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Dick Bové Has Figured Out Warren Buffett's Scam

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Dick Bové would like to think that he knows Bank of America better than anyone else, since he knew to buy when everyone else was selling and correctly interpreted "10,000 layoffs" to be more of an order-of-magnitude lower bound than the actual number of layoffs to expect. So he's offended that, while he was doing the legwork to make those calls, certain other people just had inside information handed to them on a silver platter. People like Warren Buffett:

“Did he have inside information that other investors were not aware off? Did he know that there were going to be these two major announcements [of the job cuts and executive firings] at the time he made his investment?” asked banking analyst Dick Bove of Rochdale Securities. “If he did know, I think it is illegal.”

Bove added: “Those are two very material pieces of information that were not [publicly] disclosed, and he may have had them disclosed [to him].”

It's an intriguing proposition - but seems unlikely to be right. For one thing, BofA denies it - "we would not have provided any information to him [Buffett] in advance, nor would we do that for any shareholder.” And the fact that the deal seems to have gone from vague idea to closing while Buffett was lathering up in the bath also suggests that he had no more nonpublic diligence than anyone else did.

More importantly, "due diligence" is not the same thing as "illegal insider trading." Insider trading is illegal because it involves a misappropriation of inside information, and some information asymmetry with the person on the other side of the trade. If Buffett knew of BofA's can't-lose layoff plans and bought shares in the market, then that's illegal - because he's profiting from knowing what ordinary investors don't. But buying in a negotiated transaction directly from BofA is different, since he's unlikely to have more information about BofA than BofA has. (Well, in theory.) If he actually got diligence information from BofA and used it to negotiate his deal, no one was deceived: if BofA already knew about its layoff plans and told him, then that just put both sides on a level playing field. Indeed, if BofA knew about its layoff plans and didn't tell Buffett, then that would be a problem - why should BofA be able to withhold material information from Buffett in convincing him to make an investment?

That said, BofA's claims that they'd never give Buffett any special information ring a little hollow on one point. Quite understandably, they actually agreed in writing to provide him more access than they give the average shareholder:

4.6 Information Rights. At the request of the Investor, from time to time upon reasonable notice, the Company shall make the Chief Financial Officer of the Company available to meet with the Investor for the purpose of discussing with the Investor the financial condition, business and results of operations of the Company. This right is non-transferable and terminates on the date that the Investor and its Permitted Transferees no longer collectively hold Preferred Stock with an aggregate liquidation value of at least $1,000,000,000.

If Bové is right that that's illegal, they may want to be a bit more subtle about it.

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