Thursday, December 16, 2010

The Protected versus the Unprotected: John Kinnucan on the Up Coming Insider Trading Show Trials

John Kinnucan, the research analyst who refused to wear a wire, at the request of the FBI, when he talked to his clients, and then sent an email to his clients advising about the FBI visit, has a column today at CNBC.

Kinnucan demonstrates how what "expert network" firms are doing is nothing different from what investment banks such as Goldman Sachs and JPMorgan do. The only difference is that the "expert network" firms do not have the political protection that the Goldman's and JPMorgan's of the world have.

Here's Kinnucan:

These types of “marketing trips” by senior executives, sponsored by the big investment banks...are very common, and are often great trading opportunities. The dog and pony show usually starts out in Boston, and long before it reaches New York, on its way down to Philadelphia, the word is out that the management team is talking extremely bullish, and it’s time to get on board the gravy train.

A thoughtful observer might wonder whether these management tours end up disclosing non-public information, leaving aside the issue of materiality.

However, when a stock increases 8% for no discernible reason, other than top management making the rounds with large investors, the question of materiality does seem at least somewhat germane.

Said observer might also wonder whether company management is receiving a “payment-in-kind,” in the form of enhancing their net worth by millions of dollars, for disclosing this non-public information.

Furthermore, the sponsoring bank is being effectively paid being paid handsomely for facilitating this exchange (starting to sound familiar?). You can be sure that as soon as the company management leaves the fund offices, a salesman at the sponsoring bank will be on the line with the fund trading desk, inquiring about how much stock he can expect to be purchased as a result of the visit.

For the uninitiated, this is essentially no different than how an expert network functions, i.e. facilitating access to individual company information by investors, for a fee.

So, the answer to the question posed in the title now appears obvious: The Feds will not go after an investment bank (bad career move, etc…), but they are more than happy to make a small research firm extinct (think snail darter).
Bottom line: It is important to get this information out there, as JPMorgan and Goldman Sachs will tell you. It makes the markets more efficient. But, the SEC, which has a justly deserved reputation for being incompetent to catch real criminals, e.g., Bernie Madoff, has a public relations problem which it is going to solve by going after "insider trading" assisted by Expert Network firms, while at the same time side-stepping the essentially same activities done via the protected ones, e.g., Goldman and JPMorgan.

This is totally outrageous conduct and activity by the SEC and DOJ, and if ever there was time for jury nullification, as explained by Tom Woods, to occur, it is when these absurd show trials are in court.

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