S.A.C. performed background checks on prospective employees, but it is not known whether the firm detected this blemish in Martoma’s record. Of course, S.A.C. could have learned of it and hired him anyway; forging a law-school transcript and mailing it to twenty-three federal judges demonstrates impressive comfort with risk.
It sounds as if they got exactly the kind of employee they wanted. Really, though, how did he think he'd get away with that, in the late nineties? By that point in time it was well-known that transcripts are provided by the registrar's office, not by students. Maybe it would have worked in the seventies...
The insider trading seems much the same. The sheer volume of those trades, coming less than a week before significant announcements of previously-secret information, was bound to throw up red flags. Did they have to short the stocks as well?
If this is the sort of thing that gets caught, there are bound to be billions of dollars of slightly subtler insider trading going unpoliced. The only thing I can think of is that possibly the really egregious insider trading crowds out the less aggressive sort. That's a reach though, and unless there's a good reason to believe it's true, why do we even bother policing this?
I had a mutual friend with the trader who gained inside information on the pharmaceutical stock that he then relayed to Martha Stuart. This trader(who I will not name, but can easily be found with a little googling) left his analyst position at SAC when the situation got messy then joined Front Point Partners as a portfolio manager. From what I understand, he was in the 8-figure range.
FrontPoint was then itself brought down by an insider trading case relating to the top level mgmt. I dont think the trader even received a subpoena. The sad reality is that there is probably no risk in cheating if you're not a high-profile manager. My assumption is that these guys can produce "research" after receiving a subpoena that muddies the water just enough for their lawyer to bail them out.
It seems to have a similarity to other cases of justifying behaviour based on secret information post hoc; i.e. post hoc "constructive evidence" or "constructive cause" to perform searches or road stops, based circuitively from NSA and/or CIA information which can't/won't be revealed to a court.
It's a high-trust environment, and I think very few judges would demand an official transcript. What's interesting is the risk-versus reward here. You can get disbarred many years into a successful career if this came to light. Meanwhile, clerking for a judge is mostly resume polishing. It's very educational, but you end up working the same job after your one year appointment, you just get to signal to your lawyer friends you had really good grades in school. To Martoma, that was apparently worth risking his career for an indefinite period into the future.
That's exactly right. I can report that I've had five legal jobs since I started law school (including two clerkships) and nobody has ever asked for my official transcript. I'm frankly very surprised that somebody noticed the alteration.
That being said, it still takes serious guts to pass off an altered transcript. He surely had no way of knowing that the judges would not eventually require an official transcript. I certainly assumed that I would need one before I could be formally offered the job.
>The insider trading seems much the same. The sheer volume of those trades, coming less than a week before significant announcements of previously-secret information, was bound to throw up red flags. Did they have to short the stocks as well?
It really was clever of Cohen to generate this reputation of having a 6th sense for stock movement. It turns obvious insider trading into "gee that Cohen is a genius, I wish my intuition was half as good as his"
I bet a lot of his great trades involved some kind of insider knowledge but were put down to him having an uncanny ability to intuit the market.
I guess he didn't have such a great intuition for how far he can push a ruse before the authorities caught on.
My reading of TFA was that they liquidated their holdings and sold the stocks short. Of course short-selling can hedge a non-liquid position, but that wasn't what was portrayed. After all, they didn't just not-lose; they "won" big.
Unless the stocks had risen since they bought them. It would also have been a much easier justification to the SEC - "this announcement was coming up, we didn't know which way it would go and were unhappy with the risk".
I wonder about this too. It's so rampant that I think we might be better off repealing the insider-trading laws and just telling the public that the game is rigged, and always has been. They would be safer looking out for themselves than thinking that insider trading is being effectively policed.
In the fall of his second term, he sent applications for judicial clerkships to twenty-three judges. But when a clerk for one of the judges scrutinized Martoma’s transcript, something looked off, and the clerk got in touch with the registrar at Harvard. On February 2, 1999, the registrar confronted Martoma. His transcript had apparently been doctored: two B’s and a B-plus had all been changed to A’s. (A remaining B-plus, an A, and an A-minus were left unchanged.) Martoma initially insisted that “it was all a joke.” But the school referred the matter to Harvard’s Administrative Board, which recommended expulsion.
He fought the decision vociferously, hiring a lawyer and taking two polygraph examinations. There had been a misunderstanding, Martoma explained: he had altered his transcript not for the judges but for his parents. He brought the faked transcript home over winter break, and they were ecstatic. (The panel evaluating his case noted that Martoma was “under extreme parental pressure to excel.”) But, after showing his parents the transcript, Martoma continued, he had to leave town abruptly, so he asked one of his younger brothers to compile the clerkship applications that he had left out in his bedroom. Unwittingly, the brother picked up a copy of the forged transcript, and included it in the mailing for the judges. Martoma had discovered the mistake before being confronted by the registrar, he insisted, and had sent e-mails to the secretaries of two professors from whom he had sought recommendations, asking them not to send the letters, “as I am no longer looking for a clerkship.
This sounds like the stories that distant relations who have drug problems make up, right down to a crazy amount of detail on things that aren't really important.
>Cohen has announced that he will institute more robust compliance measures to prevent insider trading, and he has hired the Silicon Valley security company Palantir Technologies to monitor his traders.
nice twist. What smells worst, HBGary or Cohen? Does Palantir have the sense of smell?
It's my opinion that any active trader (of which hedge fund is a subset) that consistently beats the market is engaged in some form of insider trading.
I'd agree with you to a large extent; a better, more precise way to put it would be to say that long/short equity hedge funds have to be engaged in de facto insider trading* in order to consistently generate enough alpha to attract investors. It's just too hard to consistently be smarter than the market on both your long and short bets, especially when it's a larger cap stock whose float has constant inflows and outflows of institutional capital.
That said, there are other asset classes which, ipso facto, do not lend themselves to insider trading, such as commodities and distressed debt. And there are definitely many traders in these spaces who consistently post outsized returns, which is why they get paid so much.
* I include in this definition not just stuff that will get you sent to jail, such as solicitation of MNPI from company employees, but also the more gray-area tactics commonly used by long/short analysts. Chief among these is speaking to "industry consultants" who give traders their "personal perspective" on certain companies, which in other words means paying them to relay the gossip they hear from their loose-lipped friends who work at various publicly traded companies.
> long/short equity hedge funds have to be engaged in de facto insider trading* in order to consistently generate enough alpha to attract investors
You're probably right. Especially considering how big the fees were. Stevie's firm took 3% of assets for expenses plus 50% of the profits.[1] That's a very high hurdle.
The standard hedge fund fee is 2%/20% and even that is high enough that many funds don't beat the S&P (or whatever they're using as a benchmark) after fees and expenses.
BTW, Bess Levin at the site I linked to below is great for irreverent and snarky comments about Wall Street.
We had a manager at BP come and present at my University a few years ago on commodity trading.
When he as discussing how BP consistently outperformed the market he didn't call it insider trading directly. If I recall his words were "BP leverages our superior market knowledge to outperform the market". In other words they had significant non-public information due to the fact that BP owns a significant amount of the commodities market. Supposedly the trading branch works at arms reach, but they still have access to production information that isn't available to the public...
You do know that insider trading rules don't apply to commodities, right?
Furthermore, BP produces the commodity they sell... They're going to make money no matter what. But of course they're going to sell for the most they can.
That isn't completely true, there are some insider trading laws that apply to commodities, in the US anyway. That is besides the point though, the fact that it is legal doesn't mean that it isn't insider trading.
I was commenting on "And there are definitely many traders in these spaces who consistently post outsized returns, which is why they get paid so much."
They outperform the market because they have superior market information...
And of course I realize that BP is going to sell their own commodity for as much as they can. It is just that there are actually pretty strict rules around how much information the trading branch is allowed to receive from the parent company.
And all the rules are available online. Most of the rules pertaining to commodities are to prevent fraud on the part of brokers, and the few that deal with insider trading deal with government employees that have information concerning subsidies, tariffs, environmental regulations, etc...
> They outperform the market because they have superior market information...
And because of their distribution, economy of scale, storage capacity (so they can wait out the market to get a higher price), refineries, etc...
BP has the advantage of being able to extract oil from the tarsands, store it, transport it, and refine it (their largest US refinery has been repurposed to refine oil sands crude), and their traders expedite the sale of it.
BTW, I happen to be in the same neck of the woods, and have spoken to BP traders here. Not sure what you're trying to read into, but what they do is legal. 100%. Company information is not considered to be 'insider' information for the purpose of commodities trading. Government regulations matter much more to commodities, as do natural events.
Hmm, perhaps it is just Canada then. I thought there was stricter regulation around commodities trading in the US as well. In Canada we do have some regulation around this though (at least in some provinces: http://www.e-laws.gov.on.ca/html/statutes/english/elaws_stat...) The manager from BP was very adamant about the fact that little communication was allowed between the traders and anyone else at BP.
Part of the issue is that BP also sells futures, and they have the ability to influence the futures price. (That is relating to your comment about economies of scale, storage capacity, etc).
I wasn't arguing about whether what BP is doing is legal or not. I was commenting on the initial post which implied that some traders are capable of making commodities trades based on some form of "skill". I was saying that they outperform the market because they have non-public information that gives them an advantage. (i.e. I was trying to dissuade laymen from thinking that they can make a quick buck off of commodities).
Thank you for those articles though. The second one in particular seems very interesting.
"Part of the issue is that BP also sells futures, and they have the ability to influence the futures price."
BP is a huge company for sure, but it produces about 4mm bbl/d of oil and world production is 90mm. So they definitely can influence the price, but they don't exactly have the market cornered.
What they can do (and other companies with more of a trading mindset, like Glencore, do really well) is utilize the information they get in real-time from the entire length of their supply chain. This isn't non-public information at all, and it'll make its way to the market within hours or days. And it also pertains only to BP's own order/production/delivery flow, which is tightly correlated to the market on a week-to-week, month-to-month basis but not on an hour-to-hour basis.
Simply not true - there are plenty of areas where consistently good returns are generated, however they aren't the best and they aren't too consistent.
The first hedge funds were successful because there was little competition, they could conduct things like arbitrage because no-one else was. The problem is that such strategies don't work generally with scale, and there is so much money in hedge funds that they can't all conduct such activity profitably and thus the opportunity is overcrowded.
Some active traders maintain their advantage by having such a high built in advantage that they have effectively monopolised a specific area, often through using technology and data mining. They are happy to sit on their strategy and keep reinforcing it to keep that advantage.
Finally there is the successful strategy of actually investing in companies over the long hall. Hedge funds don't do this, people like Warren Buffet do. Surprisingly few companies, even pension investors, properly do this (riding through bad patches without firing the investors for instance) and thus there isn't nearly as much competition as you would think - very few companies genuinely invest over a 10 year time frame for instance.
I can certainly see how one might think that, given this case. But having looked at some consistently profitable strategies, I am quite convinced that there are people with real, legal edge in the market. You wouldn't believe some of the things people exploit, they can very very small things.
I remember interviewing a guy whose whole thing was to make electronic markets in a product at the price where the price increments changed (think 8-9->10<-12-14). I didn't pursue it. Yet another guy found a small quirk in a niche market related to baskets of securities. Quite often they are things that have a cap on the money that can be extracted. A friend of a friend has an obscure electronic strategy that makes him a few million bucks a year, but can't be sized.
Then there is also a whole class of people with some sort of information privilege. Market makers who hear about a big order first (because their broker has got to call somebody first), or participants who are at a natural information aggregation point (people with a lot of connections).
In the HFT space, there's also a whole load of things related to reg NMS rules that ordinary participants are possibly not aware of.
It seems to me that all you need to gain above average return is to identify someone who will accept below average returns.
For a long time US shares that paid high dividends were disadvantaged from a tax perspective compared to those that paid low dividends. So if you are a zero tax entity (retirement fund) you could reasonably consistently outperform by selecting those companies which pay high dividends.
I work for a company where we are first banned from trading for a period, then given shares, which we must then sell over a certain period to get a particular tax treatment. We always feel that the shares trade lower over the period we must sell. And higher when we can't sell.
These are all fairly public, and I think just the tip of the iceberg.
Think of it like this: traders and everyone in the finance business devotes their entire working life and career to figuring out how to trade.
Programmers spend time learning, creating side projects on Github, poking through open source projects, working on projects at work, etc... In the decades that span a normal career, that's a lot of code and a lot of learning that a programmer accumulates, which is why they're able to create nice things.
Traders are the finance equivalent of all that knowledge (the good ones anyway). You don't think that after so much experience, it might be possible that a trader can make money in the market without cheating?
The traders that do cheat though, do so because of greed, not because it's impossible to make money...
Not a fair comparison. Programming isn't a pure competition. If you do better in programming, this does not imply that every other programmer in the world must be doing worse. In the market, the more money you make, the less everyone else can make. Of course, it's possible for all the traders to make money as long as the total market continues to grow... that's a pyramid scheme in my book....
I'm not agreeing with the parent post, because I think probability dictates that some trader will beat the market consistently (for a while). But that doesn't necessarily demonstrate "skill".
> In the market, the more money you make, the less everyone else can make.
That's just not true. When you're trading with somebody, that's because you're offering a marginally better deal than somebody else was offering. Trading activity ends up affecting decisions on what to produce.
You forget how much money goes back into the market through dividends and buybacks. Its a very significant number.
Right now the dividend yield of the S&P 500 is 1.90% (nearly a historic low) so it seems insignificant, but in past years the dividend yield has been nearly as much as the price increase of the overall market...
Mods, please replace the linkbait title ("Biggest-Ever" "Scandal") that's nowhere on the linked page. The proper title for HN would be the title of the article, "The Empire of Edge."
Other sources about the event covered by the article also don't use "the biggest":
"Mr. Martoma was found guilty in February of making illegal trades in what prosecutors have called one of the most lucrative insider-trading schemes in history."
Note "one of the most lucrative."
Note that the amount involved is just $276 million:
From the article: 'The Department of Justice announced...that Cohen had presided over insider trading "on a scale without known precedent in the hedge-fund industry."'
"use the original title, unless it is misleading or linkbait."
The current title here "Inside the Biggest-Ever Hedge-Fund Scandal" is not the original content title (even if it is inside of the title tag in the HTML, as karkarlawawa noted) and is as linkbait as linkbait can be.
The HTML doc title is a legit option for "original title" and gets used all the time on HN. This title also isn't the worst linkbait we've seen (or even seen today). But you're right that it is hyperbolic and—uncharacteristically for the New Yorker—a bit breathy,
and also not something whose accuracy we're in position to verify, so we'll adopt your suggestion. Hopefully that will not lead to another big off-topic discussion the other way.
Obviously the < title > on the page was used exactly as the meta tags even more than a decade ago: as a SEO content. The title of the article is different and appropriate to the New Yorker.
The OP used the <title> tag of a widely-read publication, regardless of the intent of The New Yorker. Madoff didn't run a hedge fund, and though I haven't done the research this may be the largest insider trading conviction related to a hedge fund.
Let's make it clear: do you really claim that what's inside of the < title > there is not a linkbait and SEO?
And that the words appear anywhere else except in the < title > tag there?
Note that the policy of HN is otherwise to even not use the title even when it appears in the real content of the page if it is a linkbait and I, personally and subjectively, like and support that approach. The current title doesn't follow it.
I'm not trying to diminish the topic itself, it's obvious that the S.A.C. Capital Advisors, L.P. used insider info for their trading often, and that it was probably the major way they had an "edge."
The summary -> no charges against the head of this insider trader, but an agreement with the government to only invest Cohen's personal assets of nine billion dollars.
It sounds as if they got exactly the kind of employee they wanted. Really, though, how did he think he'd get away with that, in the late nineties? By that point in time it was well-known that transcripts are provided by the registrar's office, not by students. Maybe it would have worked in the seventies...
The insider trading seems much the same. The sheer volume of those trades, coming less than a week before significant announcements of previously-secret information, was bound to throw up red flags. Did they have to short the stocks as well?
If this is the sort of thing that gets caught, there are bound to be billions of dollars of slightly subtler insider trading going unpoliced. The only thing I can think of is that possibly the really egregious insider trading crowds out the less aggressive sort. That's a reach though, and unless there's a good reason to believe it's true, why do we even bother policing this?