Morgenson also quoted a money manager named Herbert Denton: "Martha Stewart got hurt very badly for something that happens every single day on Wall Street. It's a falseness and a hollowness to the capitalist system when you are pretending that things are pristine and they are not. Either the SEC should get very, very serious and prosecute a lot of people or forget about it."
I'd raise my hand for the second option there. "Systemic problem" solved.
It wasn't merely US mergers she was concerned about, though, despite the wording of that lead. She cited a study by the UK's answer to the SEC, their Financial Services Authority: that showed that in 2004, 29% of companies involved in mergers experienced abnormal trading before public announcements. The FSA also said that in 2001, the comparable figure had been 21%.
What accounts for the increase? Perhaps it simply became more difficult to keep a secret between 2001 and 2004.
Ms Morgenson also quoted a money manager named Herbert Denton: "Martha Stewart got hurt very badly for something that happens every single day on Wall Street. It's a falseness and a hollowness to the capitalist system when you are pretending that things are pristine and they are not. Either the SEC should get very, very serious and prosecute a lot of people or forget about it."
I'd raise my hand for the second option there. "Systemic problem" solved.
Sunday, January 20, 2008
Insider Trading
Here's a link to a discussion of insider trading -- specifically, an interview of law professor Henry Manne, who believes most such trading ought to be legal click here.
I bring it up specifically because I've been thinking about mergers, and an impending merger is one of the classic contexts in which charges of insider trading arise. I'll refer to inside traders as ITs for short.
A merger offer, as we discussed here last week, will generally involve a "control premium," i.e. a price for the stock of the target company above its market value. If one were aware ahead of time that such an offer was, well ... in the offing ... one would of course start scooping up the stock in order to sell it again after the offer has become public and the control premium is on the table.
The big question is: who does the IT cheat? and how?
The IT certainly isn't committing a fraud in the classic sense. At common law, a fraud is a misrepresentation by one party upon which the counter-party relies, to the counter-parties' legal detriment. If the IT buys up stock of a merger target through a public exchange, it seems to me just stretching a point to the point of torture on the rack to claim that the sellers of that stock are reliance upon anybody's representation (through silence) that there ISN'T any merger in the works.
Furthermore, in general the sellers will get a higher price if there has been some leakage of word of the impending merger than they'll get if there hasn't been, so clamping down on the ITs and limiting the buying in the pre-announcement period is what does them hard. Not the IT, but the prosecution thereof.
More tomorrow.
I bring it up specifically because I've been thinking about mergers, and an impending merger is one of the classic contexts in which charges of insider trading arise. I'll refer to inside traders as ITs for short.
A merger offer, as we discussed here last week, will generally involve a "control premium," i.e. a price for the stock of the target company above its market value. If one were aware ahead of time that such an offer was, well ... in the offing ... one would of course start scooping up the stock in order to sell it again after the offer has become public and the control premium is on the table.
The big question is: who does the IT cheat? and how?
The IT certainly isn't committing a fraud in the classic sense. At common law, a fraud is a misrepresentation by one party upon which the counter-party relies, to the counter-parties' legal detriment. If the IT buys up stock of a merger target through a public exchange, it seems to me just stretching a point to the point of torture on the rack to claim that the sellers of that stock are reliance upon anybody's representation (through silence) that there ISN'T any merger in the works.
Furthermore, in general the sellers will get a higher price if there has been some leakage of word of the impending merger than they'll get if there hasn't been, so clamping down on the ITs and limiting the buying in the pre-announcement period is what does them hard. Not the IT, but the prosecution thereof.
More tomorrow.
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