Sunday, July 28, 2013

Rage Against The Machine, or, Up With Cheaters!

 We here at NotMakingThisUp have no vendetta against Holman Jenkins, Jr., despite this being our second reaction to one of his Wall Street Journal editorials in as many months.  In fact, your editor has met him in a social setting, and he seems like a thoroughly reasonable guy.
 But his knee-jerk, anything-the-government-does-is-ipso-facto-wrong mindset puts him in the repeated position of defending individuals like MF Global destroyer-in-chief Jon Corzine (here) and Rajat Gupta, former Goldman Sachs board member and convicted Raj Rajaratnam source (here), not to mention, most recently, laying into the government’s prosecution of SAC (here).
 It’s a bizarre case of a straight-laced Wall Street Journal writer whose favorite story line seems to be Up With Cheaters!
 Since the SAC case is still out there, we have nothing to say about Jenkins’ knee-jerk lambasting of the Feds’ efforts to shut the place down without seemingly having any goods on the boss of the enterprise, although the situation at SAC (five former employees cooperating with the Feds out of eight so far charged criminally on insider trading) recalls what a friend likes to say about these kinds of things: “If it looks like a duck and quacks like a duck…”
 Instead, we focus on the biggest whopper in Jenkins’ latest rage against the machine: that the “standard rhetoric” that “the public is cheated” by insider trading “is nonsense.”
 Here’s how he puts it:
 Under standard rhetoric, the public is somehow cheated by all this, but the standard rhetoric is nonsense. The public isn't damaged because another party wants to sell or buy....
 According to Jenkins’ fuzzy logic, somehow, the investors who sold 175,000 shares of Goldman Sachs to Raj Rajaratnam late in the trading day of September 23, 2008, after Rajaratnam got word from Gupta about Warren Buffett’s $5 billion investment in Goldman—a market-moving event if ever there was one—and thereby left a $900,000 profit on the table that Rajaratnam pocketed for his firm after the stock soared the next day, were not “damaged” or “somehow cheated.”
 As Zack de la Rocha would sing, “know your enemy.”  
 And in our line of business, if not in Jenkins’s, inside traders are the enemy—not the Feds.
 Good riddance to them.

Jeff Matthews
Author “Warren Buffett’s Successor: Who It Is And Why It Matters”
(eBooks on Investing, 2013)    $2.99 Kindle Version at

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The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.


John Hempton said...

Why can't people (sometimes including the SEC) think this sort of thing through clearly...


Anonymous said...

Holman Jenkins’ fuzzy logic is right. The investors sold 175,000 shares of Goldman Sachs regardless of whether Raj Rajaratnam knew anything. The proximate cause of their selling had nothing to do with Rajaratnam, and they don't have any right to sue him in civil court. However, Rajaratnam can be sued by his employer and its clients for breach of contract regarding confidentiality in civil court. Consider these witch hunts against insiders if the share price of Goldman Sachs actually fell moments after the announcement. The share price did fall below the price Warren Buffet paid for the shares, but then reversed.

In the end, it's peculiar that anyone believes valuable information must be universally available or understood. Doctors know more than patients, lawyers more than clients and teachers more than students, but few claim they have an unfair advantage when practicing their profession in competition with the novice (i.e. nurse, paralegal, tutor). Does Buffet have an unfair advantage with his confidential access to so many different industries under the umbrella of Berkshire Hathaway? No, it’s a fair advantage.

Anonymous said...

Here’s a real world example of why Holman Jenkins’ fuzzy logic is right. Person A buys car for X, and then subsequently sells the same car to Person B for less than X. Unbeknownst to Person A, Person B discovered the same car was worth ten times X before making the purchase. This occurs at random all the time. Few consider Person A to have any right to the profits gained by Person B. However, insider trading laws would force Person B to disclose his knowledge or not act upon it. The basis of the same laws is simple jealously of another person’s access to valuable information, and the fantasy of making it universally available or understood.

Jeff Matthews said...

a. If the share price fell, there's no illegal profit.
b. The writer confuses "valuable information," which can be obtained by entirely legal means (Warren Buffett learns much about the economy from his weekly car loading data from Burlington Northern Santa Fe, e.g.) with material non-public information (Warren Buffett's secretary learns that a Berkshire company is going to bid for a public company, and buys the stock for her own account, e.g.). The two (valuable information and material non-public information) are not the same thing.
c. The doctors and nurses comparison likewise confuses valuable information and material non-public information--i.e. a doctor has learned more than a nurse, which enables the doctor to earn more applying that knowledge. It's not unfair, and has no bearing on insider trading.
d. Ditto with the used car salesmen example. Somebody who knows something more about valuing cars (as with stocks) will, over time, benefit from that knowledge.


Anonymous said...

Why do so many people ignore the fact that this behavior is a crime? And why do so many people forget that "white collar" criminals are first and foremost criminals?

In my opinion, the best way to get less of this behavior is to ramp up the punishment - longer sentences in real federal prisons (i.e., Marion) and not a relatively few months in Club Fed.

Time to disincentivize the behaviors in a meaningful way.

Allan said...

From these comments, it appears Holman Jenkins knows his audience!

Anonymous said...

A. The law doesn't care if there are any profits, but the act of insider trading. Fines are lower without profits, but it is still a criminal act resulting in imprisonment. By the way, all the Goldman Sachs sellers could have repurchased their shares at a price better than Buffet, which is conveniently ignored.

B. Both Buffet examples are valuable information and are non-public / confidential. Only one of them is legal, which is absurd. Both should be legal unless Buffet had a employment contact prohibiting such acts.

C. - D. If the ability to learn justifies a competitive advantage, then it should apply to insider trading if anything. Insiders learned before others, but inevitably everyone else will learn the same thing. It's actually harder to learn the same thing as doctors, lawyers or teachers over years, while insiders have knowledge learned in a day. However, the easier group is punished out of jealously.

Anonymous said...

Another issue is the imagined harm. Anyone trading doesn't gain a penny from prosecuting insider trading. If there was no Goldman Sachs insider, the sellers got a worse result. How? The insiders are bidding the stock up higher than normal for those selling. The sellers should be thanking the insiders because Goldman shares sold marginally higher before the Buffet announcement. This is basic math that doesn't fit the inside trading witch hunt.

Anonymous said...

Correction: A. The law doesn't care if there are any profits, but the act of insider trading.

The law doesn’t care if there are any profits or avoided losses, but the act of insider trading.

Anonymous said...

Anonymous at 410pm on 29th - youre wrong.

Youre assuming the seller had to sell that day at the market price offered. Actually, sometimes people will sell in response to a sharp and seemingly unjustified up move in the share price on no news, which is often caused by insiders buying ahead of new news.

I lost money that way recently in a stock recently. A stock i owned rose from 1300 to 1440 in two days. I decided to sell some because i thought the stock was only worth about 1500, and decided to reduce to put money into another idea that looked relatively cheaper after the up move.

Next day news comes out that a buyout shop has taken a stake. Stock shoots up to 1590 the next day.

I got screwed by insider traders. Youre wrong that there are no victims. If the stock had stayed at 1300 i would never have sold any.