Take a look at the following graph:
In blue, we have the DAX, which is basically the German index. In red, we have the common shares of Volkwagen. This is a three months graph. After September 18th, we can see Volkswagen’s stock nosediving due to the latest emission scandal where it admitted cheating on some tests.
Now, look at the graph above and tell me this: how come Volkswagen was crashing pretty much consistently in the months leading to the scandal?
And don’t bring me “oh the entire sector was crashing” speech. Look:
In the months leading to it, Volkswagen was clearly trailing Toyota, Honda, Ford and General Motors and by quite a margin.
I’ll tell you why: illegal insider trading. Large shareholders dumping their shares in droves before the news “break out.”
That’s it. You don’t need a four year degree followed by a three years master to understand that people were selling their shares because they very well knew what was going on. A group of privileged “investors” (read: professional scammers) who managed to get out before getting a 50% cut on their investment. In fact, chances are a few of those people went short, meaning they sold the share hoping to buy it back at a lower price.
In three simple paragraphs, I have perfectly summed up Wall Street. Those who make a killing from it aren’t the people designing models, studying advanced data or reading financial sheets: they’re people who get information before the rest of us.
Cheaters, in sort
Remember when you were a kid and you played at the arcade and you had the message “cheaters never prosper” or something like that? It’s all bullshit.
I can’t tell you of how many all-nighters I pulled to finish some of my projects in grad school. Right next to me, there was some guy partying all week, then copying another guy’s work at the last minute and writing his name on it. That guy still got the same grade as me.
The truth is, cheaters almost always win. The suckers are the people who play by the rules and respect the law. The same holds even more true on the stock market. What do you think happened to long-term shareholders of Volkwagen? What do you think happened to those who were not “in the loop?” Hint: nothing good.
But F.S., I thought acting on privileged / non-public / secret information was illegal?
For you and I, it sure is. One thing you must understand is that, when you have money, laws are flexible and the more money you have, the more flexible laws get. You can get away with rape and murder if you are rich enough. For those people, illegal insider trading is nothing new; if anything, it’s mild by comparison to what they do.
I learned too early in my life that you and I have to abide by different, more stringent rules than those people “in command.” People who know a senator, or have contacts in the FBI and all that nice kind of thing. People who can make one phone call and make any investigation “disappear” within seconds. Don’t believe me? Take a look at this:
The U.S. government threatened to come down hard on Salomon, and Buffett stepped into the breach. He directly intervened with the Treasury department to quickly reverse a ban on Salomon bidding in government bond auctions, a move that would have crippled the investment bank. He also stepped in to run the bank for a time, and despite a $290 million fine levied on Salomon, Berkshire Hathaway ultimately saw its stake more than double when Travelers bought Salomon in 1997.
Must be nice to just be able to make a phone call like that and make all your problems go away. A 100%+ return in seven years on a bank company? That’s normal, right?
You try to do the same and tell me how it goes.
The truth is that the legal system is designed to keep poor people in poverty: it’s designed to make those with money, those who can afford all those nice shiny lawyers, can maintain their hegemony and control over us, simple pawns. The same applies to illegal insider trading: it’s not illegal insider trading, it’s a strategic reallocation of invaluable strategic resources to better align the long-term managerial goals with the mid-term expansion objectives. Man, I can just picture a $750-per-hour lawyer say that in court.
When you have money, there’s always an “exception”
Okay, a division manager at Volkswagen whispered to you that they had cheated on an important test. Your friend at the EPA said a big, big revelation was about to be made about a car company. Sure, you sold your shares in VW based on that information, but… But it’s not insider information! There is no specific proof that you acted based on those two pieces of information.
No, no: you sold for totally unrelated reasons. These two rumors had nothing to do with your decision to sell Volkswagen before the crash. Can you prove that they did influence you? Yes, you think so? Well, my team of ten Harvard graduates begs to differ. Okay, give me a $50,000 fine and let’s not talk about it again.
People like to bring up the Martha Stewart case when it comes to illegal stock trading. But people often forget she was actually convicted of conspiracy, perjury and obstruction of justice. You know, the kind of crimes that would send the average you-and-me five years in jail or more, but actually netted her five months. And had she kept her mouth shut, Martha Stewart would have gotten off with a fine, if that. Oh, that “crime”only sent her to jail because the case had been so publicized the US Government didn’t want to lose face; the last thing they wanted was a “Insider Trader gets out free!” headlines.
My point is, illegal stock trading is almost never prosecuted. It’s so rare and the percentage of cases that ends up with a conviction/settlement is so small it’s not even worth mentioning. Oh, and whenever that happens, what do they get?
- Gilmartin to return $23,713 in trading profits plus prejudgment interest of $4,034 and a civil penalty of $23,713, for a total of $51,460
So the guy got caught stealing $23,713 and his sentence was to repay $51,460. Wouldn’t you love it? Say you rob someone’s house and get caught: the only consequence you run into is to repay a little more than the double of what you stole.
I suppose another question that can be raised is the following one:
Gilmartin got caught this time, but how much times has he gotten away with it in the past?
And this leads to my next question:
Do you think that, all-in-all, Gilmartin made money from insider trading?
I would bet a little $2 on the “yes” option. Who knows how much more this man made with his other insider trades? And this leads to my final question:
Do you think Gilmartin is still trading based on illegal insider information today?
Again, I would bet a little $2 on the “yes” choice.
The law is for small people
Notice on the SEC’s page about insider trading how most of it is about small amounts. Some guy avoided at a $11,502 loss because he had access to non-public information? Give me a fucking break. Some traders steal millions daily and no one bats an eye about it. I don’t even think the money the SEC recouped from this guy paid for half the investigation fees.
I learned too early in my life that you don’t have any rights at all. All those nice charters, constitutions, acts and whatever that we might have aren’t even worth the paper they’re printed on. It’s all there to give you the illusion that you are worth something. After all, it’s easy to see that unless there are courts to validate and assert your rights, your rights will remain nothing more than a concept. The problem is that getting your rights to be respected is insanely hard, if not plain and simply impossible. First, it requires an obscene amount of money to even know which court to address and the way to do it. In many, many cases, simply opening a case will cost well over $5,000.
Sure, you can fill everything by yourself, but unless you are some kind of legal prodigy, good luck being taken seriously.
Even after starting your case, your entire ordeal will most likely lead nowhere. Let’s say, for instance, that you are beaten by a police officer and wish to sue for damage. Unless you get a lawyer going for a portion of the settlement (and, typically, a quick resolution) or some kind of amazingly generous, pro bono lawyer, you’re never going to be able to afford the legal fees. Take a case I like a lot, the one about Adrian Schoolcraft:
In August 2010 Schoolcraft filed a lawsuit against the NYPD, claiming that they both intimidated and retaliated against him. The action seeks $50,000,000 in damages. He said his four-day involuntary hospitalization in Jamaica Hospital Center’s psychiatric ward was ordered to “discredit his allegations.”
In May 2015, federal judge Robert Sweet ruled that the case could proceed to trial.
That’s right: five years and a judge finally decided the case “could proceed to trial.” Five years. And the trial isn’t even started yet. When will it start? When will it conclude? I don’t know.
Do you know how much it costs to hire a lawyer for five years, let alone pay all the court fees, the legal document, expert testimonials and so on?
Do you know how much of a toll it takes on you, on your mind, on your body and on pretty much everything you do, every single day of your life? Oh, and this isn’t even a “hard” case: it’s as cut and clear as can be, with clear audio recording and clear evidence.
And even if he wins? Then begins a string of appeal, motions, pretty much everything you can think of. And that’s for a case where everything was done correctly.
Now, let’s go back to the cop who beat you and let’s go back on your desire for justice. Assuming you can even afford it, are you ready to go through all that?
Well, here’s what’s going to happen: the cop will lie in court, it will be your word against his, and he is a police officer while you are a nobody. “Your honor, the defendant was very aggressive, he spit at me and called me a ‘fucking pig who deserves to die.'”
At best, this is a coinflip on who the judge will believe.
While you might have rights in theory, if you don’t have millions of dollars, you only have these rights on paper.
I remember when I contested my first parking ticket sometime in 2009. Somehow, I was blamed for parking more than 1 feet from the sidewalk. I wasn’t. I brought photographs, plans, even certified notarized statements I was in the right. The prosecutor had a misfiled report with half the information invalid (the guy couldn’t even brush the snow off my car to write the correct car color and had the wrong street on it). That’s it. Now, that should have been enough to dimiss the charges, huh?
The judge acted like he was listening to me for a good five minutes and said I would receive the judgement in the mail. I was guilty - original fine, plus court fees.
This is one of those “guilty before being pronounced guilty” courts. Just a racket to amass money for the city.
But you could have appealed to the Superior Court!
For the one-time low price of $300 or so, I could have appealed to a higher court indeed. A $300 filing fee for a $115 ticket, coupled with dozens of hours of work. Welcome to the justice system.
Back to illegal insider trading…
It’s so commonplace it’s not even worth talking about it anymore. The people who make money - the people who make real money, I mean - almost entirely make it from it. Back when I learned about it, sometimes in college, I was given the Alcoa-Alcan example:
On this graph, we can see the stock price slowly drift up before the big announcement that “alcoa was going to acquire alcan” for $42.5B in cash (Alcan was eventually acquired by Rio Tinto).
Unfortunately, very little remains to be found about that insider trading. The best I could find is this picture:
Notice how the line, in yellow, slowly drifts up in the months leading the buyout announcement. Notice the spike in the day before it. This is insider trading, people who knew a big buyout offer was in the work and bought the stock early. Was that investigated? Of course not.
This happens all the time and this is the way to make money. The young trader who goes to a club with rich Chinese clients and learn factory output is much lower than it should be and who ends up shorting China’s index when it’s at 5,000. The trader who knows GTAT is going to fail because his friend works at the factory and knows it’s a mess. The guy who knows an engineer working on the C-Series and knows the plane will get delayed again.
Do you get it?
These people make money from the stock market
This is the ultimate secret to make money trading stocks. Have friends high-placed in some industries. Trade on illegal insider information. You will crush all indexes. And in the very, very unlikely event you get caught? Give double what you stole, pretty much.
Ask the people who sold Volkwagen three months ago.