JP Morgan's Insider Trading How-To On Wikileaks

An anonymous reader writes "In an internal JP Morgan document published recently, Wikileaks exposes JPM's efforts to circumvent insider trading regulations, enabling their wealthy clients to profit even when others are losing. The document reads like a how-to and explains how to take advantage of SEC Rule 10b5-1, which has long been considered ripe for abuse. Now this abuse is publicly documented and will be hard to ignore."

Comments

Not a "leak" ?

[aleph42]

It should be stressed that this leak is not, in fact, revealling illegal activity. I even doubt that Wikileaks made it public; I mean, they must have some kind of advertisment or at least a publicly available description of this service, no?

If it was already public, then it's interesting for the process of defining the role of Wikileaks: here, it's role would be to raise awareness rather than reveal, which means acting like a news site.

Personaly, I think that Wikileak should not stride from it's original goal: when you're run anonymously, you must keep close to your original description; it's the only kind of accountability you offer.

Re:Not a "leak" ?

[sed quid in infernos]

The SEC was very aware of this situation. They explicitly OKed this activity in May 2001:

After the written trading plan described in Q&A 11(a) has been in effect for several months, the person terminates the selling plan by calling the broker and canceling the limit order.

(a) Does the act of terminating a plan while aware of material nonpublic information result in liability under Section 10(b) and Rule 10b-5?

No. Section 10(b) and Rule 10b-5 apply "in connection with the purchase or sale of any security." Thus, a purchase or sale of a security must be present for liability to attach. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975).

Re:Not a "leak" ?

[nycguy]

The SEC is aware of the problem. It doesn't take much link-following from the original post to find this speech by Linda Chatman Thomsen of the SEC.

Putting that aside, the fact is that regulations rarely have their full, intended effect, especially on the first go. If you read the aforementioned speech, it's pretty obvious that the SEC is trying to do the right thing: Allow executives (particularly founders and other holders of large percentages of stock) the ability to sell those shares on a pre-determined schedule, unencumbered by any insider information they have at a given time during the execution of that plan and unconcerned about the way the market would view the sale, since it had been planned and announced far in advance. For someone with a large percentage of stock, the ability to trade out of that position smoothly over time is critical, since any large sale would be disruptive to the market, and frequent small sales would likely be difficult due to the fact that they might coincide with the common circumstance of having insider information.

The problem, of course, is while the executive is not supposed to initiate the sales plan based on insider information, that same executive may cancel a sale or withdraw from the plan entirely based on non-public, material information. In doing so, they create a bias in that their sales that were initiated would be expected to perform "better than average", since any sales that would have performed "worse than average" are more likely to have been canceled. Such a bias is precisely what academics found and is referenced in Thomsen's speech. The SEC can then amend/interpret the rule so as to close any loophole. Such a process may go through multiple iterations before all the holes are patched.

In terms of the Wikileaks article itself, there are a few problems: First, it is not just "small investors" who are hurt by this. Any investor, small or large, who is not an "insider" would be disadvantaged by such activity. There's no need to be a populist to see the potential for abuse here. The second problem is that it is JP Morgan's fiduciary duty to offer the best product available to its clients, including taking advantage of the specifics of SEC regulations, if necessary. Of course, this particular opportunity is available only certain, very wealthy insiders, but that's the circumstance that the SEC created, not JP Morgan. This situation is no more unethical than Mercedes or Volvo building a "safer" automobile that is only available to those wealthy enough to afford it--and it carries the same hazard for others, actually, since a "protected" driver may be more reckless and endanger other drivers.

In short, there's no need to get bent out of shape when a necessarily imperfect law or regulation is exploited to someone's advantage. This is just what people will do in any system. The only solution is to keep in mind unintended consequences and improve the framework that one has for the future.

Re:So what's the problem with insider trading anyw

[Shihar]

You can't entirely "withhold" the information. If the CEO of a company suddenly dumps stocks in his own company, that should be a signal that something is up. The whole point of a stock price is that it moves with the financial viability of the company. There are in fact legal ways for a CEO to go ahead and sell of his stock based upon insider information, but there are a pile of loops he has to jump through and the move needs to be made public. This isn't a bad thing. Simply by selling stock you cause the price to fall. If you are selling stock because you know the price will fall in the future, you are actually evening out the eventual drop and making it take place slowly over time rather than suddenly all at once.

All trading that isn't done with a coin flip is "insider trading" to some small extent. If you think you see a pattern in the markets and make a trade, your trade is only worth something if everyone else hasn't already spotted that same pattern. In a sense, you think you have information that other people don't and make a trade based upon that information. This is what Milton Friedman is talking about when he says that insider trading is good.

There are real issues with insider trading, but it isn't necessarily true that all insider trading is bad. It is one thing for a CEO to declare he is about to make a trade based upon information he has. It is another entirely to make a trade in secret and then make some sort of move with his company to capitalize upon that trade at the expense of the company.

RTFA, idiot

[Alex Belits]

If you bothered read the linked article you would find that:

1. JP Morgan established a whole service specifically designed to abuse this rule.
2. Service was offered to people who would profit from such abuse without any announcement to the public or regulators.
3. The article shows a specific example of service being offered to a particular person, Barry Diller, and subsequent drop in stock value that the person was supposed to be shielded from (I assume, it is not known if the service was actually used in that situation).

Now you, and two morons that were so eager to praise you in responses, can take your sorry attempt of rebuttal, and tattoo it on your foreheads in 12pt Helvetica font.

Yes, it is a leak.

[RingDev]

The specific document was NOT public. The act that it describes is legal, the steps used to take that action are for the most part public knowledge (although, only a very slim portion of the society knew them), but the document that was posted was a private document to be viewed by only specific employees of JP Morgan, and select clients.

Just because it's legal, that does not mean that it is not a leak. Hell, they could get a document showing that some Senator is gay, being gay is not a crime, but releasing a private document with that information in it would still be a leak.

-Rick