All of the ingredients were in place for industry-wide evidence of insider trading. Add a dash of deals and a new political zeitgeist and the recipe was complete.
A year ago the money manager Doug Kass predicted that we'd see a "broad-ranging sting" in 2010 which would surface "the existence of extensive exchange of information that goes well beyond Galleon's Silicon Valley executive connections." He told the readers of his popular newsletter that "several well-known long-only mutual funds [will be] implicated in the sting, which reveals that they have consistently received privileged information from some of the largest public companies over the past decade."
How's that for prescience? The government's crackdown on a vast and shadowy insider trading ring has come none too soon to meet Kass' deadline, with the Securities and Exchange Commission now delivering fistfuls of subpoenas to firms like SAC, Citadel, Janus, and Wellington Management. But Kass, the founder of hedge fund Seabreeze Partners, says it didn't take a crystal ball to predict the big bust of 2010. You needed common sense, a stock chart, and a feel for the sharp shift in the political zeitgeist.
"It was acutely clear to me in looking at a number of M&A transactions that someone knew something was happening because the stocks consistently moved materially higher prior to a public announcement," Kass says. "And there has been a lack of enforcement with regard to obvious problems. The last administration, and the SEC it supervised, was remiss in prosecuting and surveillance. Then we elected a populist administration, and it was time for the pendulum to swing back."
More mergers, more suspicious stock moves
Kass' simple, spot-on formula makes it easy to understand why this holiday wave of enforcement activity was entirely predictable. The ingredients for insider trading were all in place. A burgeoning landscape for mergers and acquisitions meant dozens of bankers, executives, lawyers and investors were involved in deals that would surely move stock prices.
Unsurprisingly, the alleged improper trading was largely in healthcare and technology stocks, sectors that have seen a lot of M&A in the past two years, with the government even taking a hard look at analysts who cover Apple (AAPL). Moreover, these are sectors that have seen all sorts of other market-moving news because they're among the most dynamic sectors in the economy today. While most people with information about buyouts, product tests, or new gadgets can resist the siren song of greed and power, there are always a few who cave. Just ask Dennis Levine, Ivan Boesky, or R. Foster Winans.
A certain swagger fueled the fire -- the kind of confidence that grows when your industry hasn't seen the back of a regulatory hand in nearly a decade. The money management world grew so avaricious over the last decade, Kass says, that it spawned a cottage industry of so-called expert networks whose very business models sometimes challenged existing rules about acting on non-public information."We've had a laissez-faire attitude with regard to enforcement and Wall Street, and these traders got the message," says Kass.
The upshot of Kass' prediction? If a hedge fund manager in Florida who is busy with a day job can spot suspicious market activity and put together the cause, then SEC investigators, armed with resources and nothing to distract them from looking for fraud, can likely piece the clues together, too. "I predict there will be convictions this time," says Kass. "The enforcement agents were remiss and now they are playing catch up."
And if that means leveling the playing field for investors, as former jailbird Martha Stewart might say, it's a good thing.
Also on Fortune.com:
Now we're talking turkey: Insider trading arrests begin
Why the Feds want Steve Cohen
I believe that those being 'looked at' are those who thought they didn't HAVE TO tithe the Democratic and Republican Party Leadership. WHY no perp walks on Wall Street? The Big 10 all contribute HEAVILY to both Parties, they even WRITE the LEGISLATION the DC hookers pass into Law.
A few nobodies will be busted, maybe even do a little time at a Fed Country Club (IF they cough up enough LOOT) like our Polish Princess, Martha....but for GS, BofA, ML et al.....this charade just cuts down on the competition. DC needs a giant enema in 2012 and 2014.
Recently, the DOJ failed to copetently prosecute and convict a well-known terrorist for his crimes against America, an effort supported by mountains of evidence. With far less evidence, how will this administration prosecute and convict the current crop of corporate and Wall Street crooks? It just looks like a show, yet again at tax-payer expense, to appease the populist public, however inadequate the results.
@JF: When one lives in a world of half-baked hysteria, crackpot conspiracies, and idiotic ideas, one need not "proove" anything. Please, for the love of Jesus, use a spell checker and finish high school.
More on topic - it took quite an effort to nail Martha Stewart; how many convictions will the SEC get with far less proof? They better get some of these insiders to roll over or they're going nowhere.
WHY else would they PAY Barney Frank, Chris Mozillo Dodd, Rangel, Shumer, et al, sooooooo much money? To LOOK THE OTHER WAY. These DC 'hookers' should join Tom DeLay and Cunningham behind bars.
We act as though "rampant insider trading" is some sort of new problem. When are we all going to stop pretending the whole system is shot through with rot?
more evidence that the stock market is a rigged game. why cant we just have a revolution already?
When peoples speaks together without witness, how can you "proove" anything? When Gold ingots transfers from hand to hand, and desappears, how can you ever "proove" anything? When Traders clubs in the synagogue invented new self fullfilling prophecies, how will you "proove" anything?
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