Post by jannikki on Mar 5, 2007 22:12:18 GMT -4
SEC's Short Sighted Look at Insider Trading - March 5, 2006
David Patch
What a week we had. The SEC announced two separate allegations of insider trading abuses after a near 25-year hiatus and after last year's allegations of SEC cover-up by a former attorney and whistleblower. One of the cases announced involved a sophisticated insider-trading ring that dates back nearly 6 years and the other involving insider trading that is less than a week old that required a devious trading scheme to hide the identity of the investors in question.
While the SEC patted themselves on the back for taking these actions, critics have complained that the SEC is short sighted in how they look to these insider trading cases and exactly who the players are that they go after.
Consider for example the case announced late Friday in which the SEC froze the assets of "unknown buyers" of call options in TXU Corp.
According to the SEC complaint, the investors traded through overseas accounts and purchased the options contracts in the trading days leading into the February 26 news release. The trading went through a path of deception starting offshore to hide the identities of the players involved and was subsequently entered through US member firms from their offshore affiliates. The trading accelerated into the February 26 announcement that TXU would be purchased by a private equity group.
At the surface it looks like the SEC was on the ball, correct?
Historical trade data may actually present a very different argument.
TXU by the Numbers. [Deal Announced February 26]
* 10-day average daily trade volume leading into February 23 --- 3 million shares/day
* 30-day average daily trade volume leading into February 23 --- 3.4 million shares/day
* February 23 Trade Volume --- 6.9 Million shares [3.5 - 3.9 Million above average]
* Last time trade Volume was this high (.6.9 Million) --- November 2006
* Trade Value of extra 3.5 - 3.9 Million shares ($57 - $60) --- $178 - $228 Million ($58.5 avg share price)
* TXU traded up nearly 5% on February 23. Last time a change in market value of this magnitude took place, up or down, was November 2006 when it fell 7.8%.
Finally, when the stock opened [Gap Open] on February 26 off the pre-market news the stock was trading $7.00 higher than the February 23 closing price. Those picking up the $57.00 - $60.00 shares on February 23 were up $7 - $10.00/share the following trade day.
Possible profit on the additional 4 Million shares traded would be close to $40 million if sold on February 26 when the trading volume eclipsed 48 Million shares in a price range of $67.25 - $68.45.
Yet with all these anomalies, according to the complaint filed, the SEC is only looking at the $5.4 Million worth of options trades that took place that day. Does the SEC theorize that the options trading accounts for the excessive equity volume for the day?
Previous arguments by the SEC, when addressing short selling abuses, have claimed that the options market does not directly impact an equity valuation. It was this rationalization that allowed for the excessive levels of trade settlement failures to take place in the options market indicating the lack of settlements in an options market has no bearing on the underlying equity value of a security.
By this line of prior SEC reasoning whom else knew of the news of the private equity buy out of TXU and why has the SEC let them walk with a free pass? Can't the SEC investigate the unusual trading volume for the day as equally suspicious?
Ironically, this is identical to the report I wrote earlier this week where news of a pending deal between Pathmark (PTMK) and Great Atlantic (GAP) had come to my attention hours before the non-public deal was announced. On that day as well trading volume had spiked reaching 5X normal trading volumes leading into the news. But I knew the trading volume was directly related to the news because that was how the news came to me. It was directly correlated.
The Aguirre Impact.
Much of this recent SEC activity is even more perplexing as it comes at the heels of a Congressional hearing into allegations that the SEC has been soft on investigations and enforcement activities involving the bigger players of Wall Street.
In June 2006 former SEC attorney Gary Aguirre was meeting with Senators of the Senate Judiciary Committee spinning tales of SEC cover-ups involving insider trading investigations into the politically connected Wall Street Executives and Hedge Fund managers. The whistleblower would later testify before two separate Senate Committees and discuss the isolated case he was involved in as well as the systemic issue involving the SEC's complacency at attacking the bigger players involved in this crime.
In the testimony before Congress Aguirre stated, "For twenty-five years, from 1979 to 2004, hedge fund fraud and manipulation operated under the SEC's radar. The SEC brought no cases against hedge funds for manipulation, insider trading, or fraud directed against other market participants."
Aguirre followed up this comment with more direct accusations against the agency.
"Do hedge funds have techniques for obtaining tips, e.g., next quarter's earnings from public companies before they are publicly announced?
The SEC should be able to check for this. It receives a constant flow of suspected insider trading referrals from SROs. The NASD, NYSE, and AMEX all have market surveillance units that track the market daily for suspicious trades, including insider trading. When their computers detect suspicious trading, the SRO's staff does its own review and, if the trading appears suspicious, refers the matter to the SEC. Many of those referrals involve hedge funds suspected of insider trading. "
And as Mr. Aguirre pointed out, and history proves, not one SRO referral resulted in an enforcement action by the SEC.
It must be understood that it has to be the SEC that takes an enforcement action against a hedge fund because neither the funds nor the fund managers are required to be a registered member with the SRO's. Without being a registered member, the SRO's had no authority over these individuals and must pass on their concerns to the SEC for action.
And then suddenly, after a 25-year history of goose eggs in insider trading enforcement cases involving hedge funds, the SEC was able to expedite enforcement in an insider trading case involving Wall Street employees from such firms as Morgan Stanley, Bear Stearns, and UBS that involved a minimum of three small time hedge funds. The fraud had admittedly existed for 6 years but only recently did the SEC begin to investigate and quickly address the fraud.
Most likely it evolved after Mr. Aguirre went to Congress and exposed the negligence of the agencies policies involving hedge funds and forced the sleeping tiger to at least wake up and pay attention. Now the public wants to know when the tiger will actually let out the roar and go after the big fish in the pond and not the minnows.
If all this is due in fact to the Aguirre chronicles we owe this individual a debt of gratitude. The major media has demonized Aguirre and yet the timing of these actions is far too coincidental to ignore. How many more similar type activities went unchecked prior to this will never be known. Due to Aguirre we have at least identified the leak in the dike if nothing else. Let’s hope those that demonized Aguirre recognize the error of their ways and more openly cover this issue in the future. The public would certainly benefit from the balanced coverage.
For more on this issue please visit the Host site at www.investigatethesec.com (posted with permission)
Copyright 2007
David Patch
What a week we had. The SEC announced two separate allegations of insider trading abuses after a near 25-year hiatus and after last year's allegations of SEC cover-up by a former attorney and whistleblower. One of the cases announced involved a sophisticated insider-trading ring that dates back nearly 6 years and the other involving insider trading that is less than a week old that required a devious trading scheme to hide the identity of the investors in question.
While the SEC patted themselves on the back for taking these actions, critics have complained that the SEC is short sighted in how they look to these insider trading cases and exactly who the players are that they go after.
Consider for example the case announced late Friday in which the SEC froze the assets of "unknown buyers" of call options in TXU Corp.
According to the SEC complaint, the investors traded through overseas accounts and purchased the options contracts in the trading days leading into the February 26 news release. The trading went through a path of deception starting offshore to hide the identities of the players involved and was subsequently entered through US member firms from their offshore affiliates. The trading accelerated into the February 26 announcement that TXU would be purchased by a private equity group.
At the surface it looks like the SEC was on the ball, correct?
Historical trade data may actually present a very different argument.
TXU by the Numbers. [Deal Announced February 26]
* 10-day average daily trade volume leading into February 23 --- 3 million shares/day
* 30-day average daily trade volume leading into February 23 --- 3.4 million shares/day
* February 23 Trade Volume --- 6.9 Million shares [3.5 - 3.9 Million above average]
* Last time trade Volume was this high (.6.9 Million) --- November 2006
* Trade Value of extra 3.5 - 3.9 Million shares ($57 - $60) --- $178 - $228 Million ($58.5 avg share price)
* TXU traded up nearly 5% on February 23. Last time a change in market value of this magnitude took place, up or down, was November 2006 when it fell 7.8%.
Finally, when the stock opened [Gap Open] on February 26 off the pre-market news the stock was trading $7.00 higher than the February 23 closing price. Those picking up the $57.00 - $60.00 shares on February 23 were up $7 - $10.00/share the following trade day.
Possible profit on the additional 4 Million shares traded would be close to $40 million if sold on February 26 when the trading volume eclipsed 48 Million shares in a price range of $67.25 - $68.45.
Yet with all these anomalies, according to the complaint filed, the SEC is only looking at the $5.4 Million worth of options trades that took place that day. Does the SEC theorize that the options trading accounts for the excessive equity volume for the day?
Previous arguments by the SEC, when addressing short selling abuses, have claimed that the options market does not directly impact an equity valuation. It was this rationalization that allowed for the excessive levels of trade settlement failures to take place in the options market indicating the lack of settlements in an options market has no bearing on the underlying equity value of a security.
By this line of prior SEC reasoning whom else knew of the news of the private equity buy out of TXU and why has the SEC let them walk with a free pass? Can't the SEC investigate the unusual trading volume for the day as equally suspicious?
Ironically, this is identical to the report I wrote earlier this week where news of a pending deal between Pathmark (PTMK) and Great Atlantic (GAP) had come to my attention hours before the non-public deal was announced. On that day as well trading volume had spiked reaching 5X normal trading volumes leading into the news. But I knew the trading volume was directly related to the news because that was how the news came to me. It was directly correlated.
The Aguirre Impact.
Much of this recent SEC activity is even more perplexing as it comes at the heels of a Congressional hearing into allegations that the SEC has been soft on investigations and enforcement activities involving the bigger players of Wall Street.
In June 2006 former SEC attorney Gary Aguirre was meeting with Senators of the Senate Judiciary Committee spinning tales of SEC cover-ups involving insider trading investigations into the politically connected Wall Street Executives and Hedge Fund managers. The whistleblower would later testify before two separate Senate Committees and discuss the isolated case he was involved in as well as the systemic issue involving the SEC's complacency at attacking the bigger players involved in this crime.
In the testimony before Congress Aguirre stated, "For twenty-five years, from 1979 to 2004, hedge fund fraud and manipulation operated under the SEC's radar. The SEC brought no cases against hedge funds for manipulation, insider trading, or fraud directed against other market participants."
Aguirre followed up this comment with more direct accusations against the agency.
"Do hedge funds have techniques for obtaining tips, e.g., next quarter's earnings from public companies before they are publicly announced?
The SEC should be able to check for this. It receives a constant flow of suspected insider trading referrals from SROs. The NASD, NYSE, and AMEX all have market surveillance units that track the market daily for suspicious trades, including insider trading. When their computers detect suspicious trading, the SRO's staff does its own review and, if the trading appears suspicious, refers the matter to the SEC. Many of those referrals involve hedge funds suspected of insider trading. "
And as Mr. Aguirre pointed out, and history proves, not one SRO referral resulted in an enforcement action by the SEC.
It must be understood that it has to be the SEC that takes an enforcement action against a hedge fund because neither the funds nor the fund managers are required to be a registered member with the SRO's. Without being a registered member, the SRO's had no authority over these individuals and must pass on their concerns to the SEC for action.
And then suddenly, after a 25-year history of goose eggs in insider trading enforcement cases involving hedge funds, the SEC was able to expedite enforcement in an insider trading case involving Wall Street employees from such firms as Morgan Stanley, Bear Stearns, and UBS that involved a minimum of three small time hedge funds. The fraud had admittedly existed for 6 years but only recently did the SEC begin to investigate and quickly address the fraud.
Most likely it evolved after Mr. Aguirre went to Congress and exposed the negligence of the agencies policies involving hedge funds and forced the sleeping tiger to at least wake up and pay attention. Now the public wants to know when the tiger will actually let out the roar and go after the big fish in the pond and not the minnows.
If all this is due in fact to the Aguirre chronicles we owe this individual a debt of gratitude. The major media has demonized Aguirre and yet the timing of these actions is far too coincidental to ignore. How many more similar type activities went unchecked prior to this will never be known. Due to Aguirre we have at least identified the leak in the dike if nothing else. Let’s hope those that demonized Aguirre recognize the error of their ways and more openly cover this issue in the future. The public would certainly benefit from the balanced coverage.
For more on this issue please visit the Host site at www.investigatethesec.com (posted with permission)
Copyright 2007