You get what you pay for. The old adage cautioning against suspiciously inexpensive merchandise also applies to the grotesquely overpriced. Seven hedge fund traders were charged Tuesday with making a $62 million profit from insider information. In one instance, a rather shadowy character called “Individual 1” paid $175,000 for inside information on Dell.
Expensive, indeed.
Three key players were arrested in connection with the trades. One surrendered, and two others pled guilty. The men worked for different hedge funds and are alleged to have traded information on technology companies between 2005 and 2009, bringing in a total of $62 million among the group. They now face up to 20 years in prison.
This case is part of a larger theme of the Obama administration taking a more active role in tackling insider trading.
In October 2011, Raj Rajaratnam, a once well-respected hedge fund trader who gained fame for his unusual success, was sentenced to 11 years in prison for insider trades amounting to gains of $72 million. The case against Rajaratnam seemed to come straight from a Hollywood script: wire taps, prostitution, private islands in Greece and a former beauty queen who slept with Silicon Valley bigwigs in order to extricate information.
But what really drives this behavior? Danielle Chiesi, the former beauty queen turned trader, claimed insider trading “is like an orgasm.”
Her unintentionally ironic comment shows that insider trading taps into something distinctively human. Greed is a normal part of human nature and, in the right circumstances, could be a good thing. But is it as natural and “good” as sex?
Apparently so.
Insider trading hurts markets by creating distortions in price and value. The distortions are sometimes subtle, which leads to arguments that insider trading is a victimless crime. However, sometimes they’re more severe, such as allegations that Goldman Sachs was at least negligent in informing clients about their information on the housing bubble.
Insider trading is not a victimless crime, then, because artificial distortions of share prices affect perceived and calculated values, which are the data the rest of investors use to make trades. Think of it as “performance-enhancing information” or a drastically uneven playing field.
Despite the fact that insider trading harms markets, Wall Street is seemingly full of brokers engaging in it.
In February of 2011, the Securities and Exchange Commission brought charges on four additional hedge fund managers for insider trading. These men, who worked for a $12 billion hedge fund called SAC Capital, learned they were being investigated. As though they were animals being chased, they panicked and destroyed their files, computers and bank records.
The reaction to destroy data is just as natural as the reaction to accept insider information. Fear makes humans react with equally as clouded judgment as greed does. Not everybody responds to fear and greed in the same way, but everybody is human and does, at the very least, respond. Indeed, even midnight shoppers the day after Thanksgiving have a reason for their behavior.
Information of good deals and competition abound.
Reach the columnist at whamilt@asu.edu
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