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Keep in mind the scores of business icons who have been caught insider trading seemingly insignificant amounts of money. Martha Stewart “avoided a loss of $45,
by cepth 9y ago
Keep in mind the scores of business icons who have been caught insider trading seemingly insignificant amounts of money.
Martha Stewart “avoided a loss of $45,673 by selling all 3,928 shares of her ImClone Systems stock on December 27, 2001, after receiving material, nonpublic information from Peter Bacanovic, who was Stewart's broker at Merrill Lynch.” (wiki)
The Galleon Group case ensnared Rajat Gupta (former head of McKinsey), who provided insider information that helped Galleon Group net a $17 million profit by tipping them off about Warren Buffett’s investment into Goldman Sachs during the 2008 financial crisis. Galleon Group’s owner, Raj Rajaratnam was a billionaire at the time of the insider trading.
SAC Capital (Stephen A Cohen’s firm, now known as Point 72) was charged with using insider information to generate $275 million in profits and averted losses. Cohen is a multi billionaire.
I recommend reading The Chickenshit Club. Given the institutional and resource constraints on regulators and prosecutors, the odds that you actually are punished are slim. Leaving aside any potential political machinations, behavioral economics resource has shown that humans generally value avoiding losses much more than making more money. Behavior like the endowment effect comes into play here. Bottom line, what may seem like pocket change for billionaires may cause “irrational” behavior.
- dforrestwilson 9y agoGalleon and SAC Capital are not good examples. Their entire business models are built around gathering insider information and profiting. These 2 instances in which they caught red-handed were simply the strongest cases that the U.S. government could bring. Cohen is a multi-billionaire because he built a business which is designed to launder insider information into "clean" information without implicating himself or his lieutenants.
- cepth 9y agoI’m not sure that it’s charitable to characterize either fund as being “built around gathering insider information and profiting”. Raj Rajaratnam started at Needham & Co. in 1985, and worked his way up to firm president in 1991. He eventually bought the firm, and renamed it Galleon Group. If you look at the history of returns for Galleon, the most lucrative years were 1999 through 2002. Raj rode the tech bubble up, and got out before it burst. You don’t generate outsize, 90%+ returns solely on the basis of insider information. As for SAC, for the vast majority of his career, Stephen A Cohen was a momentum trader in the style of Paul Tudor Jones. If you read the book Black Edge or watch the PBS documentary To Catch a Trader, at some point in the late 90s to early 2000s, Cohen started employing expert networks. The use of expert networks was legal at the time, and remains a grey area. Obviously, at some point Cohen crossed the line into outright insider trading. My point for both of these examples was that both men were overwhelmingly rich by the time they got involved in insider trading. We can speculate on why they did it, but to suggest that they made their first hundred millions or billion with insider trading is inaccurate.
- dforrestwilson 9y agoI have read Black Edge, and Cohen's early scrape with insider trading in 1980s would seem to imply that his entire career has been based on getting insider information would it not? As to Raj you may be right I haven't followed as closely. Whether insider trading should be illegal and what the lines are exactly is absolutely open to debate, but it seems clear that Cohen at least built his business to maximize his insider information edge. Matt Levine has some good writing on the subject of insider information for the curious.