Samberg, Pequot Pay off the SEC
By Chris ClairIn case you read about U.S. Attorney Preet Bharara’s comments last week and wondered why in the world ordinary folks would look at the investment industry and figure it’s a rigged game, the answer is: because it is!
Arthur Samberg and whatever is left of his old firm, Pequot Capital Management, agreed to pay $28 million to settle charges that he and the firm received insider information that they used to trade shares of Microsoft Corp. In the typical weaselly manner of these settlements, Pequot and Samberg did not admit or deny the allegations, and the SEC still managed to take credit for the settlement.
This is the same SEC, mind you, that dismissed one of its own attorneys, Gary Aguirre, as he attempted to pursue allegations against Pequot. If anybody on either side had the stones to stand up and admit their behavior, the real news here appears to be that Pequot and Samberg paid off the SEC, which succeeded in collecting $28 million (but no admission of guilt, mind you) in spite of itself.
Many people I know would look at this and laugh. It’s certainly not an example of regulation. What it is an example of is how closely aligned the interests of investment managers and regulators are. After four years, everyone wanted this to go away, and $28 million was enough to accomplish that.
Laws and regulation are required because people cannot be trusted to act decently. The kinds of things Samberg and Pequot were accused of are subject to regulation and disciplinary measures. He was caught and disciplined. But does a $28 million fine really constitute a disciplinary measure? To me that’s a lot of money, but Samberg can write that off as a cost of doing business.
Most ordinary people I know would look at what Samberg was accused of—extorting a prospective employee for personal gain—and see it as another example of the everyday goings-on on Wall Street, a place where the privileged take advantage of information and power pathways not available to the rest of us to make money for themselves and other wealthy, powerful people.
Is that populist enough for you? Who will defend the kind of behavior Samberg was accused of as they attack the creeping reach of the government? As we consider candidates for the upcoming election, where exactly is the boundary between love for Milton Friedman and regulatory loathing and the notion that a level playing field should be just that?
May 27th, 2010 at 5:14 pm
Chris,
Informationally, all financial markets are by definition un-level playing fields– it is the disparity in information between financial market participants that results in the continual buying and selling of shares.
Nobody has any right to any information, meaning one can not demand that the government point guns at individuals who have come by some information others are not privvy to, to prevent them from acting on said information and making a trade (buy or sell). In effect, this is nothing but a crude price control.
Is someone being stolen from? Is fraud being committed (a form of theft, whereby the victim is tricked into handing over his property without receiving agreed upon compensation)?
If no to both of these questions, there is nothing to “regulate” and therefore nothing to complain about when it doesn’t happen.
May 27th, 2010 at 5:35 pm
Fair enough, Taylor. But by extension, then, are we to conclude that using the standards you outlined there is no such thing as “insider trading”? Inside information would merely be information others were not privvy to, yes?
Although I think I understand your argument, I do not agree with it. There is a fundamental difference between having special privilege to access information others cannot and having the intelligence and ability to interpret information available to everyone in a way that others cannot.
In my mind, it’s the difference between one soccer team beating another because its players are more talented and one soccer team beating another because it paid off the referees.
May 27th, 2010 at 10:49 pm
I see it a little differently
The institutionalized form of insider trading by hedge funds insidiously erodes the integrity of the stock markets. The concept is best illustrated with an analogy. Imagine a sports arena with thousand small boxes organized in rows on the arena floor. Each box contains an egg: some are Faberge, others gold, others silver and on and on gradually to the rotten eggs. Egg buyers–some sophisticated; some not–carefully inspect the exterior of the boxes for clues to their contents. None may peak inside. The inspection ends at 5 p.m. All egg buyers exit the arena, notes in hand, ready for tomorrow’s auction. In the early hours, a security guard allows a team of egg buyers to enter the arena, open the boxes and survey their contents. The public auction of the boxes begins at 10 a.m. sharp. With their survey notes, the early morning team pays richly for the boxes containing the Faberge, gold and silver eggs and craftily avoids those with lesser value. Other egg buyers are puzzled why their boxes never contain the prized eggs. Eventually, they lose convidence in the auction.
May 28th, 2010 at 11:02 am
There are a lot of intertwined issues here. One concerns the violation of a fiduciary obligation. Clearly, in terms of Gary’s example, if I hire a security guard with the expectation that he will keep people out of a stadium during evening hours, and he is then paid by a third party to violate his contract with me — then I have been victimized by the breach of trust.
If I understand the analogy correctly, then the sports arena can represent any publicly traded corporation, and the security guard represents any employee with access to sensitive data. The owners of the stadium that might properly be regarded as the employers of the security guard are those with long-term interest in its health as an institution, and they are the ones victimized by the breach of trust.
But in that case the one breaching faith is the security guard, not the beneficiaries of his dereliction. And the notion of “insider trading” has grown over time to encompass activities that don’t fit the framework for breaches of fiduciary obligation at all — consider the abortive case against Mark Cuban, for example.
There are also cases — not the Pequot case — inw hich insider trading serves as a valuable form of whistle blowing. Putting one’s money where the whistle is. In the Equity Funding case in the late 1960s, the public clearly benefitted from the actions of Mr. Dirks and his sources.
The law in this area as it stands is indefensible.
May 28th, 2010 at 5:53 pm
The SEC Works for Wall Street; NOT Main Street ! ! !
Currently, TOO many ‘Wall Street Gurus’ are in pursuit of ‘False Profits’ !
It is a very stupid pursuit !
J.P. Morgan, commenting on ‘taking U.S.Steel ?Public?’ said:
“We can add $Millions of Water (non-existent value) to the offering.”
That demonstrates that ‘Ethics’ has been a problem for ‘Money People’ and that happened ‘eons of time’ before ‘program trading’!
“Paid the Fine without admitting Wrongdoing.”
this is the same as telling a Kindergartner:
“No Cookie for You, young man . . . ”
It will force the miscreant to go without until Lunch !
But in the Afternoon; back to theft, and make-up more than the price of the Fine, which will be written-off, as a cost of doing business anyway!
The details and repercussions of B. Madoff serving as ‘President of Nasdaq have not been fully digested by many . . .
Couple that with the SEC’s Failure to heed the SEC’s own ‘Whistle Blowers’,who sounded the Alarm on Madoff Years before Madoff’s Cheques began to Bounce, and His Card Palace Collapsed !
SEC WORKS FOR WALL STREET!; Not Main Street ! ! !
They are ALL too stupid to realize the Folly of their Practices:
The ONLY CURE for Poverty, Is Wealth !
Wealth which is Earned!
Not Wealth which is ’stolen’ from the hapless wage earner/entrepreneur For the purpose of being re-distributed, while ‘Masquerading AS Wealth’, to those on the Dole) !
“We The People”, should Flush the whole of D.C. into the Sea!
Roy Stewart,
Phoenix AZ