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

Oh snap!

[Anonymous Coward]

Wikileaks is on a roll!

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" ?

[esocid]

It may not be confidential information but it is however informative about the prevalence of the sort of abuse that goes on with investing. You can't tell me that you were aware of such a blatant tool designed to aid with insider trading. It may be technically legal, but 100% unethical. And even more so for an investment firm to prepare a "how-to for dummies." I'm not sure how aware the SEC is of this problem, but that may get wind of it now if you weren't aware of it before.

Re:Not a "leak" ?

[aleph42]

I absolutly agree about the fact that this information was interesting, and deserved awareness.

I am just saying that, if what they did boils down to finding the obscure *public* document or webpage which described that service, then they acted just as boinboing when it finds some cool looking roadsing in Japan: intersting, but not a leak.

And by acting as a news website, *even* as a stellarly good one, they would not be fullfying the role they claimed they would.
Which is a problem because what they claimed they would do is the only thing that serves to provide accountability to a service which GREATLY needs it.

Don't take me wrong; I think WIkileak is a wonderful thing; but because it is the embodiment of openess of information. Not because they are good at finding cool stuff

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" ?

[Whiney Mac Fanboy]

I even doubt that Wikileaks made it public;

Please point us to other places this document can be found online.

I mean, they must have some kind of advertisement or at least a publicly available description of this service, no?

All documents on Wikileaks were distributed somewhere, I don't see what your point is.

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:Not a "leak" ?

[quanticle]

I think his point is that WikiLeaks should confine itself to highlighting illegal or unethical activities by eliciting internal documents that don't have general public distribution. I, like you don't agree with this, since, companies can often dig themselves into a hole by marketing illegal or unethical services (like this) to certain clients while trying to hide those same services from other clients.

Re:Not a "leak" ?

[YodaYid]

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...

If only wealthy people had access to safe cars, I would say that that is extremely unethical. Safety should not be a luxury. (I know you said "safer", not "safe", but considering how much life is lost every year in car accidents, everyone should have access to the safest possible technology)

Re:Not a "leak" ?

[dank zappingly]

I thought that the question on point was the following: Does termination of a plan affect the availability of the Rule 10b5-1(c) defense for prior plan transactions? Does canceling one or more plan transactions affect the availability of the Rule 10b5-1(c) defense for prior plan transactions? Termination of a plan, or the cancellation of one or more plan transactions, could affect the availability of the Rule 10b5-1(c) defense for prior plan transactions if it calls into question whether the plan was "entered into in good faith and not as part of a plan or scheme to evade" the insider trading rules within the meaning of Rule 10b5-1(c)(1)(ii). The absence of good faith or presence of a scheme to evade would eliminate the Rule 10b5-1(c) defense for prior transactions under the plan. From what I know the affirmative defense of having a trading plan, according to 10b5-1(c)(1)(i) requires that the person did not exercise any influence on "whether to effect purchases or sales." In other words, putting a plan into writing and then pulling out based on inside information is illegal.

Re:Not a "leak" ?

[afidel]

I would think that in general JP would have OTHER clients who are shareholders in the companies in question and so by facilitating a backdoor to insider trading they are unfairly enriching one client at the cost of another who happens to have insider information. This is exactly the situation that the insider trading regulations were written to eliminate.

Re:Not a "leak" ?

[SerpentMage]

It does not mean anything if they don't comment. Here are possible scenarios for JPMorgan when confronted with the document.

1) They don't comment, and people are saying, "this doesn't sound like very "ok" activity." Thus implied is that they are guilty.
2) They say it is not theirs. People will comment on how this is spin.
3) They say it is theirs, and as previously noted it's legal, yet people will say, "oh look how unethical JPMorgan is."

In each of the scenarios JPMorgan is dammed so they take the route of not saying anything which is simplest from a legal perspective...

Re:Not a "leak" ?

[ATMAvatar]

Or 4) They say it is theirs, demonstrate that it is legal, and use it as advertising. "We can game the rules to get you more money on your investments!"

Not that many people care about ethics when presented when more money as the alternative - just look at corporations the world over who will circumvent and even break the law, calling it merely a cost of doing business.

Re:Not a "leak" ?

[nolife]

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

It is not the same at all. When the insider takes advantage of this inside information, the money or advantage is not created out of thin air, it comes from the other investors that did not have that inside advantage. This is not paying more for something better like your car example. This is using information that others will not find out about until a future date.

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,

Wrong again. I don't think JP Morgans only "clients" are only a few people with inside information. What about JP Morgans other clients? Help a few and screw over every other client they have? Not quite fiduciary duty.

Re:Not a "leak" ?

[sed quid in infernos]

May 2001 - that would be four months after George Bush, Jr., went into the White House.

Ah, the great tragedy of Slashdot-the slaying of a beautiful political screed by an ugly fact. (With apologies to Thomas Huxley.)

The first SEC commissioner appointed by Bush to the SEC was Harvey Pitt on August 3, 2001 - more than 2 months AFTER this ruling issued. Every SEC commissioner at the time this decision issued was appointed by Clinton. Even if lower-level Bush appointees were involved in drafting the answer, the commissioners could have stopped this from issuing.

They didn't, most likely because they couldn't. The Supreme Court decision at the root of the reasoning has been in place since 1975. This must be corrected legislatively, either by removing the predefined plan affirmative defense entirely or, more likely, by making the revocation of such a plan an event to which liability can attach.

Re:Not a "leak" ?

[YodaYid]

You're right - just like private planes are out of the reach of most people, since the technology required to make a plane safe is so expensive. The rest of us have to fly commercial or drive. But I'd rather not fly in my own private plane that I got cheap because the manufacturer cut some corners. More importantly, if I did buy a private plane, I would assume that certain safety standards were met by virtue of the fact that it's even on the market.

Luckily, the technology required to make cars safe is not prohibitively expensive - I'm talking about basics like seatbelts, and basic control systems to make sure the engine doesn't overheat and explode. As a society, we decide what constitutes "safe", and we mandate that.

The reality is pretty close to what I was saying - the laws are very strict when it comes to safety, and when a technology that significantly reduces car-related deaths is introduced, and it's economically feasible, Congress typically mandates that it become standard.

By the way, where I'm standing, the poor *do* walk, ride bikes, or more likely, take the bus.

Re:Not a "leak" ?

[Glonoinha]

Here's the deal : the law says that an insider can submit massive buy or sell orders if he does not know anything (ie, no insider knowledge of events that will affect the stock price.)

Insider has tons of company stock.
He structures a massive recurring sell order, sell as much as possible, to hit every month - does this a long time ago (or now, setting it up for years to come.)
He doesn't know what the future holds for his company, so it's perfectly legit.
Every month he calls in and cancels his sell order. This is also perfectly legit.
Stock goes up, slowly over years. He still has it because he keeps calling in to cancel the sell orders he arranged years ago.
A few years from now something really bad starts brewing for his company - he gets insider knowledge that the stock price is going to die in a few days (ie. Bear Stearns this week)
He conveniently forgets to cancel this month's sell order. The pre-arranged sell order goes through, he sells his entire holdings at the current high price.
The next day the 'bad thing' happens and the stock price tanks - he's all set, sold all of his before it happened.
The entire thing is legal because the law only restricts buy or sell orders based on insider knowledge - it doesn't prevent him from not canceling orders that were placed years before.
Profit! Sucks ass, but it is a perfectly legal loophole in the law.

And I agree - time to close the loophole. The visibility brought to the issue via wikileaks ... may just start the ball rolling on doing exactly that.

The loophole

[aleph42]

The 10b5-1 loophole itself apparently consist of making a "plan" to sell your action, and then, when you would have used your insider information, cancel or go with the plan.

It really sounds so obvious like this, that you wonder how the lawmakers could miss it. One hint for them: start compiling with "-Wall".

Re:The loophole

[Creepy Crawler]

Who said the lawmakers missed anything?

Re:The loophole

[bkaul01]

Where is everyone getting this information about "cancelling"?

From TFA:

Here's how it works:

1. An insider client transfers all or a portion of their company stock into a JP Morgan Securities Inc. brokerage account.
2. The insider then develops, in conjunction with the 10b5-1 team, a 'phased, pre-planned sales program to be executed at either market or specified prices'.
3. Depending on the information available to the insider (but not the public), the insider can decide whether to execute the sale or not.

So, they enter the plan and then later, based on inside information, decide whether or not to actually execute the sale. In other words, they (in advance) make tentative plans to sell, then can cancel that before it occurs if their inside information does not support a sell-off.

Only works for stocks that drop, but that is significant when considering corporate scandals, companies in financial straits, etc.

I don't claim to know whether the article's description is correct, but it's where we're getting the idea of canceling.

Re:The loophole

[Hemogoblin]

Yeah, I understand the alleged process in the Wikileaks article. Step1 and Step2 can be used for practical, ethical, and legal trading; however, step #3 is not mentioned anywhere in the source material, which is what I was originally asking about. Where does it say in the JP Morgan pdf, or any other SEC materials, that someone can cancel a prepaid forward that they have already entered into?

Stocks Fluctuate

[xactuary]

Human nature, not so much.

So what's the problem with insider trading anyway?

[Psionicist]

On one hand I think this is good. Insider trading should not be illegal. To quote Milton Friedman:

"You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that."

The benefit of insider trading is information enters the markets quicker. That is good for me.

There are also tax lawyers who can help me create complex holding / offshore structures to make me pay less taxes, so from that point of view I fail to see the problem with help how to avoid insider trading regulations. No one would be surprised if these banks helped their clients to avoid paying specific corporate tax, for example. So what's so sacred about the insider trading regulations?

Anyhow, my problem I have with this is bad laws should be rewoked, not left in place to be circumvented with the right know-how.

Play on the playground, then bulldoze the park

[SirSlud]

Screw it being unethical; it is things like this which break the axioms that systems like markets are designed for.

Ultimately, whats important is that if some people can circumvent the risk-reward aspect of an economic, political, judicial, or social system, they're basically saying they're above the protections that western civilization grants them.

I think ethics is a poor way to frame cases like this - the very people who say, "Well, its legal, so there you go" arn't interested in ethics, they're interested in gaming a system. That system would not exist if everyone was able to take advantage of the method of abusing it. Ultimately, they're acting in a way that would destroy the system were everyone able to do what they did. I think the idea of protecting the health of institutions is an easier sell to people than saying, "Hey, that's unethical." Lots of people do unethical things, every day - whats more important is pointing out where unethical behavior is rewarded by an institution rather than punished. These institutions are set up from the very start to attempt to mitigate unethical behavior .. so when it happens, it seems pretty obvious to me that you need to change the rules. If somebody is motivated and talented enough to earn wealth, they are the last people on earth who need an FAQ. Markets are intended to reward performance and promote capitalization, not provide and easier way for individuals to make money.

Re:Play on the playground, then bulldoze the park

[demachina]

"Markets are intended to reward performance and promote capitalization, not provide and easier way for individuals to make money."

I hate to break it to you but your being a little idealistic. Markets in the U.S. are so completely disfunctional at this this point they are entirely about easier ways for affluent and usually unethical individuals to make money. The entire U.S. economy has turned in to one pyramid scheme, ponzi scheme and bubble after another. CEO of a major corporation is now a license to steal tens and hundreds of millions of dollars from shareholders and workers.

Most of the people involved in the subprime mortgage fiasco made out like bandits, as long as they cashed out before the inevitable crash came. At this point there is a massive morale hazard because the Fed is now massively exchanging treasuries that are worth something for mortgage backed securities that no one wants and are essentially worthless. Chances are the U.S. tax payer is going to eat hundreds of billions if not trillions of dollars of free market garbage, while all the mortgage brokers, house flippers and bank execs who got rich off the housing bubble are laughing all the way to the bank as long as they cashed out early enough. Pretty much exactly the same thing happened in the S&L crisis in the 80's, a bunch of crooks got rich, taxpayers had to bail out the mess.

It would be great if free markets work but time and time again its been proven that markets that aren't aggressively regulated lead to blatant excesses where some people make out like bandits and everyone else gets screwed. In this case every lower and middle income person in America is getting screwed by the fact that the dollar is cratering, inflation is spiraling out of control, their savings are being decimated all because our government is printing money at a furious rate to bail out a bunch of crooked bankers and mortgage brokers who got rich gaming your beloved "markets" and getting rewarded for their "performance" as con artists.

The one saving grace of the Bush administration was they screwed up nearly everything but at least the economy was still doing reasonably well. Now they don't even have that and it appears the economy is teetering on the edge of the worse collapse since the Depression, all because they were looking the other way while the mortgage bubble decimated our economy. They looked the other way because for a while it made our economy look vastly better than it really was.

Re:Play on the playground, then bulldoze the park

[localman]

I think the idea of protecting the health of institutions is an easier sell to people than saying, "Hey, that's unethical."

You're right, but what I think is interesting is that in my (perhaps minority) opinion, it's exactly the same thing. Ethics are a means to descibe things that while perhaps good for the individual in the immediate sense, are bad for the structures that same individual depends on -- thus they are bad for the individual indirectly.

People have got this wacky idea in their head that ethics is about altruism. Or that the ethics come from arbitrary religious rule and have no bearing on reality. But as far as I can tell, ethics are essentially secondary laws of the universe, loose but significant forms of cause and effect. Even if there was no punishment for stealing, if lots more people started stealing, our relatively comfortable society would collapse.

Anyways, just some thoughts on ethics that have been bouncing around my head recently.

Cheers.

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

[FusionDragon2099]

The benefit of insider trading is information enters the markets quicker. That is good for me. Except for the part where information won't enter the market, as inside investors benefit more from withholding inside information as it profits them.

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

[TheLink]

You want the Casino (or a favored player) to be able to know what the next cards are before other people at the table?

If there are other Casinos around, nobody will want to play at your "Milton Friedman approved" Casino.

Finally! The missing Step !

[gc8005]

For so long it's been clouded by question marks. This is the missing step #3.

Before:
1. Beg, borrow, or steal 1 million dollars
2. Take ill-gotten gains to JP Morgan
3. ??????
4. Profit!!!

Now:
1. Beg, borrow, or steal 1 million dollars
2. Take ill-gotten gains to JP Morgan
3. Follow rule 10b5-1
4. Profit!!!

Re:Finally! The missing Step !

[xaxa]

+5 Funny coming in 3... 2... 1...

Re:Finally! The missing Step !

[atlastiamborn]

1. Notice funny comment
2. Comment on how it will be modded +5 Funny
3. ??????
4. Profit!!!

Re:Finally! The missing Step !

[SpaceLifeForm]

You blew it. Could have had a +5 Funny, but you forgot:

Follow rule 10b5-1

Q.E.D.

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.

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

[evanbd]

You're missing the point. The act of trading inherently gives away information -- the information enters the market through the trade records.

The fact that this is so is easy to determine from careful analysis of stock markets. Whether that makes insider trading any more or less ethical is left as an exercise for the reader...

The Fundamental reason this is legal

[Dr Reducto]

The fundamental problem is that the SEC made trading on insider information illegal, they didn't make "not trading" on insider information illegal, and that should never be made illegal.

Re:The Fundamental reason this is legal

[pitchpipe]

they didn't make "not trading" on insider information illegal, and that should never be made illegal.

Maybe you didn't read how the whole thing works.

They set up a trade to sell at such and such a date in the future. If they get hold of some inside information that is very bad for the company, they let the trade proceed. The SEC says it's OK because the sale was set up before the knowlege of the insider information. If all is A-OK with the company, they cancel the trade, and because there was no stock bought or sold, the SEC says it's OK.

The scam is in the fact that the sale (or not) of the stock was influenced by insider information, but the SEC says it's OK whether they sell or no.

Here is my bitch, because I don't have $BIGNUM to invest in individual securities and I also will probably not come into contact with insider info, it is inherently unfair. But more importantly, it lowers my confidence in the system, making me less likely to value this market over any other, maybe even value those markets more. I know that I'm just one guy, but if lots of people start to feel this way, then it devalues the securities that are traded on that market.

Re:The Fundamental reason this is legal

[Alascom]

However, if you schedule to sell 1000x shares of stock in 1 year under 10b5-1, then giving the seller the ability to cancel the sale amounts to nullify the entire point of the plan.

Consider this. I have inside knowledge of next years events, and I have 10,000 shares and I file a 10b5-1 saying I will sell all 10,000 shares during the next year. When the next year arrives, I "DO" have insider knowledge and I cancel the sale of all my shares. Then I file another 10b5-1 for the next year and say I will sell all 10,000 again. The next year I have insider knowledge that the company is in trouble so I sell all the stock. In effect, I have skirted the purpose of 10b5-1 plans, but still sold my stock based on insider knowledge.

The point is, I can still legally (thought no ethically) sell on insider knowledge.

I disagree

[Travoltus]

Consider it an act of "hacking the SEC".

Hacking goes way beyond computers - hacking people's minds, the legal system and the financial industry, is the big game for the real big hackers who think beyond smashing stacks and simple pretexting social engineering.

Circumventing the system - it's what nerds do.

Re:I disagree

[Hemogoblin]

One last thing:

Wikileaks implies that the slide saying "[we can] help insiders with the successful sale of restricted stock", is unethical and illegal. However, I believe that they are misunderstanding what the slide is saying: Rule 10b5 is a way for insiders who do NOT currently possess non-public information to legally sell/collar restricted stock. In other words, the SEC created a way for "innocent" restricted stockholders to liquidate and access some of the value in their portfolios, which JP Morgan is quite happy to help them do so.

If the SEC could ever prove that someone with insider information was abusing one of these plans, they would come down on them like a ton of bricks.

Re:I disagree

[Hemogoblin]

Point out to me where it says in the source material, "these collars can be canceled at any time". A prepaid forward contract is an obligation to make a future trade, and the only way to cancel it is to enter into an offsetting position. If all trades must be "pre-planned" under this 10b5 rule, I don't see how you can unwind on short-notice once you receive your insider info. Perhaps I'm just missing something, so feel free to point it out.

Martha Stewart is PISSED

[EdIII]

I bet Martha Stewart wishes she was a JP Morgan client right now :)

No, you are missing the point

[Travoltus]

The only information that insider trading gives away, via the trade records, is that someone on the inside is selling a lot of stock - not their personal reasons why.

Insiders - people who typically have tons of stocks - will pump and dump, harming the company itself and leaving the small investors holding the bag.

After a few years of this going on, there won't be a single company out there, no matter how solid it is, that will survive this recurring, erratic cycle of binge & purge. Small investors, who constantly get burned time and time again, will lose faith in the system.

What happens next is fairly obvious.

Re:No, you are missing the point

[evanbd]

I'll agree that it's obvious, but not in the way you think. There's plenty of evidence that insider trading occurrs to at least a moderate degree, and not much evidence (as distinct from appeals to intuition) that it does more than minor harm to the market.

The reasons why someone is selling stock are actually far less interesting than the fact that they're selling it. People regularly look to trade records for information, and don't ask why the trades occurred. Yes, the people with inside info profit from it -- but the information gets out when they do so, even if all the details don't.

The amount of harm caused by this process is very unclear and a subject of much debate. I'm willing to believe it's non-zero (what can I say, the appeals to intuition work), but there's no evidence it's gigantic. And there's certainly no evidence of outside investors getting scared off by insider trading -- though there's plenty of evidence that they get scared off by bad management, as they should, but that's for other reasons. Pump and dump is a symptom of bad management...

As I said before, I'll leave the ethics of insider trading to others. But I'm far from convinced there's more than minor harm resulting from it.

Re:No, you are missing the point

[Forbman]

/So, first of all, what you're describing is illegal as well./

So, how exactly does Carl Icahn and his ilk make money?

Hmm... buy large blocks of stock. Start rattling board of directors that management sucks or that the company is holding too much cash that should go to shareholders. The board can ignore Icahn for only so long before its involved in a proxy fight, which usually results in Icahn getting a couple of board members placed, or Icahn figures out some other way to rock the company so that it acquiesces.

Icahn gets his extortion money either way, and the rest of the shareholders with their hands tied to the oars (i.e., execs, ESOP) or other owners might get a bump in dividends once, but long-term the company has had a major blood-letting, and they get to watch as Icahn's blocks of shares sell, but they can't get rid of their much larger shares...

Granted, not quite insider trading until he gets his puppets onto the board, but just as manipulative and damaging.

RTFM(emo) -- Overhyped, Misleading

[cfulmer]

First, didn't the OP read the stinking memo? It's all about hedging against the risk that the price would fall -- it doesn't really say anything about canceling the 10b5-1 plan. This is just jumping on the "Corporate Executives are Bad" stereotype.

Secondly, 10b5-1 has not "long been considered ripe for abuse." There is a very narrow factual scenario where it could allow an insider to make money off inside information. But, it's difficult.

Here's the problem: insiders cannot trade stock if they possess non-public material information about a Company. When a corporate executive receives most of his compensation in stock, this is a problem for him, since they often have non-public material information.

So, to solve that, the SEC came up with rule 10b5-1: at a time when you don't have that sort of information, you can set up a future trading plan where you tell your broker "this is when you buy; this is when you sell," and that's the end of your input unless you cancel the plan. The existence of the plan is made public.

And, that's the narrow place where you can escape the insider trading rules: if your plan calls for you to sell some stock, but you know that the price is probably about to rise, you can just cancel the plan and hold on to those shares. Even though you didn't actually trade, the decision NOT to trade was based on inside information.

Now, the executive still has those shares, and so he needs to create another 10b5-1 plan, which (again) is made public. However, now the SEC questions whether either plan was "entered into in good faith and not as part of a plan or scheme to evade" the insider trading rules. As a result, trades made under either plan can be called into question.

The end result is that by canceling a trade under a 10b5-1 plan, the executive makes it much more difficult to ever get rid of his stock.

Re:RTFM(emo) -- Overhyped, Misleading

[Fantastic Lad]

This is just jumping on the "Corporate Executives are Bad" stereotype.

This is JP Morgan we're talking about. They just bought out Bear Stearns for $2.00 per share when it was trading four days ago at $60. AND they managed to do it with the government guaranteeing their purchase through a 300 billion dollar bailout funded by tax payers. The whole shit-parade stinks from the ground up, and it was exactly this kind of dirty stunt JP Morgan pulled during the Great Depression which made them the giant they are today. It's not even a different company pulling the same tactics, making mountainous profit through the engine of deliberate market collapse. We've all heard this song before, we know how the story ends, and they don't even have the decency to use a different cast of characters. So yeah, when evidence of insider trading through loop-hole law surfaces, people are going to jump on the, "Corporate Executives are Bad" stereotype, and that's because those stereotypes didn't come from nowhere, and JP Morgan is the granddaddy of them all.

Is YOUR mortgage paid off? When the banks come to take your house away after the crash and you're living in a Hoover city like the ones springing up today in California, will you be nodding yessir to the fat man in the suit smirking at you from behind tinted glass? Or do believe that your job and lifestyle are somehow secure?

Newsflash: Everybody goes hungry during a real depression except a very small cadre of Bad Executives, and you don't get let into the executive's club simply by defending their evil tactics through these schoolyard debates.

-FL

Re:RTFM(emo) -- Overhyped, Misleading

[mgblst]

Maybe you could read up on shorting stock. It has been quite popular for the last few years.

If you know a stock is going down, you can sell it now, and but it later, when the price has gone down. This is called shorting. You don't own any stock, so there is no need to setup another sale, as you mentioned. You can just arrange to do this in a few months, then when you get no bad information coming in, you cancel the sale, thus having nothing to repay. You can set these up every month of so, at no loss of stock and a small fee, and only make rewards when you now something bad is coming along.

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

[Fishead]

Except that the CEO of said corporation could then manipulate this lemming mentality to his benefit, at the expense of the little guy (me).

Imagine CEO of XYZ company owns 1,000,000 shares of his company that is trading at $50 per share on Friday. He wants to build a new bungalow by the lake, but has all his capital tied up in his company. What does he do? Calls up his broker on Friday afternoon and sells 900,000 shares for $45,000,000. The media picks up on this, and it is all that is talked about all weekend. Widespread panick ensues. Monday morning opens with XYZ falling through the floor. By Tuesday afternoon, the CEO calls up his broker and buys back his 900,000 shares at $20 each for a total of $18,000,000. The CEO now has $27,000,000 to spend on his cabin. After a couple weeks, everyone realizes that there was nothing wrong with XYZ and share prices begin to climb back up.

But hey, what do I know? I don't own any stock, or have any money to play with, but I am drinking a really fine stout that makes me think I have savvy!

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

[TubeSteak]

All trading that isn't done with a coin flip is "insider trading" to some small extent. No it isn't.
"insider trading" has a very specific meaning as far as the SEC is concerned.

Here's what the SEC has to say about insider trading:
http://www.sec.gov/answers/insider.htm

This is what Milton Friedman is talking about when he says that insider trading is good. No it isn't.
Milton Friedman is talking about exactly the same kind of insider trading the SEC is.

If Friedman had his way, there would be no SEC regulation of insider trading, because he believes that insider trading introduces information to the marketplace as soon as it becomes known to the insiders. OTOH, the SEC isn't so keen on allowing this to happen.

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

[fermion]

I think that most people look at this superficially. While I agree there is nothing wrong with insider trading, it is not a solution on it's own. If an insider is buying or selling stock, this may be an indication that some material event has occurred. However, the trade itself is very low quality information. First, many traders are not going to learn about the trade for at least tens of hours. Second, it can be difficult to correlate the trade to a material event. Without the material event, acting on an insider trade simply leads to irrational trading. All a company would have to do to boost it stock value would be to have an insider buy a significant of stock, stock that could be slowly sold off later, maybe with no net loss.

IN fact most issues with insider trading deals with use of insider information and compensation of workers at the expense of stockholder/owners of the company. I have seen this at places where I work. Trades increase, often mostly executives, in the days prior to big deal or a bad report. The workers who knew what was going to happen enrich themselves at the expense of the owners. This behavior is as inappropriate as taking a computer home for personal use. The second big issue with insider trades is that the insiders have the ability to back date the transaction to a time when the price was personally favorable. This also costs the owners money by inflating compensation beyond what was publicly agreed to during the board meeting.

I have mentioned before that if a company voluntarily decides to go public, there are guidelines that go along with that choice. No company is forced to go public, so no company has to follow these guidelines. They can be private, then the employees are freee to engage in any fraudulent activity tolerated by the private owners. But, as has been mentioned so often in the media when defending the government bailouts of irresponsible companies, the stockholder is the companies are common people, retirees, single mothers, etc, and when an insider conducts a fraudulent trade, or a trade the he or she knows primarily is for personal enrichment at the expense of the owners, then such a insider is taking food away form the retiree, children, etc, and I think even the most staunch defender of corporate america will say that is the wrong thing to do. Investors deserve all the money that they should have legitimately earned.

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

[314m678]

The reason to ban insider trading has less to do with ethics then economics. A market that allows insider trading discourages capital investment by those without insider information. Encouraging people to invest in markets so that our companies have enough capital requires limits on insider trading.

There is a huge body of academic work on the economic effects of insider trading. There are reasonable and convincing papers written by reputable economists on both sides of the issue.

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

[TheLink]

Yeah. My brain is not working.

Anyway point is if players think the Casino isn't fair and there are too many players cheating they might go elsewhere.

Yes I know a stockmarket isn't like a casino. The top stockmarkets don't operate for 24 hours all year :).

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

[Anonymous Coward]

The problem lies in where you say:

"The benefit of insider trading is information enters the markets quicker. That is good for me."

This, as one might immagine of such an overarching and glib statement, is not true. Here are a few examples of situations where you get information faster but lose:

You are at a poker table, and the man accross from you is allowed to peak to see what the next card delt will be. By observing whether or not he folds, the information of how good a card that was for him reaches you faster ! But you somehow leave the table poor.

A local government official knows in advance where a new highway exit will be placed, condeming some houses and increasing the values of others. By watching looking up his real estate purchases in the deed office, you know also ! But he already bought all the good investments.

You are sitting in the audience of a company wide meeting of Enron in August of 2001. Your company officers are asked by someone in the audience how much of a person's 401k plan should be in Enron stock, and the giggly blonde former secretary who married the CEO and somehow got promoted says "all of it" and her husband nods. Somewhere in the efficiency of the stock market the signal that the CEO was dumping his stock was there, but you still ended up carrying your belongings out of the building in a cardboard box on Dec 24th, 2001.

The problem, in allowing insider trading, is that the stock market needs more money than just insiders and Milton Friedman cultists to operate. What if ordinary savers and investors, not afflicted with Friedmanism, knew there was insider trading and thus decided not to by stocks ? Surely you don't expect the likes of Ken Lay and Ivan Boesky to use only their own money, do you ?

A ban on insider trading is necessary to get people of ordinary intelligence to lend money to companies, which is of such enormous general benefit in terms of an increased economy, that it cannot possibly be offset any information gleaned after the operations of a few insiders are jumbled in with the rest of the trades.

Of course, we know that in spite of the law, insider trading happens on a wide scale. The wikileaks documents from J.P. Morgan are only a small, institutionalized and organized corner of all the insider trading that happens. And the modern stock market is not particularly efficient at distributing that insider information -- supposedly there were insider trades on Bear Sterns stock last Wednesday, but by Monday morning any non-insider wakes up and finds that the stock has lost 98% of it's value.

I think your view of insider trading is just a small part of a general flaw in all of current economics: it does not distinquish between economic activity that is the result of force or fraud and activity which is not.

Let us suppose there is a community where everyone believes they have to give a tenth of their crops to the priest on the hill to make it rain. One day the priest dies and people see it still rains, so they store the 10 percent for bad times. Economists would say "holy shit 10 percent of the economy vanished" while even a Down's Syndrome kid, and many smart dogs, would say "wow our community just got much more productive".

Let us suppose there is a community in a "state of nature" where theft and robbery is common. One member of the community gets a coin, and he only keeps it until he meets the first person who is bigger than he is. Eventually the biggest person gets all the stuff, but each night while he is sleeping the quietest ones take it. One day a smart guy (i.e., has never talked to Milton Friedman) says "listen up pig fuckers, from now on you only get to keep what you earn, and only I can steal (tax)." He has family members who are strong and have weapons and are loyal to him without regards to economics. People begin to plant and save up more, because these "aristocrats" don't steal everything, unlike their neighbors. An economist would say "this is horrible, the volicity

I disagree

[Hemogoblin]

I'm not a financial advisor, but I have taken quite a number of finance and derivative courses. I've read the pdf file at least three times now, as well as some other materials, and it seems to me that the Wikileaks analysis is flawed.

In itself, the services being offered by JP Morgan are perfectly legal and ethical; they are essentially a "collar", but with different instruments. They're a way of creating a position in which you're mostly immune to changes in the stock price. Wikileaks mentions this briefly by saying

The techniques outlined in the 31-page document ... are really only useful for insiders who anticipate their company shares will decline...(Emphasis added) ... which is misleading. Entering into a collar doesn't necessarily mean that you have insider information, it just means that you don't want any risk at all. I would guess that 99.99% of CEO's with stock options / stock will enter into a collar of this sort to protect the value of their portfolios.

So what I'm saying is that there isn't anything wrong with JP Morgan offering these services, period. There is a very practical and ethical reason to enter this sort of contract, and there are a number of safeguards to prevent insiders from large short-selling before things go bad. Nowhere does it even imply in the pdf that JP Morgan "wants to help you inside-trade and beat the market by 6%!"

Unfortunately, the 10b5 rules are not strict enough to prevent inside-traders from also using the services. It's still better than allowing insiders to trading around "blackout" dates.

Anyway, read the businessweek article; it will explain things better than I can. As for this story, it seems to me more of a case of someone offering legitimate services which are being abused by some bad apples.

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

[Apu]

Not an expert but, in my understanding... A wash sale isn't illegal in and of itself. You just can't claim the interim loss as a tax deduction.

Market manipulation is another issue entirely but that gets murkier.

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.

Does anyone else find it naive...

[Katatsumuri]

...to think that insider trading is impossible, or not going on in large volumes? Laws and regulations surely ban the most blatant forms, but you never know all the ways information can travel.

Openly legalizing insider trading using some obscure loophole may look cynical, but that's only another example of big money at work. This law gets fixed, they find another way.

Re:I'd tend to agree.

[Vlad_the_Inhaler]

I thought they had their DNS entry blocked (but not that of their mirrors outside the US) because they did not defend themselves in court when that Swiss bank applied for the block. The same judge reversed the ruling a few days later.

*sigh*

[EmagGeek]

All they are doing here is providing a vehicle for insiders to have a "stop loss" order without the required advance notice of sale.

Mainstream media coverage

[gabeman-o]

Where is the mainstream media coverage? Why is this not on CNN, Bloomberg, etc?

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

If I may...

[aleph42]

If I may...

You had the energy to read the pdf three times, and you sound pretty sure that you found a problem in the current version of the Wikileak page, based on factual and verifiable information... that's the perfect oportunity to edit that article!

If you're not sure, "be bold" (a wikipedia guideline: http://en.wikipedia.org/wiki/Wikipedia:Be_bold): edit it anyway, but add some explanations to the discussion thread (actually, your slashdot post would be perfect for that).

Remember, a wiki is that cool thing were a spotted mistake is a corrected one!

Re:If I may...

[Hemogoblin]

I took your advice and edited the article. If the person would like to re-edit it with proper information and better detailed accusations, then by all means they can go ahead.

Re:If I may...

[Hemogoblin]

Well that was pointless: Wikileaks reverted both my edits without an explanation, so we're stuck with a shitty article. I wonder why it's called "Wiki"-leaks if they won't let anyone edit it.

Re:If I may...

[Hemogoblin]

Ugh... the wikileak admins don't understand the the topic, so they accuse me of being an employee of JP Morgan Chase. Talk about admin abuse... I'm never using that site again.

Re:I'd tend to agree.

[It doesn't come easy]

It's an old mainframe thing (you know, geeky). In the old days devices were controlled by directly embedding control codes in the characters sent to a device. Control H (that is ^H) was/is the code for the backspace key. So if you typed something and wanted to erase it, your character string would look like "John is the the REAL asshole^H^H^H^H^H^H^Hpower behind the scenes." In truth, you didn't really send strings like this for a text printout, at least not for devices like teletypes, because it would be too late for you bub!

In any case, instead of ^W the original poster should have used ^H if he meant to backspace. A Control W is an End of Transmit Block. How a device responded to a End of Transmit block would vary for each device.

I think he expected the imaginary device to erase a word for each control W. However, to know how the device would respond, we would have to know what the output device was.

In the wind.

[Fantastic Lad]

What would you rather have:

1) The Feds bailing out Bear Sterns, using the services of JP Morgan, or
2) Bear Stearns being unable to meet short term cash flows, going backrupt, and completely destroying the economy of the United States and world?

Naturally, I'm all for seeing things steady and stable. It's the larger questions which need to be examined, though.

There is every indication that the various structures now crashing, including Bear Sterns, were planned in back rooms specifically by people hoping to reap benefit from the resulting situation. Bear Stearns was crippled a year back when changes were made to its operating system. I'm not going to get into the details right now, (I'm busy as heck tonight), but take a look at what has been happening over the last twelve months with regard to how Bear Stearns borrows and lends money and certain critical privileges which were revoked; its demise has been nervously expected for quite some time, and the results we are seeing are exactly the sort of thing which people like JP Morgan were able to plan for and almost certainly had a hand in engineering. JP Morgan basically just made a huge, huge power move on the world economic chess board; These are the institutions which make up the Fed, and dictate how the Western economy works, and JP Morgan's power as a central bank, if there still happens to be a world in the next few years, will determine the shape of the Western economy for decades to come.

This kind of stuff doesn't happen without some serious scheming. --And it's apropos to keep in mind that the Great Depression may have seemed like a terrible time of want, but that for those who became the power-brokers of the last ninety years, did so as a direct result of a few small and well-positioned groups setting things up so that they could legally scoop up nearly ALL the property and material wealth in America for themselves. --Before the big crash a century ago, everybody was mortgaged and levied and in debt up to their ears, on both the personal and corporate level, just as everybody is today, and when the market was tipped, those few people ended up owning everything which they were able to re-sell at enormous profit. This is king-making stuff, and we're seeing the same scam happening again, right now. This is history unfolding, and the little people like us are expendable chaff in the wind.

-FL