To The SEC: Prove It

The SEC is laying out more details of their "bust" in the hedge fund world:

The defendants behaved like “common criminals” who took a “page from drug-dealer handbooks,” Manhattan U.S. Attorney Preet Bharara said yesterday at a press conference. The probe is focused on hedge funds and their sources of information, he said, adding that more arrests may be coming….

“And if you find yourself chewing the memory card in your cell phone to destroy any record of your misconduct, something has gone terribly wrong with your character,” Khuzami said.

Is it ok if you perform your insider trading in plain sight?

I am of course referring to (among other outrages):

• The blatant and outrageous buying of stocks, options and futures contracts the day before Options Expiration in August of 2007 – the afternoon before Ben Bernanke made his "unannounced" discount rate cut.  The market was down huge in the morning before reversing in an "unexplained" fashion that later proved prescient.  What are the odds that was a "lucky guess?" A few hundred million to one?
• A similar "magical" reversal right in front of the financial stock shorting ban – announced the next morning.
• The put buying on Bear Stearns – front month with roughly a week left and dramatically out of the money, not to mention the request to open up strikes all the way down to $2.50 – with the stock trading at $60.  There is no possibility that was a "lucky bet" either.
• Ditto on Lehman Brothers, although somewhat (and only somewhat!) less-dramatic.
• The incessant rumor-mongering and "pump and dump" played during the entirety of the summer and early fall of 2008 with MBI, Ambac and other mortgage insurance companies, which were the recipient of daily "leaks" promulgated through CNBC and elsewhere on "imminent" rescues (that never materialized.)  Who fed Charlie Gasparino that (later proved false) information and did they trade on it, knowing that it would (and did) produce a huge pop in the market every time he came on the air?
• The documented example of UBS employees sending emails stating that a security they were peddling was "Vomit" – yet they were peddling it to customers.  They still have a banking license, despite this coming from a judge in that case:
• “Pursuit has established probable cause to sustain the validity of a claim that the UBS defendants were in possession of material nonpublic information regarding imminent ratings downgrades on the notes it sold to the plaintiffs, information UBS withheld from the plaintiffs,” Superior Court Judge John Blawie wrote in a Sept. 8 opinion in Stamford, Connecticut.
• The incessant "Buffett is buying the world" garbage rumors of the same timeframe – also promulgated by CNBC and other media outlets.  Again, the rumors were proved false but the question remains – who fed them to the media and did they trade on it?
• Barofsky is said to have 35 active criminal investigations related to insider trading, among other sins, related to the bailout.  Will we see those turn into criminal complaints – or indictments?
• How about Dick Durbin (yes, the Senator) who disclosed trades on the back of information related to the bailouts?
• The two-day-ago outrage with front-month UUP calls, 300,000 of them, that were bought (two weeks left!) for 15 cents and more than doubled yesterday (the next day) after a news release about a temporary liquidity freeze on the fund (thereby generating a massive squeeze.)  Those were bought in 10,000 lots – that’s clearly institutional activity.  Did someone KNOW there was to be a squeeze?  It sure looks that way!

Or how about a bit of statistical analysis?  What are the odds of a large firm having only three losing days in about 120, and only one in 60?  Who’s that?  Goldman Sachs and their proprietary trading.  Again, quite simply: what are the odds?

Everyone likes to make a buck.  But nobody wants to play in a rigged casino – unless they’re one of the people who is either being kicked back profits for doing the rigging or one of the beneficiaries.

People seem to forget that it’s not just wrong when someone profits by improperly driving some firm into the dirt.  The market is a negative sum game in that it has fees and costs associated with participation.

As a consequence whenever someone makes a profit based on improper inside information and/or rumor mongering whether the move in the market is up or down someone else loses an equivalent amount of money.

That is, there is no "free lunch" – the scammers only profit by stealing a gain from (or larding a loss onto) someone else.

The comment from the SEC was that:

(the) probe suggests insider trading may be a fundamental part of the business model of some of the firms being probed.

No, really?

How about the major Wall Street players?  How about those calls from Bernanke and Paulson to those executives right around major market "turning points"?  Is it unlawful for a major Wall Street bank, for example, to buy futures after receiving a call from Bernanke in which he discusses intent to increase asset purchases and/or lending facilities?

If it isn’t it should be, and if it is, I think some people have a bit of ‘splaining to do.

Remember, the SEC said:

“If you’re a wealthy trader, you aren’t special,” Bharara said, urging Wall Street professionals to come forward to disclose crimes. “Knock on our door before we come knocking on yours.”

I’ll believe it when I see explanations for the above list – for starters – along with an explanation of how in a fair and free market where there is no unlawful inside information being exchanged you can manage to put up a string of over 120 trading days with only three tiny losses.