Insider Trading
May 1, 2011
Posted by Jody Eisenman | Filed under Uncategorized
You knew this was bound to happen. As the stock market spirals ever higher, it seems that there have been a rash of insider trading cases recently. In bear markets, most investors are losing money. However, in markets like this, a lot of people are looking to get an edge. Competition among hedge funds is fierce. Unfortunately, some people use shortcuts.
The two biggest cases today concern Warren Buffets’ Berkshire Hathaway and hedge fund giant Galleon.
In the Berkshire situation, David Sokol has gotten himself not only in hot water with the SEC, but also finds himself out of a job. Not just any job, mind you. Sokol was a top executive at Berkshire, and was considered to be on the short list to replace Buffet when he decides to step down. In mid-December, Sokol met with some bankers from Citigroup in order to discuss companies that might be interesting takeover candidates. It seems that Sokol was only interested in a company called Lubrizol. The next day, Sokol bought 2300 shares for his personal account. A few days later, Citi brought Lubrizol and Berkshire together for discussions. Sokol then proceeded to send his shares at roughly the same price he paid for them. However, two weeks later, Sokol bought 96,000 shares on the open market for roughly $10 million. He notified Buffet at some point while negotiations between the two companies were going on. On March 14, Berkshire launched a takeover offer for Lubrizol, which, if consummated, would give Sokol about a $3MM profit on his shares. After some back and forth on this, Sokol resigned from the company. Sources say that the SEC is investigating this, although nothing formal has been announced. Did Sokol trade on insider information? Its’ tough to say, but from the facts currently available, it would seem pretty iffy. Insider trading is defined as trading on information that it is non-public. At the same Sokol made his purchase, Berkshire had not yet made any bid for the company, nor is it clear that they were even in discussions with Lubrizol yet. It would seem to me that Sokols’ purchase was probably somewhat foolhardy, but not criminal. In any case, losing a prime position at Berkshire Hathaway is pretty severe.
On the other hand, you have the case of Raj Rajaratnam and Galleon. Raj is the founder of Galleon Fund, which manages about $3BB. Raj is alleged to have made over $60MM from tips by hedge fund traders and corporate insiders. Although Raj has proclaimed his innocence, it would seem that the evidence against him is overwhelming. First of all, the Feds have wiretaps that would indicate that Raj was given inside information on companies. In addition, several people that were indicted have already pleaded guilty and have turned states’ evidence. Raj claims that all his profits were based on old fashioned research. On the Dublin-based website Intrade.com, betting is about 9/1 in favor of conviction on at least one count. I’d be surprised if he were to be acquitted on all counts.
Meanwhile, the stock market continues to rise to dizzying heights. As I wrote on March 29, “On a technical basis, it would appear that the 1338 level on the S & P could be key (we are currently at 1310). A strong close above that level could send the market into the stratosphere”. The S &P broke 1338 this past Tuesday. Just three days later, we closed at almost 1364. For the month of April, the Dow rose almost 500 points, with most major indices at or near all-time highs. It is hard to believe that that the S & P was trading at 683 back in March of 2009. Although many investors think the market has come “too far too fast”, the fact remains that any attempts to short this market have been met with massive losses. Where is the top? I wouldn’t even hazard a guess at this point.
