I missed these arrests from back in mid-December:
“U.S. prosecutors filed criminal charges against a former Lazard Freres banker on Wednesday for alleged insider trading that earned him and others $500,000 in illegal profits.
The trading involved some of the highest profile deals during the leveraged buyout boom of 2005 to 2007, including the buyout of TXU Corp, as it was formerly known, for $44 billion, including debt.
The charges were brought against Adnan Zaman, a former vice president at Lazard Freres, in federal court in San Francisco.
Financial regulators also filed civil charges against him and Vinayak Gowrish, a former associate at private equity firm TPG Capital, saying the one-time fraternity brothers stole confidential stock tips and then passed them on to friends. In return, the men received cash kickbacks.
The U.S. Securities and Exchange Commission settled the civil case with Zaman, who agreed to return $78,456 in ill-gotten gains and to be permanently barred from associating with any financial broker or dealer.
The SEC said that Gowrish and Zaman, friends since high school, tipped two friends, Pascal Vaghar and Sameer Khoury. Vaghar and Khoury also settled with the SEC.”
More at Reuters.
My Comments
Is it just me, or does there seem to be an awfully high number of desis (Hindi for home-boy).
What´s with these guys?
As a fellow desi, I have to hang my head. World-class education, world-class jobs, better than world-class salaries…and a world-class racket.
Perhaps these folks just understood that they were really doing nothing wrong (other than violating a law).
Stay with me for a minute…
As “bad” as stories like this sound, it’s possible that the true motive (to make as much profit as possible on a stock play) is really not that different from the motive anyone else who ventures into the market is using. One gets the feeling sometimes that people who “invest” their money in the stock market truly believe government and it’s “laws” have their back and as such guarantee a level playing field. Not so!
No law (obviously) can prevent “insider trading” (whatever that is) from occurring. Anyone who invests their money in the stock market is taking a huge risk, and at the same time has to realize that not all players will profit. A profit is taken at the expense of another trader, plain and simple. In order to maximize this, we all think we know something someone else doesn’t; that if we play that hunch, that detail we discovered through research, or that tip we accidentally overheard at lunch, then we’ll gain at the expense of someone who doesn’t know this. If this wasn’t the case, there would be little need for a stock market.
Not trying to defend those who purposely break the law (a non-violent offense in this case, BTW), but calling the use of information no one else has to try and turn a profit a “racket” is not really accurate in my view.
Hi —
Not sure there isn´t a victim…
Inside info is OK. But there are specific types of information you are forbidden to trade..which the traders well knew was wrong, other wise they wouldn´t have been trying to hide stuff, as they were.
In order for markets to function there has to be some degree of confidence that rules are being adhered to, so doing something in rank contradiction of the law encourages everyone to see the whole thing as more or less a racket…and then it turns into one.
It´s like illegal immigration.
You can make an argument that ok, it´s the law that´s wrong in the first place…so why not break it..but then that leads to even more lawlessness…and so on.
That´s one level. But there´s also the level, that employees who are leaking confidential information about their companies are doing something damaging to their companies. Say, a company knows it has a damaging event coming up (an analyst rating or a missed earnings or something like that) – it can do what it needs to do to boost investor confidence in time for it. But if someone gets that information out before the company can take some action, it´s caught unfairly off guard.
I see it as a battle between technocrats/bureaucrats (money managers after all are only managers) versus value producers, or capitalists..
Money management has to be subsidiary to value producing because money is only an exchange, whereas value preexists and underlies the exchange
Your points are well made, however it’s a bit vague to say that disobedience of a bad law leads to lawlessness. It can also lead to a revoking of bad laws, as in the now-mounting pressure to decriminalize marijuana in the United States. In so doing, in the case of the stock market, people would necessarily have to become very wary of any investment they make, which would be a good thing (and likely would, by itself, level the playing field). Even the use of insider information, if this were decriminalized, would peter out over time since any significant advantage in it would be removed. As for damaging a company, the actual monies that change hands on any given trade are never seen by a company. This is a little understood facet of the stock market: stock prices at any given moment are largely a function of trader emotion, and companies (other than via IPOs or maybe some bonds) never see the proceeds from a trade. “Invested” funds go directly to another trader, who was looking to sell when you bought. Not sure companies are actually hurt by insider trading unless you count a drop in stock price (which is typically a large part of upper mgmt compensation).
For a market to function does there have to be confidence that rules are being followed? This statement still seems problematic (though I agree it’s likely true)–while we all would like rules to be adhered to, they often aren’t. In a true free market, any shenanigans are immediately and appropriately treated by the motive force behind it: people with money (and it’s better if the money is of sound value, as you suggest). One could go a step further and describe this as human action, which of course was the basis behind Mises’s economic theories (as opposed to mathematical models, I mean).
I probably sound like an agorist; I’m not, really. Just a fellow traveler!
you misunderstand natural law when you speak of meaningless conventions like insider trading -is there any other type of trading? all trading can be shown to ‘hurt’ someone…ooooh. isnt the dirty farmer trying to profit off my hunger.
as a desi i am neither proud or ashamed of these guys.they were doing their jobs. as a foreigner, i may even detect a scapegoat hunting happening.
btw, not al ‘insider trading’ is acceptable. especially if they violate contracts. ‘hurting’ companies is not a valid explanation – if not covered by contracts. external parties -regulator or fairy godmother have no business interfering in it.
everyone from bernanke to bush oughta be in jail,if you started implementing such “laws”. or are the “law”makers above it all?
Hi –
I am sure there is scape goat hunting. But as a desi, I am not sure I am the one who should point that out…
They may well be scape goats….but at the same time they’re also privileged people, who, whether they like it or not, represent the aspirations of their country men. They had the opportunity to participate in the capital markets..and use their position for their good as well as the good of their country of origin and their adopted country.
There is nothing imaginary about the kind of good they could have done.
Yes, the government is the biggest racket of all and the source of the corruption. No one denies it…at least, not me.
But these guys knew what they were doing was illegal and also, wrong.
All forms of insider trading aren´t wrong, but apparently these were.
Companies can be damaged by many things..including their own bad actions. But we’re talking about breaking rules of confidentiality.
What if your medical doctor decided to use your medical information to make some money for himself…
You could as well argue, why shouldn´t he..why should be held to higher standards?
Unscrupulous attitudes in one field do bleed into others and cause the undermining of the whole social fabric and that´s what we are seeing..
Also —
This whole notion that natural law is not violated by this..is pretty suspect
Sure it is.
Did these people do what they were doing openly?
Did they say, well, I think the law is a fraud openly. No.
They abided by it on the surface, so indeed it´s deception.
As for share prices…the whole history of the capital markets recently has been that share price fluctuations are now driving businesses.. and forcing them into short term modes of operation..the same thing has happened to money managers.
The whole short term bias has had a very negative impact. Always looking for an inside edge in a very aggressive, heck with the rules, Greed-is-good type of way, contributes to that.
People who don´t get this are being blinded by language and what I call market fundamentalism
The market is not a nature god or the law of the jungle
It´s a group of interactions that presupposes some ethical basis and behavior..some rule-following.
Banking and money management are professions NOT businesses..they have professional and ethical codes.
Actually businesses should be able to trust them as doctors used to be trusted.
Instead we have businessmen (the anti nss crowd) teaching professional ethics to the professionals )bankers and managers).
I am afraid the ideology of short term speculation has brainwashed a whole lot of people on this.
I see that intentional violation of the rule of law is troublesome…but of course the American Revolution was based on just that premise (jury’s still out on whether that actually achieved what was intended). dsylexic’s example is a good one though: if the people noted in the article you linked agreed by contract (via their own signature or other good faith effort) not to behave this way and then did it anyway, reprimand is indeed in order.
I think the market is a natural force, behaving in and of itself by way of the traders involved. No agreement is reached in total transparency by both parties to a voluntary contract; both believe they have gotten something from the agreement, or it wouldn’t be made.
Consumers want products to cost zero; producers want products to cost infinity; what actually happens is in between the two and results from natural market forces, not rules, per se. While I agree most people think rules are needed to govern this behavior, there is a clear distinction in my view between ethical bases and rules.
Rules aren’t necessary for those who observe ethical bases in their behavior. Those who break rules by definition wouldn’t obey them anyway.
I am convinced that scams like the one Bernie Madoff perpetrated exist *because* of the existence of rules, not because of the lack of them. Those investors didn’t do proper due diligence on this obvious (now) snake-oil salesman because they believed they were covered by SEC legislation and this guy was just that good. And on top of that, apparently relatively few others knew about it. And these “investors” weren’t going to openly announce their great discovery to all…it would have diminished their expected return if everybody knew!
Snake-oil salesmen have been around since the very first markets came into existence.
Yes – I agree that a proliferation of rules is usually indicative of a break down in morality..but I don’t buy that the break down in morality was caused by the proliferation of rules..that’s a correlation not a causation.
The breakdown is caused by the every increasing intrusion of the state (force) into all areas, creating perverse incentives so that the other things that would normally restrain unethical behavior and enforce rule following have vanished..
– public censure, public shaming, death, bankruptcy, isolation…
these are negatives, but they are negatives that we banish at our risk, because they operate as natural rule enforcers.
Don’t cheat, because once you’re known to cheat, no one will do business with you. But what if the existence of the government as honey pot makes cheating not only attractive but the only way to go? Then you get a society where class (in the good sense, high class, educated, well spoken, moral, valuable) is thrown out..and everything is classless, except for money..which on its own bestows class…no matter what you did to get it. You get a society of gangsters and their molls and shills, which is, sorry to say, what we have in the US today.
meh eck desi nehi hu….which means i am not a desi and make desi ladies laugh uproariously
when they hear me say it…. totally off topic
but i thought it might amuse you…. 😉
cheers
I’m amused..
Very good…or did you just pick up that one line!