Today is really becoming pile on the SEC day. First Matt Taibbi gets on them for not using “subpoenas, depositions, everything short of hot pokers and waterboarding” on people just because they hadn’t done anything wrong. Now the unfortunately named Toby Scammell, whom the SEC sued for insider trading last week, has fired back with his own blog called #SECFAIL.
Scammell made hundreds of thousands of dollars by buying a lot of short-dated out-of-the-money call options on Marvel just before it announced that it would be acquired by Disney. Scammell claims he came up with this strategy because he is an awesome options trader who once “spent four months researching and writing a book on scenario-based trading.” The SEC claims his girlfriend was working on the acquisition as a Disney consultant and told him about it in advance.
You'd think they could just agree to disagree on this, but Scammell has spent a lot of time with the SEC answering questions, and based on the quality of those questions and the SEC's complaint, he's decided that they're a bunch of morons and not worth any more of his time. Specifically:
If the SEC understood how to read a bank statement or how call options worked then I wouldn’t be writing this. But this is the SEC—an incompetent government agency filled with bumbling lawyers who don’t understand the first thing about the markets they’re charged with regulating. They’re the financial regulatory equivalent of the DMV, except their lawyers lack domain expertise. I have no doubt a random selection of TSA screeners and postal workers would do a better job if their only training involved watching an hour of CNBC.
So far this is nothing you wouldn't hear out of Harry Markopolos on a good day. But beyond just general competence points, though, Scammell quite sensibly points out that the SEC’s case is entirely circumstantial. Its complaint doesn't actually suggest that it knows how information got from Scammell's girlfriend to him:
By no later than August 13, 2009, Scammell had obtained the identity of the acquisition target from his girlfriend, whether through overhearing one or more of his girlfriend's Marvel-related conversations, by seeing electronic or paper documents in her possession related to the Marvel acquisition, or through her conversations with him.
One of those, whatever. As Scammell says:
The SEC is making an illogical leap and assuming that I knew what my girlfriend knew. Call it the SEC’s transitive theory of insider information: If Person A knows Person B and Person B knows Fact C then Person A knows Fact C. Based on that standard, well-networked investors everywhere should be sued and embarrassed in the press, not for receiving information but merely for their relationships.
So far, so good – Dealbook is convinced, noting that “Even before his hostile missive on Tuesday raised new questions about the case, the S.E.C.’s lawsuit contained crucial holes.”
But, kids, listen. If you're accused of insider trading, it's totally natural to want to lash out at the SEC. But you've got to take some time, reflect, keep your emotions in check. Or else bad things can happen. Here are some other things Scammell says that will maybe help him a tiny bit less:
With tens of thousands of emails, texts, and instant messages processed the SEC can’t even muster an out-of-context quote (as they’ve done elsewhere) to support their claim that I knew something. On the contrary, my girlfriend made it clear from the outset that she wouldn’t tell me what the target was, and I never asked. …
[During an unrelated project,] I heard Disney had been trying to buy Marvel for years. (This was later confirmed to be a known fact inside media circles by multiple news articles.) …
My trading before and after Marvel shows a clear, consistent pattern: one of aggressive, short-term, event-driven and technically-driven trades. I have years of history trading penny stocks and speculating on FDA approvals, acquisitions, earnings calls, and political events.
Err, yes. This is why you check with your lawyer before blogging about your insider trading case. The SEC claims that Scammell knew that his girlfriend was working on a big acquisition for Disney, and that it would announce before Labor Day 2009. Scammell more or less admits that – he just claims that he didn’t know it was Marvel.
Of course, if Scammell had advance news that Disney was going to acquire a competitor by Labor Day, it would have been smart for him to buy out of the money call options on other mid-cap competitors – big enough to be a big deal for his girlfriend and Disney, small enough to be a reasonable acquisition target – because those stocks were likely to move up on any announced acquisition (cf. Motorola Mobility's comps). Even if he had gotten the acquisition target wrong, knowing that Disney was going to announce a major acquisition of a competitor in August would give him a pretty good chance of making money on out-of-the-money call options.
Inside information is material if there is “a substantial likelihood that a fact ‘would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.’” If you knew that Disney was announcing an acquisition in August, that would probably “significantly alter” your “total mix” of information in thinking about buying September call options on a company that had been identified as a potential target in the past.
Is this, like, definitive proof of insider trading? No. Does it help him? Not really. Is the SEC going to be inclined to cut him some slack after he's accused them of a "stunning lack of knowledge about investing, acquisitions, or how to read basic financial documents"? Yeah, good luck with that.