All of the ingredients were in place for industry-wide evidence of insider trading. Add a dash of deals and a new political zeitgeist and the recipe was complete.
A year ago the money manager Doug Kass predicted that we’d see a “broad-ranging sting” in 2010 which would surface “the existence of extensive exchange of information that goes well beyond Galleon’s Silicon Valley executive connections.” He told the readers of his popular newsletter that “several well-known long-only mutual funds [will be] implicated in the sting, which reveals that they have consistently received privileged information from some of the largest public companies over the past decade.”
How’s that for prescience? The government’s crackdown on a vast and shadowy insider trading ring has come none too soon to meet Kass’ deadline, with the Securities and Exchange Commission now delivering fistfuls of subpoenas to firms like SAC, Citadel, Janus, and Wellington Management. But Kass, the founder of hedge fund Seabreeze Partners, says it didn’t take a crystal ball to predict the big bust of 2010. You needed common sense, a stock chart, and a feel for the sharp shift in the political zeitgeist.
“It was acutely clear to me in looking at a number of M&A transactions that someone knew something was happening because the stocks consistently moved materially higher prior to a public announcement,” Kass says. “And there has been a lack of enforcement with regard to obvious problems. The last administration, and the SEC it supervised, was remiss in prosecuting and surveillance. Then we elected a populist administration, and it was time for the pendulum to swing back.”
More mergers, more suspicious stock moves
Kass’ simple, spot-on formula makes it easy to understand why this holiday wave of enforcement activity was entirely predictable. The ingredients for insider trading were all in place. A burgeoning landscape for mergers and acquisitions meant dozens of bankers, executives, lawyers and investors were involved in deals that would surely move stock prices.
Unsurprisingly, the alleged improper trading was largely in healthcare and technology stocks, sectors that have seen a lot of M&A in the past two years, with the government even taking a hard look at analysts who cover Apple (AAPL). Moreover, these are sectors that have seen all sorts of other market-moving news because they’re among the most dynamic sectors in the economy today. While most people with information about buyouts, product tests, or new gadgets can resist the siren song of greed and power, there are always a few who cave. Just ask Dennis Levine, Ivan Boesky, or R. Foster Winans.
A certain swagger fueled the fire — the kind of confidence that grows when your industry hasn’t seen the back of a regulatory hand in nearly a decade. The money management world grew so avaricious over the last decade, Kass says, that it spawned a cottage industry of so-called expert networks whose very business models sometimes challenged existing rules about acting on non-public information.”We’ve had a laissez-faire attitude with regard to enforcement and Wall Street, and these traders got the message,” says Kass.
The upshot of Kass’ prediction? If a hedge fund manager in Florida who is busy with a day job can spot suspicious market activity and put together the cause, then SEC investigators, armed with resources and nothing to distract them from looking for fraud, can likely piece the clues together, too. “I predict there will be convictions this time,” says Kass. “The enforcement agents were remiss and now they are playing catch up.”
And if that means leveling the playing field for investors, as former jailbird Martha Stewart might say, it’s a good thing.
Also on Fortune.com: