Inside Heist - 11/22/10

 
The weekend was filled with chatter regarding a vast insider trading probe.
This is may very well be a big deal.
I say lock 'em all up, as the playing field has been uneven for some time, from my perch.

 

Stated simply, I say lock 'em all up, as the playing field has been uneven for some time, from my perch.

Insider trading charges expand. The SEC alleges, in a broad-ranging sting, the existence of extensive exchange of information that goes well beyond Galleon's Silicon Valley executive connections. Several well-known long-only mutual funds are implicated in the sting, which reveals that they have consistently received privileged information from some of the largest public companies over the past decade.

-- Doug Kass, "20 Surprises for 2010" (surprise No. 13)

It's that time of the year when I begin to formulate my surprise list (for 2011).

My bunny had a good nose, as this weekend was filled with chatter and a Wall Street Journal revelation regarding a vast insider trading probe -- something I suggested explicitly in last year's surprise list (for 2010).

Federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders, and analysts across the nation, according to people familiar with the matter. The criminal and civil probes, which authorities say could eclipse the impact on the financial industry of any previous such investigation, are examining whether multiple insider-trading rings reaped illegal profits totaling tens of millions of dollars, the people say. Some charges could be brought before year-end, they say.

-- Saturday's Wall Street Journal report

Based on my contacts, I believe that the soon-to-be-announced insider-trading indictments will be far-reaching and could even have the potential to be market-impactful, as the allegations will not only include some of the most prestigious hedge funds but will also allegations against some of the largest and most conservative mutual-fund companies, investment bankers and law firms.

In other words, this is may very well be a big deal.

Up till now, the SEC has been asleep on many counts. Here are a few obvious examples:

  • The SEC dismissed multiple complaints and internal regularities in the Madoff case.

     

  • Takeovers are routinely preceded by strength in the shares of target companies.

     

  • High-frequency-trading strategies buy (and see) order flow before they get executed.

     

  • Monthly, quarterly and yearly share price markups are common place and are generally ignored.

     

  • There have been limited prosecutable actions by many of those companies/executives that sold stock with knowledge of deteriorating finances. (The most conspicuous example of this sort of abuse, at Countrywide Financial, was punished with a fine that was dwarfed by what the chairman took out of the company).

     

  • Arguably, Sarbanes-Oxley was ignored by many financial institutions that obscured their true health through structured investment vehicles and other accounting devices -- yet there have been few indictments.