Friday, 12 December 2014

Insider trading effectively legalized in US?

Yves Smith wrote "Bill Black: Second Circuit Decision Effectively Legalizes Insider Trading", a very worrisome article. Some snippets:


A U.S. appeals court dealt federal prosecutors a blow in their crackdown on insider trading on Wall Street on Wednesday, overturning the convictions of two former hedge fund managers charged with making illegal trades in technology stocks.

The 2nd U.S. Circuit Court of Appeals in New York said prosecutors presented insufficient evidence to convict Todd Newman, a former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, co-founder of Level Global Investors.

The court held that defendants can only be convicted of insider trading if the person trading on confidential information knew the original tipper disclosed it in exchange for a personal benefit.

What does this mean in practical terms? The court has just provided a very-easy-to-satisfy roadmap for engaging in insider trading legally. Don’t give the person who gave you the choice tidbit any explicit payoff. You can give him all sorts of buttering up before hand (fancy meals, hot women, illicit substances, box seats, whatever you think will induce cooperation and show your seriousness and ability to pay) and just engage in vague winks and nods. As long as you don’t pay the tipster for the trade in any crass or traceable way (and no communications that point to an explicit payoff), you are good to go. Compensation down the road, in hard dollar or soft forms is perfectly kosher.

Needless to say, the implications are terrible. Thanks to high frequency trading, way too cozy a relationship between the Fed and its preferred banks, and years of suspicious trading patterns (markets too consistently not breaching technically significant price levels, with the trading looking decidedly not organic) has sapped the faith of retail and even smaller institutional investors in the integrity of markets. The Second Circuit has just announced open season on pervasive misuse of inside information.

Wall Street’s court of appeals (the Second Circuit) has just issued an opinion not simply overturning guilty verdicts but making it impossible to retry the elite Wall Street defendants that grew wealthy through trading on insider information. Indeed, the opinion reads like a roadmap (or a script) that every corrupt Wall Street elite can follow to create a cynical system of cutouts (ala SAC) that will allow the most senior elites to profit by trading on insider information as a matter of routine with total impunity. The Second Circuit decision makes any moderately sophisticated insider trading scheme that uses cutouts to protect the elite traders a perfect crime. It is a perfect crime because (1) it is guaranteed to make the elite traders who trades on the basis of what he knows is secret, insider information wealthy absent successful prosecutions and (2) using the Second Circuit’s decision as a fraud roadmap, an elite trader can arrange the scheme with total impunity from the criminal laws. The Second Circuit ruling appears to make the financial version of “don’t ask; don’t tell” a complete defense to insider trading prosecutions. The Second Circuit does not simply make it harder to prosecute – they make it impossible to prosecute sophisticated insider fraud schemes in which the elites use junior cutouts to create (totally implausible) deniability.


In Malaysia, recently regulatory activities regarding insider trading has increased. However, progress is very slow, a recent announcement by the SC involved an alleged insider trading case which happened more than 7 years ago.

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