Wednesday, October 21, 2009

How Major Players Beat the SEC

The Securities and Exchange Commission has many convoluted rules that make little sense. In some areas it is near impossible to operate unless you find a way around the rules.

I was really shocked at the sloppy discussions going on by the players in the Galleon insider trading case. Since the SEC regs are usually goofy, there are usually ways around them.

I know an investor relations executive who never tries "to pump up" a client stock, since that would be illegal. What he does is "disseminate information, about a company, that the investment community might find attractive."

Talking open stuff on a telephone line is simply stupid. The real players talk in code. If they know a takeover is coming, they call up their buddy and tell them, "I have been looking at the balance sheet of XYZ company. My analysis tells me it's way undervalued."

Real slick operators create rumors for themselves.

The line from the movie, Wall Street, "Blue horseshoe loves Anacot Steel." is often repeated by lower rung Wall Streeters. But I wonder if they know what is really going on?

In the movie Gordon Gekko (Played by Michael Douglas) has Bud Fox (Played by Charlie Sheen)call up a financial newspaper and whisper to the reporter, "Blue horseshoe loves Anacot Steel."

Now, what is going on here is that Gekko is trying to create a paper trail. If he knows Anacot Steel is going to be taken over, he needs justification for buying the stock. He tips off a financial newspaper that something is brewing. They run a story. He buys the stock after the story runs. If the SEC questions him about the purchase, he can say, "I bought it after I saw the story in the paper."

Another tactic is for a major player to have an analyst "upgrade" his recommendation on a takeover target. Then he can say he bought it on the analyst upgrade.

The more and more regulations that enter a society, the more and more important it will be to talk code and find angles. George Bush I is a major code talker, as I have previously discussed.

If you don't know how to talk code, you better start learning. As regulations explode, you are going to need the ability. And, you better understand when someone is talking code to you, otherwise you are going to miss some great opportunities from those who really know how to do deal in a very regulated environment.


  1. That Bush code on Neil/Silverado sounds similar to the Biden commentary on Paradigm.

    It's how the politically connected avoid legal consequences for unethical behavior, the kind that would throw you or me in jail.

  2. PEU Report,

    No one should go to jail for 'unethical behavior' so I assume you're just describing a state of reality not implying that this is a just situation.

    It's ridiculous to punish people for the non-crime of insider trading. These rules are established, as regulations always are, to protect the big players who inside trade all day long, from little competitors who might try to inside trade and work their way up the ladder of financial stardom themselves.

  3. Taylor, thanks for explaining why you or me would end up in jail.

    Who knew America was all about keeping hegemonic powers (from the Bush's to the Biden's) in place?

  4. PEU Report,

    I am confused.

    I like following your blog and I love your comments (most of the time) because you ask good questions that highlight/imply scandalous behavior.

    But sometimes I get the feeling that you believe the solution to these problems is more regulation, not less.

    On this particular issue (insider trading), you seem to be most upset that there is "one rule for thy and another rule for thine" in the sense that common people get punished for insider trading while 'insiders' don't. I might be reading you wrong but it sounds like you would like to see the rules enforced more equitably in the sense that the insiders get beholden to the insider trading laws as well.

    For my part, I would like to see neither the insiders nor the commoners punished for insider trading. It's a non-crime. Trading on knowledge no one else has because you are some kind of insider does not deprive anyone of anything unless people are somehow entitled to sell their stock/financial instruments at a particular price, which they are not. There's no fraud, no theft and no murder/assault involved in insider trading. Those are the three primary, fundamental forms of coercion in society that deserve punishment and insider trading doesn't fall into any of those categories.

    Now, if some executive of a company sold his own company short because he was actively working to undermine the company... he should be punished. But not for insider trading-- he should be punished for fraud. When he becomes an executive he has a contract and an obligation to perform in his role to the best of his ability. Working to sabotage his own company is a violation of his contract and an act of fraud and should be punishable as such.

    But mere insider trading... no force involved, so why are we punishing these people?

    That is where I am confused with where you stand, PEU.