“The only sure way of making money is through insider trading! That’s why most traders are insider traders, real or imagined. The trick of the game is to differentiate an insider tip from a malevolent rumor and from a stupid rumor.” Basil Venitis, firstname.lastname@example.org, https://venitism.wordpress.com
Joon H. Kim, the Acting United States Attorney for the Southern District of New York, and William F. Sweeney Jr., the Assistant Director-in-Charge of the New York Office of the Federal Bureau of Investigation, announced today that FEI YAN, who works as a post-doctoral associate at a major research university in Cambridge, Massachusetts, was arrested this morning at his residence in Cambridge and charged with insider trading. YAN made approximately $110,000 in connection with trading in options to buy the stock of Stillwater Mining Company, based on misappropriated material nonpublic information. YAN was presented earlier today in federal court in Boston, Massachusetts.
Kim told us: Fei Yan repeatedly traded on confidential corporate information obtained from his spouse, a lawyer at an international law firm. Armed with confidential information about a corporate acquisition his spouse was working on, Yan allegedly traded on that information over and over again during a three-week period. As alleged, some of these trades followed online research Yan conducted on how to avoid law enforcement detection, including an article entitled ‘Want to Commit Insider Trading? Here’s How Not to Do It.’ The answer to Yan’s online inquiry should have been clear, there is no proper way to commit insider trading.
FBI Assistant Director-in-Charge William Sweeney told us: The charges, as described today, present a very specific timeline of events in which Fei Yan allegedly traded on inside information acquired from his spouse, who worked for a law firm representing a mining company in the middle of a major acquisition. But, as we allege today, Yan dug too deep. Researching how to evade detection, Yan allegedly used an Internet search engine as an accomplice. But it doesn’t take much to understand the rules against insider trading, or how to break them.
According to the Complaint filed today Manhattan federal court:
YAN’s spouse worked at the New York office of an international law firm. In the summer of 2016, a mining company retained the Law Firm to represent it in negotiations to acquire Stillwater Mining Company, a publicly traded company whose shares trade on the New York Stock Exchange under the symbol SWC. On or about August 25, 2016, in connection with the Spouse’s work at the Law Firm, the Spouse learned of the negotiations between the Mining Company and Stillwater Mining and continued to work on the transaction through December 9, 2016, the date on which it was first publicly announced that the Mining Company was going to acquire Stillwater Mining. While working on the transaction during the fall of 2016, the Spouse had access to material nonpublic information regarding the potential acquisition.
The Law Firm required its employees, including the Spouse, to abide by a confidentiality policy, which prohibited disclosure of “information received from and about . . . clients . . . [and] other parties involved in transactions with clients.” In addition, YAN and the Spouse had a history, pattern, and practice of sharing confidences.
In early and mid-November 2016, the Spouse billed dozens of hours working on the potential merger between the Mining Company and Stillwater Mining, and YAN and Spouse were in frequent phone contact. During this period, YAN conducted internet searches for “yahoo swc” and “stillwater merger,” even though the Mining Company’s potential acquisition of Stillwater Mining had not yet been publicly announced.
On November 22, 2016, the Spouse participated in a Law Firm call regarding the potential acquisition. That same day, YAN, using a brokerage account he had previously set up in his mother’s name, bought 71 options to buy Stillwater Mining stock. The next day, YAN and the Spouse spoke twice. After these calls, YAN bought an additional 200 options to buy Stillwater Mining stock.
Negotiations between the Mining Company, represented by the Law Firm, and Stillwater Mining continued to progress, and the Spouse continued to work on the transaction. On December 1, 2016, after a 78-minute phone call with the Spouse the previous evening, YAN purchased an additional 100 Stillwater Mining options.
The following day, YAN conducted multiple internet searches and research related to mergers and acquisitions, including searches for “process of acquisition” and “company acquisition process.”
YAN and the Spouse also spoke on the phone multiple times on the night of December 5 and the early morning hours of December 6, 2016. Later on the morning of December 6, YAN bought an additional 341 Stillwater Mining options. Later that day, YAN conducted internet research related to insider trading. For example, YAN searched for “how sec detect unusual trade” and accessed at least three articles on financial websites related to insider trading. YAN also searched for the name of an individual who was charged in this District in May 2016 with insider trading.
The next day, shortly after speaking with the Spouse by phone for approximately 30 minutes, YAN conducted an internet search for “insider trading with international account” and, shortly thereafter, viewed articles entitled “U.S. Insider Trading Enforcement Goes Global” and “Want to Commit Insider Trading? Here’s How Not to Do It.” The following day, YAN bought an additional 54 Stillwater Mining options.
Early on the morning of December 9, 2016, it was publicly announced that the Mining Company would acquire Stillwater Mining for $18 per share. Beginning at approximately 9:33 a.m. Eastern time, minutes after the open of regular market trading. YAN sold the Stillwater Mining options he had previously purchased, resulting in a profit of approximately $109,420. Also that day, YAN conducted Internet searches for “insider trading cases,” and “insider trading options.
YAN, 31, of Cambridge, Massachusetts, is charged with two counts of securities fraud and one count of wire fraud. The securities fraud counts carry a maximum sentence of 20 and 25 years in prison, respectively, and a maximum fine of $5 million and $250,000 respectively, or twice the gross gain or loss from the offense. The wire fraud count carries a maximum sentence of 20 years in prison and a maximum fine of $250,000, or twice the gross gain or loss from the offense. The statutory maximum sentences are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendant would be determined by the judge.
The only sure way of making money is through insider trading! That’s why most traders are insider traders, real or imagined. The trick of the game is to differentiate an insider tip from a malevolent rumor and from a stupid rumor. That’s where experience comes in. I have been trading the markets for forty years, and I can smell the bullshit instantly. Insider trading is very healthy, because it helps the markets reach the equilibrium point soon. All insider trading legislation is stupid. You just cannot put all people in jail!
The permanent political class enriches itself at the expense of the rest of us. Insider trading is illegal, yet it is routine among kleptocrats. Normal individuals cannot get in on IPOs at the asking price, but kleptocrats do so routinely. Kleptocrats also get many hot issues, bypassing all fair procedures of distribution. By funneling hundreds of millions of dollars or euros to supporters, even more campaign donations are ensured. An entire class of investors now makes all of its profits based on influence and access to kleptocrats.
Kleptocrats have transformed politics to trade. They are traders who use their power, access, and privileged information to generate wealth. And at the same time well-connected financiers and corporate leaders have made a business of politics. They come together to form a kleptocratic caste.
Political intelligence consultants are hired guns who dig for closely held information to be used to trade stocks. Many work for hedge funds and securities firms, who just happen to be some of the biggest political campaign contributors.
While everyone has the same right to be a constituent and the same right to be part of a political discussion, the opportunity just isn’t always there. There’s limited time and resources for everyone to be involved in every discussion. This incentivizes brokerages to cultivate or simply purchase political connections in order to preserve privileged access to profitable information. This flow of information is more difficult to regulate than lobbying, which is regulated, because it is traveling in the opposite direction, that is, from politicians to their constituents.
Trading without inside information is a handicap! Inside trading is the normal thing to do. Otherwise, the odds are stack against you, as almost everybody else is insider trader. Handicapped traders eventually lose all their money, throwing it in the black hole of ignorance. Be an insider trader, or do not trade at all. Technical analysis is ridiculous, and fundamental analysis is yesterday’s news. Insider trading is the only way to trade!
Insider traders can escape prosecution by publishing a sponsored post with the inside information before they trade it. If the trade ticket shows a time stamp after the publication of a sponsored post, nobody can touch them, because it’s considered public information, not insider information anymore!
Legislators do not understand that the objective of insider trading laws is counter-intuitive, to prevent people from using and markets from adjusting to the most accurate and timely information. The rules target non-public information, a legal, not economic concept. As a result, we are supposed to make today’s trades based on yesterday’s information. Unfortunately, keeping people ignorant is economic folly. We make more bad decisions, and markets take longer to adjust.
Insider trading laws imbalance markets by regulating only one-half of the trading equation. A good investor makes money by knowing when not to buy or sell as well as when to buy or sell. Many insider tips alert owners to hold their shares or not to buy other ones. The sooner people act on accurate information the sooner the market will reach the equilibrium price. Interfering with the adjustment process by prosecuting people for insider trading will take the market longer to adjust.
Individuals and companies are entitled to keep proprietary information and punish those who violate that trust. But the offense should be civil, not criminal. And the punishment should fit the charge. In no case is the government justified in using intrusive enforcement measures developed to combat violent crime. The government should stop punishing investors seeking to act on the most accurate and timely information. After all, that’s what the financial markets are all about.
Insider trading creates an arcane distinction between non-public and public information. It presumes that investors should possess equal information and never know more than anyone else. It punishes traders for seeking to gain information known to some people but not to everyone. It inhibits people from acting on and markets from reacting to the latest information. Enforcing insider trading laws does more to advance prosecutors’ careers than protect investors’ portfolios. Information will never be perfect or equal.
There shouldn’t be any prohibitions on insider trading at all. Insider trading, it’s against the law, but not because the U.S. Congress ever explicitly set out to ban it. Today’s prosecutions are based on an ambitious 1961 Securities and Exchange Commission administrative order and a lot of federal court rulings since. Now the courts may have begun to turn back the tide. That seems like a positive development — especially if it causes smart, ambitious prosecutors to begin looking elsewhere for cases to win.
My financial strategies are based on inside information, libertarian economics, and chaos theory. My objective is to identify the significant undiscounted aspects of economy and industries. This is where the true opportunities for investors lie and where business can get the jump on competitors. My approach is top down, emphasizing the major themes, which will influence business and financial markets.
Stockbrokers are taking advantage of their privileged position to increase profits for favored investors and hedge funds, all at the expense of their other customers. Brokers routinely leak confidential information about large stock trades to their best, most lucrative clients. When a savvy activist investor submits a trading order through a brokerage firm, for example, the brokers will exploit this information by telling their favorite clients all about it. Those clients can then imitate the activist’s strategy, thus earning higher returns themselves—to the detriment of the rest of the market, which was not privy to the leak.
It’s a huge issue, because it hurts the investors who try to implement their investment ideas and puts the smaller asset managers at a disadvantage. An important source of returns for fund managers in the stock market is not their superior skill or investment acumen. Rather, some managers appear to free-ride on the information provided by stockbrokers about the best ideas of other investors, which in turn is acquired thanks to the brokers’ ability to observe order flow before the rest of the market. Stockbrokers play a key role in shaping information diffusion in the stock market.
A Schedule 13D is a form that investors must submit to the SEC within 10 days of buying a 5 percent (or greater) stake in a company. It’s a legal requirement, which, like many disclosure requirements, is meant to level the playing field. Once that form is filed, everyone knows which firm an activist investor is targeting. The market tends to react positively to the news of a new 13D. Activists’ target companies tend to experience significant price changes once the activists’ strategies are released. In other words, the stock price of the target company goes up.
Until that form is filed, only two parties are supposed to know about the trade order: the investor who initiated the transaction, and the broker who orchestrated it. But, brokers tend to spill the beans to their other clients before the form is filed. The activist investor could also be leaking the information in order to drum up interest in the target company. But, in general, it behooves the activist to keep the trade on the down low, so as not to drive up the stock price while the trade is still in play. It makes a lot of logical, strategic sense for a broker to leak the information.
If I’m the broker, then I know an order, and I know how this will impact the price; what I can do is use this information to generate more and more commissions from my best clients. And that’s what we see, a quid pro quo between the broker’s best clients—who get rewarded for their past business with the information, and the broker—who earns higher fees by executing their piggyback trades. This behavior of the brokers is not confined to activists’ trades but systematically occur for informed trades: that is, any time the smart money changes their stock positions.
Leaking information about stock trades might be both unethical and illegal, due to a fiduciary duty called best price execution. Brokers are legally required to seek the best execution reasonably available for their customers’ orders. If brokers leak information about the trades they execute, they end up causing a price disadvantage for the investors who ordered those trades. That’s because these transactions are deliberately executed slowly, so any information leaked during that time may end up affecting the stock price before the transaction is completed.
The price I give you is supposed to be the best price on the market. But, if you come to me with an order, and then I start telling all my best clients what you’re trying to do, they’re going to do it as well, which will push the price up. So the price you end up paying is not the best possible price.
There is a gray area that the brokers are navigating, because it’s not clear how much information is too much information. For example, if I don’t say that it’s Soros that made the large order, if I just say, ‘oh, I think there’s a lot of interest in this stock today,’ is that illegal? Well, maybe not. So, then, maybe there is sort of a gray area where they can navigate and continue doing this without breaking the law.
Warren Buffett borrows to finance stocks that have low volatility, low price-to-book ratios, high profits, and high dividends. Donald Trump might have been even richer if, instead of dabbling in skyscrapers and casinos, he’d simply taken his eight-figure inheritance and sunk it into the stock market.
Fundamentally, stock markets are driven by popular narratives, which don’t need basis in solid fact. Such stories are thought viruses. They spread by contagion. Theories that seem to explain the stock market’s direction often work like this: First, they cause investors to take action that propels prices even further in the same direction. These narratives can affect people’s spending behavior, too, in turn affecting corporate profit margins, and so on. Sometimes such feedback loops continue for years.
The most prominent story seems to be one of a global slowdown with associated deflation. Underlying this tale are deeper, longer-term fears. There is a name for these concerns too. It is secular stagnation—the idea that there is disturbing evidence that the world economy may languish for a very long time, even for generations.
The current secular-stagnation story is less dramatic than that of the debt crisis. But because it’s so vague, the negative feedback loop can’t be resolved as neatly. The question may be whether this thought virus mutates into a more psychologically powerful version, one with enough narrative force to create a major bear market.
The main legal theory behind insider trading prosecutions is that corporate information belongs to the corporation, so employees shouldn’t be allowed to go around selling it. That makes some sense. It also makes one wonder why it isn’t left up to the corporation to discipline leakers and decide whether to press charges, but you could argue that most corporations would opt just to cover up the wrongdoing and move on.
When it comes to those who receive this information, though, it gets a lot harder to understand what public purpose is served by aggressively prosecuting them. This isn’t hubcaps or Old Master paintings, it’s information. And in general, the more information that gets out about a corporation, the better a job financial markets can do in pricing its securities.