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“Illegal Insider Trading is Rampant and May Even Be On the Rise”

Posted by Larry Doyle on November 20, 2010 6:54 AM |

How are regular retail investors supposed to compete?

Why have investors been fleeing our markets in droves?

Well, if the financial earthquake of 2008 did not crush you then perhaps the “Flash Crash” of May 6th left you sufficiently unnerved. Were you able to weather both those upheavals? If so, I congratulate you for your discipline and perspicacity. I would also encourage you not to let your guard down. Why’s that?

The fact is the challenge in navigating our economic landscape is not only addressing the squalls and storms that we can observe on the horizon but also the insidious work of those who would betray the very integrity of our markets. Is this even possible? Let’s navigate.

There is no doubt that corrupt and illegal activities along the lines of insider trading have occurred for time immemorial. That fact should never lessen our resolve to expose the corruption and the corrupt. Those involved in insider trading are stealing from each and every person of integrity involved in our markets. While everybody in our nation is entitled to due process, our nation as a whole is entitled to know that the ‘financial game’ is on the up and up. That hoped for reality has taken some serious hits over the last few years. I raise this topic this morning given the headline in today’s Wall Street Journal, U.S. in Vast Insider Trading Probe,

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.

Think there are some people close to this mess waking up this morning and quickly losing their appetite? Might there be others who are saying, “honey, we need to talk”?

Three years and a very wide net may catch a lot of fish, including some real sharks. Let’s continue trolling.

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.

The investigations, if they bear fruit, have the potential to expose a culture of pervasive insider trading in U.S. financial markets, including new ways non-public information is passed to traders through experts tied to specific industries or companies, federal authorities say.

The fact is I know that many money managers, especially hedge funds, have been very proactive in reaching out to industry insiders. That fact alone does not mean that illegal activities are occurring. In fact, one could say that people are working hard to unearth data and info. Shouldn’t they be commended for their hard work and ingenuity in digging for data? The fine line of integrity and industriousness is crossed when the details unearthed are material, non-public, and acted upon. Now we have a problem. Welcome to Wall Street circa 2010. The WSJ continues,

One focus of the criminal investigation is examining whether nonpublic information was passed along by independent analysts and consultants who work for companies that provide “expert network” services to hedge funds and mutual funds. These companies set up meetings and calls with current and former managers from hundreds of companies for traders seeking an investing edge.

Among the expert networks whose consultants are being examined, the people say, is Primary Global Research LLC, a Mountain View, Calif., firm that connects experts with investors seeking information in the technology, health-care and other industries. “I have no comment on that,” said Phani Kumar Saripella, Primary Global’s chief operating officer. Primary’s chief executive and chief operating officers previously worked at Intel Corp., according to its website.

In another aspect of the probes, prosecutors and regulators are examining whether Goldman Sachs Group Inc. bankers leaked information about transactions, including health-care mergers, in ways that benefited certain investors, the people say. Goldman declined to comment.

While it would be easy to take another shot at Goldman for being singled out here, I would venture to say that every firm on Wall Street would be tangled in this net.

Independent analysts and research boutiques also are being examined. John Kinnucan, a principal at Broadband Research LLC in Portland, Ore., sent an email on Oct. 26 to roughly 20 hedge-fund and mutual-fund clients telling of a visit by the Federal Bureau of Investigation.

Are you kidding me? Can you imagine being on the receiving end of this e-mail? How many guys do you think received this message and called Kinnucan via their cell phones or even better via a calling card and said, “What the f&%$ is wrong with you? Get your tech people to take my name off that distribution!!”

You can’t make this stuff up. Should Kinnucan be fired for sheer stupidity? Wow!! I am continually amazed at how seemingly intelligent people can be so dense. What did Kinnucan have to say?

“Today two fresh faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information,” the email said. “(They obviously have been recording my cell phone conversations for quite some time, with what motivation I have no idea.) We obviously beg to differ, so have therefore declined the young gentleman’s gracious offer to wear a wire and therefore ensnare you in their devious web.”

Wow. Once again the use of ‘wearing the wire’ is brought into play on Wall Street. Seems like all the trappings of ‘organized activities’ are once again on display. To whom did Kinnucan write?

The email, which Mr. Kinnucan confirms writing, was addressed to traders at, among others: hedge-fund firms SAC Capital Advisors LP and Citadel Asset Management, and mutual-fund firms Janus Capital Group, Wellington Management Co. and MFS Investment Management. SAC, Wellington and MFS declined to comment; Janus and Citadel didn’t immediately comment.

Key parts of the probes are at a late stage. A federal grand jury in New York has heard evidence, say people familiar with the matter. But as with all investigations that aren’t completed, it’s unclear what specific charges, if any, might be brought.

The action is an outgrowth of a focus on insider trading by Preet Bharara, the Manhattan U.S. Attorney. In an October speech, Mr. Bharara said the area is a “top criminal priority” for his office, adding: “Illegal insider trading is rampant and may even be on the rise.” (LD’s highlight)

Let us embrace due process, but I ask in the midst of this all this smoke, “how again are regular retail investors supposed to compete?”

Navigate accordingly.

Thoughts, color, comments, and constructive criticism always encouraged and appreciated.

Larry Doyle

Related Commentary
Sense on Cents/Insider Trading

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Danny

    I wonder what Broadband’s lawyers think about Mr. Kinnucan’s decision to email his clients?

    Compromising an investigation, perhaps?

    Think all of these people even know what defines insider trading? So many relative newcomers to the market view the industry as a ‘me or them’, zero sum game so I do not think they even know some of the activities are likely illegal.

    Management on the other hand…

  • Rick


    They gave up on the ability to arbitrate fair practices in this part of the market place, instead, caveat emptor might be a better system with harsh penalties for purposefully wrong guidance and crimes of omission.

    All insiders have knowledge of the company they are involved in. And all insiders know less about the market context they are involved in than those that study them independently. They will and can screw up just like non insiders and ought to be allowed to. The calculation that insiders might or might not be involved in manipulating a stock or deriving personal gain from it is one investors will have to factor into their ownership equations.

    Absolute full and instant disclosure would be the first element, but that too is potentially misleading because brothers in laws can buy stock too and blinds from overseas (Soros) do it now all the time.

    An insoluble problem is better dealt with as such instead of going forward with the false claim that it can be regulated and kept within bounds.

    Hope you are well

    They just “put em up and take em down.”
    …and the Doyle of West Roxbury corollary is that ‘they only lend it to them‘.

  • Bubba

    To the extent that crimes have been committed, when can we get some of this “fresh meat” in here?

    I am sure some of these ‘gentle’men may be fairly cute.

  • Hotel California

    I ask what about FINRA’s illegal “insider selling” of Auction Rate Securities in mid-summer 2007, then FINRA likely warned all her “little pups” eg brokerages, to do the same, and they did by dumping them on the small retail investor. Some of us are still frozen in this junk.. 3 years later!

    FINRA needs to be investigated, who will do it, they are all crooks.

    • disenchanted

      I agree with you on the assumption that there was inside trading involved with FINRA’s auction rate securities “dump”.Finra lost our fortunes and we are paying for it now in tremendous dues and fees. The one issue that is wrong, is that if FINRA had partners in the brokerage industry, it sure wasn’t the little guy!! We are still trying to get full disclosure on this event.

  • fred

    Cheaters, let’s line them all up in the light of day for public scrutiny. I bet alot of “well healed” financial types are sweating a whole lot right now!

    Expert Systems hah, nothing more than good old fashion insider trading. This is potentially HUGE, much bigger than the GS marketing scandal. (hedge funds, mutual funds, ins cos, pension plans, trading desks, etc.). Come to think of it, anyone with above average returns is suspect!

  • Hedgie

    Come on, is there any doubt that the Feds are trying to circle the wagons to go after SAC’s Steven A. Cohen?

    From Galleon and all those found guilty in that ring to now this…and then who’s next?

  • Moxie

    If you’re not cheating, you’re not really trying.

    The fact is the manner in which hedge fund managers are compensated is going to lead to this type of activity.

  • fred

    As we approach the anniversary of the flash crash, you have to ask the question, can it happen again? Absolutely!

    Case in point SPPI was down over 25% in 5 mins on an article posted by Adam Feurstein over at The Street. I read the article, there were no new facts presented that should have influenced the stock price by over 25% that quickly.

    As a small investor trying to limit risk, it makes sense to use stops, doesn’t it? In my opinion, prudent risk taking should be rewarded not punished. How many stops were triggered on this intraday volitility? Will this change in ownership result in shares moving from weak to strong hands? Should a stock that trades over 3 million shares a day react by 25% within minutes on no new news?

    I wonder, was the intraday price action initiated and then exploited by parties paying for data access to bid ask spread information or prior knowledge that the article was being printed? What about the timing of the article on an FDA approval/disapproval day?

    So many questions so few answers.

    What was the official SEC response to the flash crash? Were any changes implemented to protect the small investor on a security specific basis from “insider trading” tactics and practices?

    • LD


      Great comment. I STRONGLY encourage anybody who has any interest in the workings of our exchanges to follow the work of Joe Saluzzi and his partner Sal Arnuk at Themis Trading. I interviewed Joe a few different times on my Sunday evening show. He is THE BEST when it comes to highlighting these issues.

      Here is a link to all my references of Joe,

      Sense on Cents/Joe Saluzzi

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