Thursday, July 13, 2017

The wrong way to make a little cash

Via Twitter, an unfortunate story of insider trading from an unusual sector of society: 
BOSTON (Reuters) - A research scientist at Massachusetts Institute of Technology was arrested on Wednesday on charges that he engaged in insider trading based on information he obtained from his wife, a corporate lawyer working on a deal involving a mining company. 
Fei Yan, 31, was arrested in Massachusetts after federal prosecutors in Manhattan accused him of trading last year on inside information about South Africa's Sibanye Gold Ltd planned $2.2 billion acquisition of Stillwater Mining. 
The U.S. Securities and Exchange Commission in a related lawsuit accused Yan of netting $120,000 by placing trades ahead of the Stillwater deal and another merger based on information he obtained from his wife, an associate at a corporate law firm.... 
...Yan, a citizen of China, had been employed as a post-doctoral associate in MIT's Research Laboratory of Electronics, according to Kimberly Allen, a spokeswoman for MIT. She referred further comments to the U.S. Attorney's Office in Manhattan. 
He was charged in a criminal complaint with securities fraud and wire fraud. Following a hearing in federal court in Boston, Yan was released on a $500,000 unsecured bond....
You know, I knew a couple of folks who traded equities in graduate school, but, for the most part, no one in graduate school has any information that is really worth trading on. It's not like your latest NMR result is going to affect the value of any corporation by any significant amount (in school, anyway.)

(A small side debate: on Twitter, a respected follower (and longtime reader of the blog) and I were pondering whether or not it was more likely that wealthy people or non-wealthy people were most likely to be caught, prosecuted or convicted by federal authorities for insider trading. I feel like it's more likely that the small fry are the ones who are caught, but my interlocutor felt that it was the wealthy folks who attracted more prosecutorial attention. Readers, what say you? Are there any relevant studies on this issue?) 

15 comments:

  1. We have to go through pretty rigorous insider trader training at my small biotech, and our General Counsel usually makes it a big point of emphasis that the SEC purposely targets "little guys" to make an example of, even if the $ amount isn't that significant. I guess to discourage anybody from thinking "why would they care about little old me?" and trying something. Maybe that artificially inflates the non-wealthy number of prosecutions/convictions. But I also suppose a whole bunch of small fries can do more damage than one Big Mac, so maybe that's the thinking here.

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  2. Wealthy vs non-wealthy? I'll see your Fei Yan and raise you a Martha Stewart...

    I would assume the wealthy are more likely to *do* insider trading (access to capital and information), but I don't have any stats on the conviction rates by income bracket. However, I would imagine that it is much easier to *detect* insider trading by the non-wealthy, infrequent trader...

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    1. My recollection is that Stewart used insider information not to buy, but to sell a stock on the eve of a large drop. That's certainly a case where a person of modest means might act, and it's got to be hard for a wealthy person to sit on their hands a wait for the hit. But this is why you need to have a diversified portfolio. If you learn from an insider that 1% of your portfolio is going to loose 50% of its value, that's a normal day on Wall Street for you and not worth cheating over.

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  3. I assume that small fry is the base load for securities prosecution. They need to have high conviction rates and people with less money to hire lawyers (and to plan ahead). Rich bigwigs are publicized to convince people that it's not just "poor" schlubs who get nailed but that no one is above the law and as deterrence (because larger more institutional insider trading is a threat to the stock markets and the economy - if the gains in stock markets go to those who can get information fast and not to the people that risk their money, people aren't going to risk their money, and the businesses that would have started with that money won't).

    "Poor" in this context probably isn't really poor - you have to have a significant amount of money lying around to take advantage of insider information, and so the insider training pool is probably enriched in relatively wealthy people. On the other hand, after this (because he's going to lose the profits, and his wife will probably lose her job and be difficult to hire elsewhere), they may very well be poor.

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    1. You fail to recognize congress is actually immune from insider trading. Even those appointed to any special commission.

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  4. I am sorry to say but these guys are termite! No matter how they benefit from coming to the USA, a termite is a termite. Eating us within. No ethics, no moral!

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    1. "These guys" being insider traders? Or are you saying what you are clearly saying.

      Chemjobber, delete racist and pointless comments please.

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    2. How right you are. All the American citizens and white people working on Wall Street are downright angels when it comes to not engaging in insider trading.

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    3. Wait, are you sure "these guys" doesn't mean Yan and his wife? I didn't see anything in the comment that necessarily generalized it.

      My interpretation may have been colored by a childhood spent watching honest Italian-Americans seethe every time the media reported some new mafia crimes, though....

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  5. There are businesses that are more risky than insider trading.

    https://vimeo.com/26981353

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  6. A million dollars isn't much anymore, and well educated professionals in CA, NYC, Boston and even Austin need at least a few million in stocks, bonds and real estate on the cusp of retirement. So, I'm going to define wealthy as having ca. 10 times as much money as I do, call it 30 to 50 million. With 30 to 50 million at least 20 million is going to fairly liquid, in stocks, short term bonds, ETFs, etc. An investor at that level is going to have access to information in the gray zone between public and insider information. It's likely he or she is on the lookout for a little spice to make his overall yield pop from maybe 7 % in a diversified portfolio to 9 or 10%. At the same time this person probably got there through disciplined investing and understanding the down side of risk. Made aware of a flat out insider trading opportunity, especially one involving an equity class he has little history with or a tainted connection through a social network that would raise a flag, such a disciplined investor who is already beating the market is going to run in the other direction. It's the poor slob, who like a short stacked player in a Hold'em tournament who needs to double up or loose his tournament life, who takes the bait and like a bolt from the blue makes the perfect stock pick at the perfect time as his only significant equity trade of the year. The idiot in question here made not one perfect pick, but two, and the common point was the firm representing those equities, where his wife had access to the information.

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  7. The richest typically also wield the most power. Take Steven Cohen of SAC for example, a guy who has had near insurmountable allegations of insider trading leveled at him, but practically laughs them off as he continues to trade and shop for multimillion dollar artworks. I think it's easy to believe that the small-fry are an easier target for prosecutors, who probably prefer convictions at the end of the day.

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    1. Cohen also had four of his direct reports sent to jail, and at one point, something like a consent decree in which he agreed to not trade. He laughed it off, but not without lots of lawyer time and lots of luck.

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    2. "He laughed it off, but not without lots of lawyer time"

      That's exactly why small-fry are less likely to wriggle off the hook, and in turn why a prosecutor might be less likely to take on such an opponent. Not sure about the luck part, it sounds as though he was extremely careful and is clearly very intelligent. Also, something about how he receives so many emails in a day that he couldn't possibly have traded on the emailed tip-offs that were used as evidence against him.

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  8. The guy's wife wasn't busted too?

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