Legal Trading Too Hard

Illegal trading kind of hard, too.
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By Federal Bureau of Prisons (http://www.bop.gov/locations/index.jsp) [Public domain], via Wikimedia Commons

By Federal Bureau of Prisons via Wikimedia Commons

If you happen to read every indictment that comes flowing out of the SEC (as we at Dealbreaker do) you begin to wonder why it is that so many seeming professionals with active careers and growing families choose to engage in such shit-headed two-bit scams. Surely any intelligent investor knows that insider trading in your mother's name or trading on your own research reports would be detected by an SEC committed (at least until recently) to rooting out “broken windows” offenses.

But still they do it. And the best answer we've come across as to why comes from one Individual A, an accomplice in an alleged scheme to take over unwitting investors' brokerage accounts, conduct off-hours trading on small-cap low-vol stocks, and then profit by having someone take the other side of the trades. At one point during the course of the scam, I.A.'s alleged partner-in-crime – Philadelphia day trader Joseph Willner – asked if I.A. would be down to do some trading that day. The response, per the SEC:

Legal trading too hard.

There it is. A theory of securities law criminality so concise that it doesn't even need a verb. It's too difficult to profitably play the public markets, especially when there is, sitting across from you, an entire industry built around eating your lunch. But knowing that fact doesn't make day trading any less irresistible.

So eventually some people resort to less legit means to make a buck – in this case somehow commandeering the accounts of unsuspecting victims to move the prices of thinly traded stocks and then profiting from the dislocations with another account. (Individual A, who controlled the dummy accounts, allegedly got a cut of the profits Willner made in his own account. I.A.: "u remember deal ... i can do that [expletive] half half profit.")

Perhaps the more interesting facet in the story, however, is that bitcoin still isn't a foolproof avenue for money laundering:

Willner agreed to the profit sharing arrangement with Individual A. In order to mask his payments to Individual A, Willner transferred proceeds of profitable trades to a digital currency company that converts United States dollars to the cryptocurrency known as bitcoin, and then transmitted the bitcoins to Individual A.

There were other ways the SEC says Willner left his tracks uncovered – by failing to mask his home IP address, for instance – but at the very least we can affirm, again, that sending illicit payments in bitcoin does not magically erase the alleged crimes that necessitated the bitcoin in the first place.

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After The STOCK Act It Will Still Be Legal To Trade On Congressional Inside Information*

Here's a sort of touching monologue from David Einhorn's call with Punch: If you’ve done the analysis, and come to the conclusion that on it’s own, the company is not going to make it, it makes all of the sense in the world to raise equity at whatever the price is, so that you can know that the company, you know, is – is going to make it. Now, what that brings to my mind though is, you know, obviously we haven’t done your analysis, we haven’t done -- signed an NDA; I don’t know that we’re going to sign an NDA, because we prefer to just remain investors, but from my perspective, and I’ll be just straight up with you, is that gives a lot of signalling value. And the signalling value that comes from figuring out the company has figured out that it’s not going to make it on it’s own is that we’ve just grossly misassessed the -- you know what’s going on here. And -- and that, that will cause us to have to just reconsider what we’re doing, which is not the end of the world to you. You will continue on even if we don’t continue on with you. You could sort of see why the FSA read that to mean that he was insider trading. Like ... (1) You have told me something with signalling value. Sorry - "a lot of signalling value." (2) I will now act on that signal. (3) Don't be mad. "Signalling value" sure sounds like it means "material nonpublic information," doesn't it? Now as we've discussed before, trading on that information would not be enough to make Einhorn guilty of insider trading in the US, though maybe it wouldn't be exactly a great idea here either. Why? Because in our weird but sort of sensible insider trading laws, it's just not illegal to trade on material nonpublic information. It's only illegal to trade based on material nonpublic information that was obtained in violation of some sort of duty of confidence. Since Einhorn didn't sign an NDA, he had no duty of confidence. And since the Punch CEO and bankers weren't tipping him for nefarious purposes, but were instead sounding him out on the company's behalf as a shareholder and potential investor in a new capital raise, they weren't breaching their duty of confidence. You could quibble with the details of that but it's basically the law here. In England not so much. That also seems to be the law for our friends in Congress, who recently passed a law making it illegal for them to insider trade, which is worrying some people who make their living from trading on Congressional inside information:

It's Probably Best Not To Think Too Hard About JPMorgan's Revenue-Per-Trade Breakdown

Despite its overwhelming brown-ness I was kind of mesmerized by this slide from Jes Staley's presentation for use later today at JPM's investor day: The table shows the "number of trades" and revenue per trade for a bunch of JPMorgan's investment bank trading products, which it's disclosing now for reasons that are unclear but you can guess. Bloomberg does: