An inside job

    By Flavius on Sun, 02/09/2014 - 1:46pm |

    This will be of minimal interest in this  venue so I’ll keep it short.

    The laws against “insider trading”  are as unenforceable as prohibition and should suffer the same fate.There’s nothing wrong  per se with an investment advisor learning as much as possible about a target. That’s his job.

    She can do it by trying to worm the information from an inside source. Or going to the favorite bar of any insider and just listening .  In fact D&B (I think) used to have a service called Key Reports-perhaps still do- where their investigator did just that.

    BTW the regulations requiring corporate forecast disclosure should also be repealed. They merely add to the already powerful temptation to do “profit management”.

    US attorneys should earn their pay pursuing other matters( or closing lanes on the odd bridge) .The unlucky handful  of convicted violators are an unnecessary  expense for the penal system and should be freed.

    And a by product will be all investors  having a greater chance of  increased equal access to the same, right or wrong, “inside advice”.

    Comments

    The rules against insider trading may have become too broad as in your example of an investment advisor ferreting out inside information but what if a senior insider colluded with the adviser and leaked information for profit?

    Some insiders do have fiduciary responsibilities that oblige them to put the interests of shareholders before their own.

    The rules may be difficult to enforce but that is all the more reason to make an example when they are - pour encourager les autres. Sadly that is not happening

     


    by EmmaZahn on Sun, 02/09/2014 - 3:36pm

    Re the senior insider: he or  her confederates chiefly make a profit when the inside information is sufficiently secret so the insider gets a jump on non-insiders . E.G. selling short before news of bad results becomes known.

    If everybody knows, no one can profit from exclusive possession of wha

    in fact

    -  every body   knows..


    by Flavius on Sun, 02/09/2014 - 4:04pm

    But everyone won't know. Isn't that the point? Nor will insiders want or allow everyone to know and they will prevent that from happening. That's how THEY will make their money. If they allow others to know, their edge disappears, no?

    So if the CEO tells the COO and the CIO about an upcoming move, and they buy or sell appropriately, their entire profit (almost) comes from everyone else going in the other direction.

    So anyone can try to ferret out whatever information they want, but if insiders collude, then part of that collusion is control of that information.

    What am I missing here?

    That said, you are right that it is a fine line and hard to enforce only because, yes, smart investors try everything they can to find out as much as they can about an investment before risking their money.

    Watching insider stock buying and selling, however, is a pretty good proxy for knowing what is going on. If the insiders are buying with their own money at market prices (not just exercising options) they could be cockeyed optimists, or they could be trying to lure others to the flame to create a self-fulfilling prophecy, or they could know that things are looking up the company and stock price for good reasons.

    BTW, I'm fine with these kinds of posts. It's the area in which I work.


    by Peter Schwartz on Wed, 02/12/2014 - 8:45am


    You're right, I'm not the target audience for this discussion.  I'll admit it, I'm an economic dunce.  So talk to me as if I was a small child because I do not understand your logic.  

    I find it interesting though that prohibition is your analogy and not armed robbery or manslaughter.  It's hard to convict people of armed robbery and manslaughter, but I don't hear anyone calling for us to stop enforcing those laws.

    You seem to be saying, and again, this is just how I am interpreting your post;
    Sure people on Wall Street cheat all the time.  But it's really hard to catch them, so we ought to just let them do whatever they want.  

    Have I got that right, or did I misunderstand you?

    We should condone swindling because the swindlers are too good at swindling and it's too hard to convict them?   

    The rat-faced greedy pricks that play with our economy like it's their private bankroll should be given free rein to do as much harm as possible because the rules are a little too vague and their methods too clever to lead to easy convictions?

    Cheating is okay if you are manipulating the market because it's so easy to do and the laws can't be enforced because the cheaters will just find new and better ways to cheat?  
     
    Why not just ask the American public to turn over their wallets and roll over onto their backs and let the bears tear into their exposed and vulnerable bellies?

    Again, I apologize if I have mis-characterized or misunderstood what you wrote. 

    Feel free to explain the errors of my thinking.  Because what you wrote appears to be madness to me.


    by MrSmith1 on Sun, 02/09/2014 - 4:27pm


    The war wasn't going well. Having already drafted all really appropriate doctors the Government was reduced to bringing in any one who could possibly help.

    Including the Nation's eminent heart transplant specialist.

    The litter bearers bore into the operating tent the first casualty, bleeding copiously from an almost severed left leg.

    Right" said the surgeon. " We've  got a donor ,let's get on with the transplant."

       
    Doctor " said the chief nurse. "This patient is in danger of bleeding to death."

    "Quite right " said the surgeon."I'll have to take a look at that once I've completed the transplant. "


    by Flavius on Sun, 02/09/2014 - 10:02pm

    Aside:  every time I check in here I have to re-sign in and it is very tiresome!

    Flavius, your response to MrSmith struck me as downright insulting and did not give the slightest indication that you had any respect for his question. Why write a post here and do that?  I know people comment insultingly often, but he was asking a question about your actual, original post. 

    At the risk of getting a similarly flip response, why should people who can sit in a bar and listen to insiders talk have an advantage over, say, a nurse like me who is working every day but whose entire retirement depends on the stock market?   WE ARE ALL (reluctant) STOCK-HOLDERS now because no one has any choice -- but most of us also have no ACCESS?  

    Why?  Why?  Because it's too hard?  Are you saying that we, the schmos who have 401K's are the obligatory organ donors for the elite who have access?  Because stopping them is just too damn hard?  Is that your point?

     

    PS. I always read your posts because I usually learn something. Help me out here. 

     


    by CVille Dem on Mon, 02/10/2014 - 7:49pm

    I want to come in on the other side of Flavius--insider trading is illegal because it constitutes common law fraud.

     

    The sale of anything in a sense represents a meeting of minds with regard to the value of the item to the buyer versus the value of the cash to the seller.

     

    Thus, we coutenance a distress sale of a home, where the real estate market is extremely efficient as to valuation (comparables, appraisals, inspections, etc.) and we impose, furthermore a variety of disclosures as burdens upon a seller as part of a drive towards transparancy.

     

    One might well analyze the sale of a stock based on inside information that a drug trial had just failed (the basis of some recent sentences imposed on sellers and the tipster doctors) by considering whether the same sale, instead of being conducted through an exchange, was face to face.  

     

    In such case, (let's suppose it's Boone Pickens selling and Carl Icahn buying), should Carl say, "Hey Boone, that drug trial for the alzheimer's cure, how's that goin'?"  Boone:"Gee, Carl, I dunno.  I just need some cash for my wife's breast implants, you know how these things are"

     

    Two weeks later the stock crashes, and Carl can sue Boone for fraud, in which suit he would employ the usual methods of discovery to find out if he could prove that Boone lied when he said he didn't know and pretended he was just short of cash.

     

    In a sense, the insider trading strictures are an attempt to bring the common law tort anti-fraud remedies into an exchange based anonymous system where buy and sell orders are aggregated for purposes of efficiency of valuation.

     

    Making the sanction unmoored from the value of the sale (as a tort action would turn, even with triple damages, etc, on the dollar amounts involved, always trivial for someone in a position to get reliable inside info) is an attempt to deter by making the downside so horrendous (prison time)

     

    Flavius innocent bartender who overhears two directors schmoozing is excluded because 1. it happens in public, and 2.  He can't really be sure about the reliability of the eavesdropped info.


    by jollyroger on Mon, 02/10/2014 - 8:54pm

    Flavius,

    An interesting take!

    I think it's important to note that "insider trading" is not illegal per se.  In short, if you or I or some other mook happens to hear some drunk CEO mouthing off in a bar about some imminent merger, as I understand things we can trade away to our hearts' content.

    This is a link to an SEC advice memo relating to the distinction between lawful and unlawful insider trading.  It gives several examples of that which is unlawful:

    Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.

    Examples of insider trading cases that have been brought by the SEC are cases against:

    Corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments;

    Friends, business associates, family members, and other "tippees" of such officers, directors, and employees, who traded the securities after receiving such information;

    Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;

    Government employees who learned of such information because of their employment by the government; and

    Other persons who misappropriated, and took advantage of, confidential information from their employers.

    So I'm happy to go to a bar with you on Wall Street for some tips, but my problem is that after a few drinks if I haven't thrown up outside I'll not be in any condition to steal a tip.


    by Bruce Levine on Mon, 02/10/2014 - 9:04pm


    A reply of sorts to all the above.

    Thanks Cville for pointing out that my reply  to Mr Smith was insulting.I apologize .

    Otherwise the common element in the comments is the accusation that  I'm recommending letting the bad guys get away with law breaking. Nope. I'm recommending changing the laws so that what they are doing is legal.Let caveat emptor apply. Every prospectus should carry a warning

     not all information that  may affect the company's future financial results has been   published

     

    or..........

    Customer: Waiter let me have the beef stew and a few kind words.

    Waiter serves the stew.

    Customer: How about the kind words?

    Waiter: Don' t eat the stew.

    .

     

      

     

     

    by Flavius on Mon, 02/10/2014 - 11:52pm

    "I'm recommending changing the laws so that what they are doing is legal.  Let caveat emptor apply."

    But isn't that really a distinction without a difference? 

    The public should have no expectation of honesty and transparency in transactions?  In other words, the stock market should not only have no appearance of fairness, it should be run on a basic assumption of duplicity and collusion? 

    Let the buyer be wearing no clothes ... which will happen soon enough in your scenario.


    by MrSmith1 on Tue, 02/11/2014 - 12:05am


    Joe and Ginny small investors( and you too) should know that a very large share of  market activity is preceeded by first obtaining inside information .After which as often as not those wise buyers lost their shirts by relying too heavily upon it.

    We can't stop it and  should stop pretending we can .

     

     

     
     
    a

    by Flavius on Tue, 02/11/2014 - 1:12pm


    Is it morally okay for people to cheat if alot of people do it? 

    We can't stop people from murdering other people either, yet we still punish people for doing it.

    What kind of security can one expect in a market where the rules are changed to say that cheating is legal? 

    Why would Joe and Ginny Small Investor (and me too), want to put their money into a  market that can't be trusted to deal with their / our investments honestly?

    Isn't at least the appearance of honesty and transparency necessary for the market to continue to flourish and attract new investors?

     

     

     

     

     


    by MrSmith1 on Tue, 02/11/2014 - 4:35pm

    On Dec 4 1933 Jack Daniels was immoral and on Dec 5 it wasn't. Despite the confident  belief that Oklahoma would remain dry as long as the last voter could stagger to the polls.   


    by Flavius on Tue, 02/11/2014 - 10:45pm

     

    The fact that you continue to go back to that rather weak prohibition analogy tells me you have nothing to say that actually could lead to a reasonable discussion of this issue.  Whether that is intentional or not, I do not know.  I have tried to draw you out and have asked you more than once to explain your thinking beyond the flippant remarks and childish shaggy dog routines, but you seem unwilling to do so.   I guess I should consider that a blessing..

     


     

     

     

     


    by MrSmith1 on Wed, 02/12/2014 - 12:41am

    Yeah I am flippant. It's  a stylistic choice .

    Foolishly I hadn't realized that  would be considered insulting which I certainly don't intend.

    I also chose to employ the shaggy dog (good epithet) routines which probably offend many besides you. 

    Maybe I should employ a disclaimer " Abandon hope all those who expect a serious reply"  

    Cheers.

     

     

     

     

     


    by Flavius on Wed, 02/12/2014 - 9:16am

    This caveat is true now and it's not a problem, as I understand it.

    There are LOTS of things that will impact the company's future results that most people don't know and will never know BECAUSE those in the know will keep it secret. So that's always been true.

    However, if the secret keepers then get to trade on that information--especially if that information contradicts the public view of the company's health or direction--then the lambs will simply be led to slaughter.

    And presumably, fewer and fewer lambs will enter the market. Which won't be good for the slaughterers who need liquidity.

    It's true that the lambs don't have a lot of options now, but if you slaughter enough of them, then things could go badly for you on the political front.

    But still Will Rogers' wise saying applies: I'm less concerned with the return on my money than the return of my money.

    Or this: A 50% loss requires a 100% gain to bring you back to EVEN. Just avoiding losses by staying out of the market and perhaps investing in income-producing real estate properties or other things...is a way to make money. You don't need to play a sucker's game just to fund your retirement.


    by Peter Schwartz on Wed, 02/12/2014 - 8:42am

    Not sure what should be in the law or not after reading this post and its comments but it does remind me when I was in my twenties and went into a brokerage thinking I might place some dough on a deal I had read about.

    The broker looked up after looking at my list and asked: "Is the money you are putting into this buy disposable income? Would you be okay if the money you put down today disappeared?

    I didn't put any money down that day.


    by moat on Tue, 02/11/2014 - 7:31pm

    Once upon a time...long before the SEC and during the days of "bucket shops" and "stock operators"...it was caveat emptor all the way and to the nth degree.

    But back then, and for quite a while, investing meant investing in a company, and the reward one expected, principally, was dividends, not 20 baggers.

    The good news for the unconnected sheep was that a company could cook its books all it wanted, but it couldn't fake the cash it was paying out.

    Yes, in some ways it could. It could pay out one big dividend and no more. It could simply return principal instead of paying out from profits. And it could run ponzi schemes in which peter paid paul.

    But in general, a company that paid out dividends, especially increasing dividends, over a long period of time couldn't fake that.


    by Peter Schwartz on Wed, 02/12/2014 - 10:04am

    Yeah. In theory you can't  fake cash. Unless you do a Madoff.


    by Flavius on Wed, 02/12/2014 - 10:35am

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