Karl Denninger wonders about Insider Trading: Are There Really Cops?
Courtesy of Karl Denninger, The Market Ticker
This is an interesting article….
Federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders and analysts across the nation, according to people familiar with the matter.
The criminal and civil probes, which authorities say could eclipse the impact on the financial industry of any previous such investigation, are examining whether multiple insider-trading rings reaped illegal profits totaling tens of millions of dollars, the people say. Some charges could be brought before year-end, they say.
Wow, tens of millions of dollars?
How about the hundreds of billions extracted by people who had advance knowledge of various Fed and Treasury actions?
I mean, don’t get me wrong – there’s plenty of evil to go around here, and the leaking of deal-making is one of the dirty secrets of Wall Street. Despite being very illegal it goes on all the time, with the most-serious violations coming from insiders in the investment banks, seconded only by those at companies that are trying to put deals together.
So-called "Expert Network" firms are supposedly beset by people who are subject-matter experts in a given field. But their "expertise" often consists of cajoling interviews out of company insiders who are then pushed to disclose the intent of the firm to engage in some sort of corporate action that would bring the traders that hire the "experts" riches.
That is, they’re not studying the state of the art and trying to figure out who’s got the edge from publicly-available and thus unprotected information, using their expertise – instead they’re basically probing information that is not disseminated and available – such as who’s thinking of buying whom.
Trading on the former is legal – your analytical skill is perfectly legitimate.
Trading on the latter – prying material non-public information out of someone and then trading on it – is not legal; you’re bringing nothing in the form of analysis and skill to the table, but rather are using what amounts to a time machine to bet on yesterday’s horse race. The law prohibits this and with good reason.
The practice is so common and unpunished that it’s become somewhat of an art form, and companies actually exist that look to track options trades in various firms where there is no news that is out on the wires. The Najarin Brothers ("Optionmonster.com") is one such site. Trading on the order flow is legal, but the fact of the matter is that this "order flow" is being generated, quite frequently, by people who have material inside information – that is, following their trades is legal, but the originating act and the original trades are not.
There’s one sure way to know that some sort of institutionalized thievery has become pervasive – when companies start to show up that legally profit from theexpression of the original unlawful activity.
Do I believe this "Crackdown" is real? Not until I see people from the major investment banks and others that get hit with criminal charges, not just civil fine actions.
That is, let’s see some of these, centered on Wall Street:
