7 ms·

The incredible stock-picking ability of SEC employees

mkempe 13y ago
Quis custodiet ipsos custodes? The wealthier our societies, the more numerous and lucrative the government positions, relative to the population median. At some point, the social fabric is likely to rip in awful ways.
- dragonwriter 13y ago
  > The wealthier our societies, the more numerous and lucrative the government positions, relative to the population median. Evidence?
  - mkempe 13y ago
    The abusive stock-profits of these SEC employees is not an isolated event. The enormous difference in salary levels and wealth accumulation around DC vs the rest of the country over the last few years should be a clue. Similar disparities in economic fate --between government employees and those they perceive as subjects-- are visible in most Western European countries I know well. As our societies have gotten wealthier, governments have grown in disproportion -- and opportunities for steady income (including very early retirement) and indirect graft have increased.
    - notacoward 13y ago
      What a load of crap. While it is true that the number of government employees tends to be higher in more prosperous countries (e.g. OECD), the total share of wages going to government employees is lower and therefore the (relative) wages per government employee must be much lower. Check out table 3 on page 9 of this: http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-1806 http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-1806 It's disgraceful that SEC employees seem to be engaged in insider trading, but to extrapolate there to "government employees and those they perceive as subjects" is quite literally insane.
      - jjarmusch 13y ago
        I wouldn't be surprised if you're killbanned for disagreeing with one of HN's many insane libertarian nut jobs. This place is packed to the rafters with people who really believe the government is full of cackling evil villains and nothing more. And if you dare to insult their religion, those nut jobs will killban you. And then only people who have showdead turned on will see what you write. Not that any of it matters in the end.
      - mkempe 13y ago
        I think we're using different lenses. The WorldBank stats you reference are very restrictive, being limited to central government employees in the 90s. But today's actual government cost is more than that. If we look at recent OECD and local numbers for what one would more expansively consider the "public sector" the proportions are much higher in e.g. Sweden [1] and Greece [2]. Further, I would suggest that to measure the full impact of government on society, one should include the pension costs of retired public sector employees (one of the major driver in the PIGS crisis in recent years) as well as public works contractors (e.g. hundreds of millions of dollars for recently failed IT projects in the US). One could also argue that the cost of mass unemployment caused by government policies should be factored in as well (e.g. contrast Spain and Germany). [1] http://www.oecd.org/gov/pem/OECD%20HRM%20Profile%20-%20Sweden.pdf http://www.oecd.org/gov/pem/OECD%20HRM%20Profile%20-%20Swede... [2] http://www.sant.ox.ac.uk/seesox/pdf/IordanoglouPatronageandPublicEmployment.pdf http://www.sant.ox.ac.uk/seesox/pdf/IordanoglouPatronageandP...
        notacoward 13y ago
        "Different lenses" is a cute term for cherry-picking. Using Sweden as an example is bad enough, since they're well known for having one of the most "social democratic" governments in the world. Using Greece is even worse, and I shouldn't even need to explain why. It's like using Iceland as the only data point in a discussion of bank regulation, or Ukraine in a discussion of nuclear safety. Also, the numbers for local government (including US states) are likely to be even worse for your point. I challenge you to show that the numbers measured across the whole world (not just OECD and certainly not just two outliers) have changed significantly. It's probably quite reasonable to include pension costs. You also forgot to mention the salaries of government contractors (especially military). On the other hand, the numbers we have are already limited to people in the workforce so adjusting separately for unemployment would be double-counting. Nice try. When all reasonable adjustments are made, the results might show a slightly greater advantage for government workers, but still very far from your wild claims about government workers getting super-rich off the backs of the rest of us. Those remain utterly unfounded, and the burden is still on you to provide more than a few shreds of pseudo-evidence.
    - rayiner 13y ago
      Government employees make a lot in absolute terms, but are also much more likely to be highly educated or skilled. In practice, white collar professionals take a pay cut to work in government.
    - dragonwriter 13y ago
      Repeating the same assertions without support in longer-winded form is not evidence.
steverit 13y ago
The SEC's response: "Nester explained that before staff can work on an issue that involves a company, they have to sell any holdings of stock in that firm. As a result, he said, there shouldn't be any surprise that a sale would precede the announcement of an enforcement action." I don't know about anybody else, but this seems pretty plausible to me.
- JumpCrisscross 13y ago
  This story is more instructive in the perils of jumping to conclusions than anything else.
- jey 13y ago
  That's extremely amusing, since the probability of a enforcement action conditional on an investigation being started is much higher than the prior probability of an enforcement action. And if an enforcement action occurs, the price is only going to go down. So this is practically an institutionalized version of the insider trading the article is talking about!
  - letstryagain 13y ago
    The fair way to handle this is to disallow any buying OR selling of related stocks until the public announcement of the results of the investigation.
    - jpwright 13y ago
      But then you have conflict of interest if you're asking SEC employees to investigate companies they hold stock in. The incentive would be to not investigate or impose milder penalties.
      - 001sky 13y ago
        No, put the stocks in a blind trust.
mherdeg 13y ago
Cool, so can you trade on this? Specifically, is the SEC's turnaround time to Freedom of Information Act requests fast enough that you could make a viable trading strategy out of "ask for the last week's worth of trades and rebalance appropriately"?
sixQuarks 13y ago
SEC employees should not be allowed to trade stocks, period! Fed chairman abides by these rules, it's ridiculous that employees of SEC do not.
- JumpCrisscross 13y ago
  In an ideal world. In practice the most qualified people for SEC roles have a background in industry, and prefer to have a say on their portfolios. Prohibiting discretionary trading (or worse, stock ownership) would likely catastrophically restrict the pool of applicants to the clueless and unqualified.
  - dmckeon 13y ago
    So, create a mutual fund that operates as a blind trust, and allow transfers free of capital gains tax into the fund when an employee is hired. For extra points, require everyone who gets a Federal salary to participate, including Congress-folk and their staff. Operate the fund so that when the US economy is doing well, and unemployment is low, and other reasonable and measurable national economic goals are met, all the participants benefit. An incentive like that might attract to Washington more cluefull and qualified people who are willing to cooperate so that the people of the country benefit.
    - Oculus 13y ago
      I wish I could upvote this more than once. Aligning government employees interests with the nation's should be #1 priority. Talk about an incentive to do your job well.
  - 001sky 13y ago
    "catastrophically restrict the pool of applicants" This is amusing, but false. This is similar reasoning to why CEO's should make 10-20million dollars a year, rather than say...$10MM/yr. There is actually no shortage of people to be the CEO of any company (or the top rank in any hierarchy) and truth be told, Boards of Directors could not tell the difference for 9/10 candidates. As the saying goes, "graveyards are filled with the people thought previously indispensible". And empirical examples abound. Just imagine Apple without Steve Jobs, or Yahoo without whoever the guy was before Marissa Mayer. The only thing keeping quality applicants out of the SEC is power, presitige, and respect. There are many jobs that people work for low pay (eg Academia) provided that their social status is secure.
JumpCrisscross 13y ago
The paper [1] finds "at least some of these SEC employee trading profits are information based, as they tend to divest (i) in the run-up to SEC enforcement actions; and (ii) in the interim period between a corporate insider’s paper-based filing of the sale of restricted stock with the SEC and the appearance of the electronic record of such sale online on EDGAR." On (i): SEC employees are required to divest of their holdings in a company before working on an issue relating to it. The findings thus demonstrates an alignment of ethics and private interests. On (ii): there is potential for abuse. When an insider sells stock, the sale must be reported electronically to the SEC via Forms 3, 4, and 5. When an insider sells restricted stock it is reported via Form 144. Form 144, unlike Forms 3, 4, or 5, may be filed electronically or by paper - over 90% of Form 144s are filed by paper. These paper filings are only available through third-party data providers, e.g. Bloomberg, and even then at a delay from filing. [1] http://www.darden.virginia.edu/web/uploadedFiles/RajgopalSECtradingpaper.PDF http://www.darden.virginia.edu/web/uploadedFiles/RajgopalSEC...
jellicle 13y ago
Just think about how good Mt. Gox employees must be in bitcoin speculation.
loumf 13y ago
Seems like a pretty small sample size. Shouldn't we expect it to be less like the overall market?
Oculus 13y ago
This is absurd. Why would we ever let regulators of the market be active participants in it. Certain jobs in the government require for one's assets to be in a blind trust for there to be no conflicts of interest. If anyone in the government is doing it, it should be the SEC.
- devindotcom 13y ago
  If you read the article, the SEC states that the reason they sold is because they were forced to by law, as they were soon going to being regulators of the securities they were going to regulate. However it does appear to be a good indication that something is coming down the line if SEC people sell...
  - nostromo 13y ago
    They should be barred from changing any position they have the moment there is a whisper of some sort of regulatory action against a company. This policy is forcing them to act on non-public information, which is very illegal for everyone outside of the SEC.
    - Oculus 13y ago
      Maybe allow for two options: Option A: Blind trust with some capital gains incentives? Option B: Ability to manage your own portfolio, but can't act on SEC+company news until x hours after publicly disclosed?
      - bagels 13y ago
        How about C: They aren't allowed to trade at all.
        mkartic 13y ago
        Isn't that a bit extreme? I'm not saying there should be implicit trust or that there is no risk of insider trading, but still. Its not right to deny them of all rights to have other sources of income apart from their job. I mean, having to sell all their stocks of a certain company before investigation is forfeiture enough. My two cents, D: Some sort of anonymized peer review of transactions? Maybe even automated.
nazgulnarsil 13y ago
6 out of 56 doesn't seem "incredible" to me.
Rangi42 13y ago
Aren't the employees' sales a useful contribution to the stock market? They're turning private knowledge about upcoming SEC actions into public information, assuming that the public bothers to correlate stock sales with SEC employee lists. (If either of those pieces of information isn't publically known, then an SEC employee selling stock doesn't contribute any more information than any random shareholder's sale.)
boon 13y ago
What do you expect in a perfect libertarian free market system??? Oh. Wait. Sorry, I had to after reading all the bitcoin hate in other threads.
tosseraccount 13y ago
The TSP (fed retirement) plan has 5 basic funds: Large , Small, international equities and corporate and government bond funds. Perhaps allowing a similar mechanism to invest a private portfolio in these funds and allowing re balancing once a year would be a good policy. Investments and withdrawals will be weighted based on selected allocation.
- TheBiv 13y ago
  Very good idea, and one that I hope they had brought to the table (I wasn't at the table and I would love to know if you were). I have to imagine that something like this was brought up as an option, and it was struck down due to a counter argument that these are former stock traders and to disallow the stock traders to do what they love to do, would not allow the SEC to get the best talent.
erikpukinskis 13y ago
Is it really that hard to do a t-test comparing the buys and the sells to find out if the difference is statistically significant at this sample size? I'm sure there are better tests, but that one is literally the first test you learn in a statistics course. Are there no journalists at the Post who have taken a basic stats course? They could literally just punch in the 10 numbers (buys and sells for each of the five events) into http://studentsttest.com/ http://studentsttest.com/ and get a result. We should really figure out some way to enable more science students to pursue journalism. What's the point of having thousands of brilliant scientists doing research if journalists are just going to mangle it every time? Distribution is just as important as production.
mikeyouse 13y ago
Are we just going to ignore that this data only began to be collected in 2009, at a stock market bottom? All stocks have done well since then..
jcrites 13y ago
> Nester explained that before staff can work on an issue that involves a company, they have to sell any holdings of stock in that firm. As a result, he said, there shouldn't be any surprise that a sale would precede the announcement of an enforcement action. Can I use this fact to detect upcoming potential investigations or enforcement actions which may not be public knowledge, and use that to my advantage? [Edit:] This also seems to have the unfair effect that SEC employees get an "out" from previous investments in companies that the SEC is about to investigate. Isn't that ultimately another form of trading on insider knowledge, even if it's mandatory? On the other hand, if SEC employees are not forced to sell, then their holdings may diminish their impartiality. It seems like the only fair and neutral approach is to require SEC employees to hold no individual stocks at all during their employment - or any type of financial instrument issued by organizations they might potentially investigate. (Is this perhaps what the SEC means, that employees are forced to sell because they've just joined the SEC? If they're forced to sell an individual instrument only at the beginning of a specific investigation into a single organization who issued the instrument, then that seems like a loophole.)
- toomuchtodo 13y ago
  > On the other hand, if SEC employees are not forced to sell, then their holdings may diminish their impartiality. It seems like the only fair and neutral approach is to require SEC employees to hold no individual stocks at all during their employment - or any type of financial instrument issued by organizations they might potentially investigate. The solution is blind trusts, with the additional cost picked up as part of their compensation package. The way to guarantee impartiality is to remove any chance of impropriety. I would also settle for extremely common ETFs like the SPDR S&P 500.
  - JumpCrisscross 13y ago
    SEC employment is often preceded by time in the industry. This means a large fraction of high-value employees are likely entering their roles with existing holdings. Requiring immediate divestment for all SEC roles sounds extreme. It makes sense that any new investments made during one's time at the SEC should be made into index funds or accounts managed at the independent discretion of a non-SEC manager. But banning all SEC employees from holding any individual stocks during their employment is a deterrent to recruiting.
spikels 13y ago
My two favorite government investing scams: (1) Congress's insider trading exemption - Until recently legislators and their staff were completely exempt from insider trading laws while they were often privy to insider information[1]. It's no wonder they do so well in the market. Too bad some minor restrictions recently were enacted - but no worries they just got rid of them as soon as the noise died down[2]. (2) Tax-free portfolio rebalancing - Big shots like the Secretary of Treasury often sell billions in stock without paying any capital gains tax. This allows them to fully take advantage of the free step up in basis when they die. So they can never pay anything on the fortune they made at Goldman Sachs[3]. Fuck these assholes! [1] http://www.thewire.com/politics/2011/11/hustle-defuse-60-minutes-congressional-insider-trading-story/44952/ http://www.thewire.com/politics/2011/11/hustle-defuse-60-min... [2] http://www.techdirt.com/articles/20130416/08344222725/congress-quickly-quietly-rolls-back-insider-trading-rules-itself.shtml http://www.techdirt.com/articles/20130416/08344222725/congre... [3] http://www.celebritynetworth.com/articles/entertainment-articles/the-200-million-reason-henry-paulson-became-treasury-secretary/ http://www.celebritynetworth.com/articles/entertainment-arti...
- tosseraccount 13y ago
  Tax free re-balance? Wow! Paulsen took got 500 million with no tax.
- AjithAntony 13y ago
  As to the tax-free sale, unless I misunderstand, this is extremely limited and far from "often". Few people will ever have the opportunity, it occurs once in a lifetime, and it is offered as compensation for the forced liquidation of one's entire stock portfolio to become a public servant.
  - spikels 13y ago
    Yes you get to sell all your stock in one company and buy a diversified portfolio. Maybe you haven't heard but diversification is good. And NOT FREE for everyone else. Do you understand the value of this? In my view everyone should be able to do this under the ancient English law principle of like-kind exchange. But in the US today it is "special people" only. To recap: Why are you taxed for something? Because they can tax you. There are no principals just opportunity. Much like why did your car get broken in to. Because they can.
jvm 13y ago
Insider trading seems unfair. But after a lot of thinking and listening to arguments on both sides, I now actually find the argument in favor of legalizing insider trading fairly compelling. I'd suggest that anybody with strong feelings against it take a little time to consider the arguments for. The argument for has two levels: 1) The trade is a victimless crime. Given the way markets worse, the naïve party would have bought or sold the asset anyway from someone else. Think about how you buy stocks: you just call your broker and ask to buy at the market price. If you do that and end up buying from an insider, you are no worse off. 2) Insiders actually move the price in favor of the naïve party they trade with. If a stock is being sold on the market $29 and the insider knows its true value is $20, they must sell below the other offers (e.g., $28.99) to make the trade. This is in favor of the buying party relative to the outcome without the insider: the buyer will lose $.01 less per share. At large trading volumes, insiders will actually move the market strongly in the direction of the fair price, making all trades of that asset more fair. Unfair though it may be, society at large does not benefit banning insider trading, and allowing it would make stock market prices more accurate which is actually probably a fairly strong benefit to society.
- nostrademons 13y ago
  The victim is trust in the market. If you know that someone else may have better information than you do, you get a "market for lemmings" situation where everybody assumes that the only reason someone would sell a stock is that they know it's going to tank, and so nobody buys. Liquidity collapses, and with it, the market. The SEC isn't intended to protect individual investors, it's intended to protect the market as a whole. That's why they don't care when individual people get screwed, only when people get screwed to an extent that they won't invest in the market. People change their behavior based on what other people do; without full public information, the result of that tendency is to tend towards zero liquidity.
  - dnautics 13y ago
    forgive me if I don't shed any tears for 'trust in the market'. Shouldn't we be more suspicious about the market? People blindly throw their money at the hands of fund managers etc, which means our society is overleveraged on risky propositions.
notastartup 13y ago
Isn't this like telling people to not to break the law but we can because we are the law? What stops a hedge fund manager from being extra nice to the boys that turn Bud Fox?
alexjfowler 13y ago
Members of the sec could be required to register their trades (tested against IRS records yearly to ensure 100% accuracy and eventually automated). Now, place all holdings in a database table. When a company is going to be investigated, select only sec employees who are not listed as having holdings in that company. My solution is obviously incomplete, but maybe it could be the basis for a more robust system.
lutusp 13y ago
This problem is trivially solved -- force new SEC hires to buy one or more market index funds and put them in a blind trust for the duration of their employment. Historically, market index funds do as well as active portfolios (on average), unless brokerage commissions and tax implications are included in the assessment, in which case they do better (a fact proven by the now-famous WSJ dartboard contest). So SEC employees would have a more profitable portfolio than usual for the duration of their employment, and they would avoid even the appearance of impropriety. How is it that this obvious solution hasn't been put in practice?

Quis custodiet ipsos custodes? The wealthier our societies, the more numerous and lucrative the government positions, relative to the population median. At some point, the social fabric is likely to rip in awful ways.

dragonwriter 13y ago
> The wealthier our societies, the more numerous and lucrative the government positions, relative to the population median. Evidence?
- mkempe 13y ago
  The abusive stock-profits of these SEC employees is not an isolated event. The enormous difference in salary levels and wealth accumulation around DC vs the rest of the country over the last few years should be a clue. Similar disparities in economic fate --between government employees and those they perceive as subjects-- are visible in most Western European countries I know well. As our societies have gotten wealthier, governments have grown in disproportion -- and opportunities for steady income (including very early retirement) and indirect graft have increased.
  - notacoward 13y ago
    What a load of crap. While it is true that the number of government employees tends to be higher in more prosperous countries (e.g. OECD), the total share of wages going to government employees is lower and therefore the (relative) wages per government employee must be much lower. Check out table 3 on page 9 of this: http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-1806 http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-1806 It's disgraceful that SEC employees seem to be engaged in insider trading, but to extrapolate there to "government employees and those they perceive as subjects" is quite literally insane.
    - jjarmusch 13y ago
      I wouldn't be surprised if you're killbanned for disagreeing with one of HN's many insane libertarian nut jobs. This place is packed to the rafters with people who really believe the government is full of cackling evil villains and nothing more. And if you dare to insult their religion, those nut jobs will killban you. And then only people who have showdead turned on will see what you write. Not that any of it matters in the end.
    - mkempe 13y ago
      I think we're using different lenses. The WorldBank stats you reference are very restrictive, being limited to central government employees in the 90s. But today's actual government cost is more than that. If we look at recent OECD and local numbers for what one would more expansively consider the "public sector" the proportions are much higher in e.g. Sweden [1] and Greece [2]. Further, I would suggest that to measure the full impact of government on society, one should include the pension costs of retired public sector employees (one of the major driver in the PIGS crisis in recent years) as well as public works contractors (e.g. hundreds of millions of dollars for recently failed IT projects in the US). One could also argue that the cost of mass unemployment caused by government policies should be factored in as well (e.g. contrast Spain and Germany). [1] http://www.oecd.org/gov/pem/OECD%20HRM%20Profile%20-%20Sweden.pdf http://www.oecd.org/gov/pem/OECD%20HRM%20Profile%20-%20Swede... [2] http://www.sant.ox.ac.uk/seesox/pdf/IordanoglouPatronageandPublicEmployment.pdf http://www.sant.ox.ac.uk/seesox/pdf/IordanoglouPatronageandP...
      - notacoward 13y ago
        "Different lenses" is a cute term for cherry-picking. Using Sweden as an example is bad enough, since they're well known for having one of the most "social democratic" governments in the world. Using Greece is even worse, and I shouldn't even need to explain why. It's like using Iceland as the only data point in a discussion of bank regulation, or Ukraine in a discussion of nuclear safety. Also, the numbers for local government (including US states) are likely to be even worse for your point. I challenge you to show that the numbers measured across the whole world (not just OECD and certainly not just two outliers) have changed significantly. It's probably quite reasonable to include pension costs. You also forgot to mention the salaries of government contractors (especially military). On the other hand, the numbers we have are already limited to people in the workforce so adjusting separately for unemployment would be double-counting. Nice try. When all reasonable adjustments are made, the results might show a slightly greater advantage for government workers, but still very far from your wild claims about government workers getting super-rich off the backs of the rest of us. Those remain utterly unfounded, and the burden is still on you to provide more than a few shreds of pseudo-evidence.
  - rayiner 13y ago
    Government employees make a lot in absolute terms, but are also much more likely to be highly educated or skilled. In practice, white collar professionals take a pay cut to work in government.
  - dragonwriter 13y ago
    Repeating the same assertions without support in longer-winded form is not evidence.

steverit 13y ago

The SEC's response: "Nester explained that before staff can work on an issue that involves a company, they have to sell any holdings of stock in that firm. As a result, he said, there shouldn't be any surprise that a sale would precede the announcement of an enforcement action." I don't know about anybody else, but this seems pretty plausible to me.

JumpCrisscross 13y ago
This story is more instructive in the perils of jumping to conclusions than anything else.
jey 13y ago
That's extremely amusing, since the probability of a enforcement action conditional on an investigation being started is much higher than the prior probability of an enforcement action. And if an enforcement action occurs, the price is only going to go down. So this is practically an institutionalized version of the insider trading the article is talking about!
- letstryagain 13y ago
  The fair way to handle this is to disallow any buying OR selling of related stocks until the public announcement of the results of the investigation.
  - jpwright 13y ago
    But then you have conflict of interest if you're asking SEC employees to investigate companies they hold stock in. The incentive would be to not investigate or impose milder penalties.
    - 001sky 13y ago
      No, put the stocks in a blind trust.

mherdeg 13y ago

Cool, so can you trade on this? Specifically, is the SEC's turnaround time to Freedom of Information Act requests fast enough that you could make a viable trading strategy out of "ask for the last week's worth of trades and rebalance appropriately"?

sixQuarks 13y ago

SEC employees should not be allowed to trade stocks, period! Fed chairman abides by these rules, it's ridiculous that employees of SEC do not.

JumpCrisscross 13y ago
In an ideal world. In practice the most qualified people for SEC roles have a background in industry, and prefer to have a say on their portfolios. Prohibiting discretionary trading (or worse, stock ownership) would likely catastrophically restrict the pool of applicants to the clueless and unqualified.
- dmckeon 13y ago
  So, create a mutual fund that operates as a blind trust, and allow transfers free of capital gains tax into the fund when an employee is hired. For extra points, require everyone who gets a Federal salary to participate, including Congress-folk and their staff. Operate the fund so that when the US economy is doing well, and unemployment is low, and other reasonable and measurable national economic goals are met, all the participants benefit. An incentive like that might attract to Washington more cluefull and qualified people who are willing to cooperate so that the people of the country benefit.
  - Oculus 13y ago
    I wish I could upvote this more than once. Aligning government employees interests with the nation's should be #1 priority. Talk about an incentive to do your job well.
- 001sky 13y ago
  "catastrophically restrict the pool of applicants" This is amusing, but false. This is similar reasoning to why CEO's should make 10-20million dollars a year, rather than say...$10MM/yr. There is actually no shortage of people to be the CEO of any company (or the top rank in any hierarchy) and truth be told, Boards of Directors could not tell the difference for 9/10 candidates. As the saying goes, "graveyards are filled with the people thought previously indispensible". And empirical examples abound. Just imagine Apple without Steve Jobs, or Yahoo without whoever the guy was before Marissa Mayer. The only thing keeping quality applicants out of the SEC is power, presitige, and respect. There are many jobs that people work for low pay (eg Academia) provided that their social status is secure.

JumpCrisscross 13y ago

The paper [1] finds "at least some of these SEC employee trading profits are information based, as they tend to divest (i) in the run-up to SEC enforcement actions; and (ii) in the interim period between a corporate insider’s paper-based filing of the sale of restricted stock with the SEC and the appearance of the electronic record of such sale online on EDGAR." On (i): SEC employees are required to divest of their holdings in a company before working on an issue relating to it. The findings thus demonstrates an alignment of ethics and private interests. On (ii): there is potential for abuse. When an insider sells stock, the sale must be reported electronically to the SEC via Forms 3, 4, and 5. When an insider sells restricted stock it is reported via Form 144. Form 144, unlike Forms 3, 4, or 5, may be filed electronically or by paper - over 90% of Form 144s are filed by paper. These paper filings are only available through third-party data providers, e.g. Bloomberg, and even then at a delay from filing. [1] http://www.darden.virginia.edu/web/uploadedFiles/RajgopalSECtradingpaper.PDF http://www.darden.virginia.edu/web/uploadedFiles/RajgopalSEC...

jellicle 13y ago

Just think about how good Mt. Gox employees must be in bitcoin speculation.

loumf 13y ago

Seems like a pretty small sample size. Shouldn't we expect it to be less like the overall market?

Oculus 13y ago

This is absurd. Why would we ever let regulators of the market be active participants in it. Certain jobs in the government require for one's assets to be in a blind trust for there to be no conflicts of interest. If anyone in the government is doing it, it should be the SEC.

devindotcom 13y ago
If you read the article, the SEC states that the reason they sold is because they were forced to by law, as they were soon going to being regulators of the securities they were going to regulate. However it does appear to be a good indication that something is coming down the line if SEC people sell...
- nostromo 13y ago
  They should be barred from changing any position they have the moment there is a whisper of some sort of regulatory action against a company. This policy is forcing them to act on non-public information, which is very illegal for everyone outside of the SEC.
  - Oculus 13y ago
    Maybe allow for two options: Option A: Blind trust with some capital gains incentives? Option B: Ability to manage your own portfolio, but can't act on SEC+company news until x hours after publicly disclosed?
    - bagels 13y ago
      How about C: They aren't allowed to trade at all.
      - mkartic 13y ago
        Isn't that a bit extreme? I'm not saying there should be implicit trust or that there is no risk of insider trading, but still. Its not right to deny them of all rights to have other sources of income apart from their job. I mean, having to sell all their stocks of a certain company before investigation is forfeiture enough. My two cents, D: Some sort of anonymized peer review of transactions? Maybe even automated.

nazgulnarsil 13y ago

6 out of 56 doesn't seem "incredible" to me.

Rangi42 13y ago

Aren't the employees' sales a useful contribution to the stock market? They're turning private knowledge about upcoming SEC actions into public information, assuming that the public bothers to correlate stock sales with SEC employee lists. (If either of those pieces of information isn't publically known, then an SEC employee selling stock doesn't contribute any more information than any random shareholder's sale.)

boon 13y ago

What do you expect in a perfect libertarian free market system??? Oh. Wait. Sorry, I had to after reading all the bitcoin hate in other threads.

tosseraccount 13y ago

The TSP (fed retirement) plan has 5 basic funds: Large , Small, international equities and corporate and government bond funds. Perhaps allowing a similar mechanism to invest a private portfolio in these funds and allowing re balancing once a year would be a good policy. Investments and withdrawals will be weighted based on selected allocation.

TheBiv 13y ago
Very good idea, and one that I hope they had brought to the table (I wasn't at the table and I would love to know if you were). I have to imagine that something like this was brought up as an option, and it was struck down due to a counter argument that these are former stock traders and to disallow the stock traders to do what they love to do, would not allow the SEC to get the best talent.

erikpukinskis 13y ago

Is it really that hard to do a t-test comparing the buys and the sells to find out if the difference is statistically significant at this sample size? I'm sure there are better tests, but that one is literally the first test you learn in a statistics course. Are there no journalists at the Post who have taken a basic stats course? They could literally just punch in the 10 numbers (buys and sells for each of the five events) into http://studentsttest.com/ http://studentsttest.com/ and get a result. We should really figure out some way to enable more science students to pursue journalism. What's the point of having thousands of brilliant scientists doing research if journalists are just going to mangle it every time? Distribution is just as important as production.

mikeyouse 13y ago

Are we just going to ignore that this data only began to be collected in 2009, at a stock market bottom? All stocks have done well since then..

jcrites 13y ago

> Nester explained that before staff can work on an issue that involves a company, they have to sell any holdings of stock in that firm. As a result, he said, there shouldn't be any surprise that a sale would precede the announcement of an enforcement action. Can I use this fact to detect upcoming potential investigations or enforcement actions which may not be public knowledge, and use that to my advantage? [Edit:] This also seems to have the unfair effect that SEC employees get an "out" from previous investments in companies that the SEC is about to investigate. Isn't that ultimately another form of trading on insider knowledge, even if it's mandatory? On the other hand, if SEC employees are not forced to sell, then their holdings may diminish their impartiality. It seems like the only fair and neutral approach is to require SEC employees to hold no individual stocks at all during their employment - or any type of financial instrument issued by organizations they might potentially investigate. (Is this perhaps what the SEC means, that employees are forced to sell because they've just joined the SEC? If they're forced to sell an individual instrument only at the beginning of a specific investigation into a single organization who issued the instrument, then that seems like a loophole.)

toomuchtodo 13y ago
> On the other hand, if SEC employees are not forced to sell, then their holdings may diminish their impartiality. It seems like the only fair and neutral approach is to require SEC employees to hold no individual stocks at all during their employment - or any type of financial instrument issued by organizations they might potentially investigate. The solution is blind trusts, with the additional cost picked up as part of their compensation package. The way to guarantee impartiality is to remove any chance of impropriety. I would also settle for extremely common ETFs like the SPDR S&P 500.
- JumpCrisscross 13y ago
  SEC employment is often preceded by time in the industry. This means a large fraction of high-value employees are likely entering their roles with existing holdings. Requiring immediate divestment for all SEC roles sounds extreme. It makes sense that any new investments made during one's time at the SEC should be made into index funds or accounts managed at the independent discretion of a non-SEC manager. But banning all SEC employees from holding any individual stocks during their employment is a deterrent to recruiting.

spikels 13y ago

My two favorite government investing scams: (1) Congress's insider trading exemption - Until recently legislators and their staff were completely exempt from insider trading laws while they were often privy to insider information[1]. It's no wonder they do so well in the market. Too bad some minor restrictions recently were enacted - but no worries they just got rid of them as soon as the noise died down[2]. (2) Tax-free portfolio rebalancing - Big shots like the Secretary of Treasury often sell billions in stock without paying any capital gains tax. This allows them to fully take advantage of the free step up in basis when they die. So they can never pay anything on the fortune they made at Goldman Sachs[3]. Fuck these assholes! [1] http://www.thewire.com/politics/2011/11/hustle-defuse-60-minutes-congressional-insider-trading-story/44952/ http://www.thewire.com/politics/2011/11/hustle-defuse-60-min... [2] http://www.techdirt.com/articles/20130416/08344222725/congress-quickly-quietly-rolls-back-insider-trading-rules-itself.shtml http://www.techdirt.com/articles/20130416/08344222725/congre... [3] http://www.celebritynetworth.com/articles/entertainment-articles/the-200-million-reason-henry-paulson-became-treasury-secretary/ http://www.celebritynetworth.com/articles/entertainment-arti...

tosseraccount 13y ago
Tax free re-balance? Wow! Paulsen took got 500 million with no tax.
AjithAntony 13y ago
As to the tax-free sale, unless I misunderstand, this is extremely limited and far from "often". Few people will ever have the opportunity, it occurs once in a lifetime, and it is offered as compensation for the forced liquidation of one's entire stock portfolio to become a public servant.
- spikels 13y ago
  Yes you get to sell all your stock in one company and buy a diversified portfolio. Maybe you haven't heard but diversification is good. And NOT FREE for everyone else. Do you understand the value of this? In my view everyone should be able to do this under the ancient English law principle of like-kind exchange. But in the US today it is "special people" only. To recap: Why are you taxed for something? Because they can tax you. There are no principals just opportunity. Much like why did your car get broken in to. Because they can.

jvm 13y ago

Insider trading seems unfair. But after a lot of thinking and listening to arguments on both sides, I now actually find the argument in favor of legalizing insider trading fairly compelling. I'd suggest that anybody with strong feelings against it take a little time to consider the arguments for. The argument for has two levels: 1) The trade is a victimless crime. Given the way markets worse, the naïve party would have bought or sold the asset anyway from someone else. Think about how you buy stocks: you just call your broker and ask to buy at the market price. If you do that and end up buying from an insider, you are no worse off. 2) Insiders actually move the price in favor of the naïve party they trade with. If a stock is being sold on the market $29 and the insider knows its true value is $20, they must sell below the other offers (e.g., $28.99) to make the trade. This is in favor of the buying party relative to the outcome without the insider: the buyer will lose $.01 less per share. At large trading volumes, insiders will actually move the market strongly in the direction of the fair price, making all trades of that asset more fair. Unfair though it may be, society at large does not benefit banning insider trading, and allowing it would make stock market prices more accurate which is actually probably a fairly strong benefit to society.

nostrademons 13y ago
The victim is trust in the market. If you know that someone else may have better information than you do, you get a "market for lemmings" situation where everybody assumes that the only reason someone would sell a stock is that they know it's going to tank, and so nobody buys. Liquidity collapses, and with it, the market. The SEC isn't intended to protect individual investors, it's intended to protect the market as a whole. That's why they don't care when individual people get screwed, only when people get screwed to an extent that they won't invest in the market. People change their behavior based on what other people do; without full public information, the result of that tendency is to tend towards zero liquidity.
- dnautics 13y ago
  forgive me if I don't shed any tears for 'trust in the market'. Shouldn't we be more suspicious about the market? People blindly throw their money at the hands of fund managers etc, which means our society is overleveraged on risky propositions.

notastartup 13y ago

Isn't this like telling people to not to break the law but we can because we are the law? What stops a hedge fund manager from being extra nice to the boys that turn Bud Fox?

alexjfowler 13y ago

Members of the sec could be required to register their trades (tested against IRS records yearly to ensure 100% accuracy and eventually automated). Now, place all holdings in a database table. When a company is going to be investigated, select only sec employees who are not listed as having holdings in that company. My solution is obviously incomplete, but maybe it could be the basis for a more robust system.

lutusp 13y ago

This problem is trivially solved -- force new SEC hires to buy one or more market index funds and put them in a blind trust for the duration of their employment. Historically, market index funds do as well as active portfolios (on average), unless brokerage commissions and tax implications are included in the assessment, in which case they do better (a fact proven by the now-famous WSJ dartboard contest). So SEC employees would have a more profitable portfolio than usual for the duration of their employment, and they would avoid even the appearance of impropriety. How is it that this obvious solution hasn't been put in practice?