“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, venitis@gmail.com, https://venitism.wordpress.com


Joon H. Kim, the Acting United States Attorney for the Southern District of New York, announced that JOHN AFRIYIE, a former analyst at a Manhattan-based private investment fund, was sentenced today in Manhattan federal court to 45 months in prison for committing insider trading.  AFRIYIE was convicted on January 30, 2017, following a jury trial before U.S. District Court Judge Paul A. Engelmayer, who also imposed today’s sentence.   

Kim said: “On more than two dozen occasions, John Afriyie traded on material nonpublic information, and then used his own mother and destroyed emails to cover up his crimes. The heavy price of the illegal edge Afriyie sought was his liberty.”

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. 

According to the Indictment, other filings in Manhattan federal court and the evidence presented at trial:

In January 2016, Apollo Investment Management LLC (“Apollo”) contacted the Fund to discuss the possibility of the Fund providing debt financing for Apollo’s potential acquisition of ADT Corporation (“ADT”). The Fund entered into a non-disclosure agreement with Apollo and was granted access to confidential documents related to the ADT transaction. As an investment analyst at the Fund, AFRIYIE had access to the Fund’s network server, which maintained, among other things, electronic shared directory file folders containing material nonpublic information, including information about Apollo’s acquisition of ADT.

In violation of the Fund’s policies and in breach of his duties to the Fund, AFRIYIE repeatedly accessed material nonpublic information about Apollo’s pending acquisition of ADT in an electronic shared drive folder on the Fund’s network server. In approximately 28 separate transactions between January 28, 2016, and February 12, 2016, AFRIYIE purchased approximately 2,279 ADT call options for a total of $24,254 before the public announcement of that transaction. AFRIYIE purchased the ADT call options through a brokerage account that AFRIYIE controlled, but was held in the name of AFRIYIE’s mother. As cover for his criminal scheme, AFRIYIE repeatedly pretended to be his mother in recorded telephone calls with his broker.  AFRIYIE did not reveal his trades or the existence of the brokerage account to the Fund.

The public announcement of Apollo’s acquisition of ADT in February 2016 caused ADT shares to hit $39.64 per share, up from its value of $29.20 per share on the day AFRIYIE began purchasing ADT options.  Upon subsequently selling the ADT options, AFRIYIE generated more than $1.5 million in illicit profits.

In connection with his arrest, AFRIYIE lied to agents of the Federal Bureau of Investigation (“FBI”) about his ADT options trades and falsely claimed that his own voice on a recorded call with his broker was really his mother’s voice.  Following his arrest, AFRIYIE also attempted to delete the contents of an email account that he had used to communicate with his broker.

After the guilt phase of the trial had concluded, and based on AFRIYIE’s request, the jury also determined that $2,648,862.46 in seized funds were subject to forfeiture as proceeds of AFRIYIE’s crimes.    

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