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Businesses The Almighty Buck

JP Morgan's Insider Trading How-To On Wikileaks 246

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."
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JP Morgan's Insider Trading How-To On Wikileaks

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  • Oh snap! (Score:4, Funny)

    by Anonymous Coward on Tuesday March 18, 2008 @09:39PM (#22791272)
    Wikileaks is on a roll!
  • Not a "leak" ? (Score:5, Informative)

    by aleph42 ( 1082389 ) * on Tuesday March 18, 2008 @09:41PM (#22791284)
    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" ? (Score:5, Insightful)

      by esocid ( 946821 ) on Tuesday March 18, 2008 @09:46PM (#22791320) Journal
      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" ? (Score:5, Interesting)

        by aleph42 ( 1082389 ) * on Tuesday March 18, 2008 @10:01PM (#22791430)
        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
        • Hell, they've got a server, all they need to do is multihome it and have the second webserver called wikinews, or something. Declare it a sister site for things that are major but not technically leaks.
          • In favour of this scoop: Wikileaks' best defense right now is popularity. It has been taken off DNS because a Judge didn't like its mission^W^W^W^W ruled against it; this could easily happen again with a bigger foe.
            • Re: (Score:3, Informative)

              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.
        • 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.

          Don't slam them for investigative reporting - someone's got to do it.

        • Yes, it is a leak. (Score:5, Informative)

          by RingDev ( 879105 ) on Wednesday March 19, 2008 @08:09AM (#22794354) Homepage Journal
          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
      • Re:Not a "leak" ? (Score:5, Informative)

        by sed quid in infernos ( 1167989 ) on Tuesday March 18, 2008 @10:04PM (#22791446)
        The SEC was very aware of this situation. They explicitly OKed this activity [sec.gov] 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).

        • All that means is the SEC cannot go after the person who owns the brokerage account.

          The SEC can (and often does) go after the brokerage firm for selling packages that are purposefully structured to flout the rules.
        • According to the article, JP Morgan refused to comment when asked if the document was theirs. This doesn't sound like very "ok" activity.
          • Re:Not a "leak" ? (Score:4, Insightful)

            by SerpentMage ( 13390 ) on Wednesday March 19, 2008 @07:16AM (#22793990)
            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" ? (Score:4, Insightful)

              by ATMAvatar ( 648864 ) on Wednesday March 19, 2008 @07:39AM (#22794140) Journal

              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: (Score:3, Interesting)

          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 "en
      • Re:Not a "leak" ? (Score:5, Informative)

        by nycguy ( 892403 ) on Tuesday March 18, 2008 @10:56PM (#22791772)
        The SEC is aware of the problem. It doesn't take much link-following from the original post to find this speech [sec.gov] 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 [ssrn.com] 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.

        • That was both an excellent explanation, and a good dose of perspective. 'preciate it. :)
        • Re: (Score:2, Insightful)

          by YodaYid ( 1049908 )

          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)
          • To paraphrase Seinfeld: Helmet laws are for heads that are too stupid to know they need protection, what's the point?
        • Re:Not a "leak" ? (Score:4, Insightful)

          by afidel ( 530433 ) on Wednesday March 19, 2008 @01:51AM (#22792666)
          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.
        • I don't think that is correct. It is illegal to pull out of a schedule based on inside information. 10b5-1(c)(1)(i)(B)(3). Scheme also has to be entered into in good faith. 10b5-1(c)(1)(ii). I skimmed the document and didn't find any reference to this practice, or anything else that seemed patently illegal. If someone with more knowledge of the matter could point something out to me, I would be much obliged.
        • Re:Not a "leak" ? (Score:4, Insightful)

          by nolife ( 233813 ) on Wednesday March 19, 2008 @07:53AM (#22794236) Homepage Journal
          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.
      • I disagree (Score:5, Interesting)

        by Hemogoblin ( 982564 ) on Wednesday March 19, 2008 @01:09AM (#22792494)
        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 [businessweek.com] 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:I disagree (Score:4, Insightful)

          by Hemogoblin ( 982564 ) on Wednesday March 19, 2008 @01:20AM (#22792546)
          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.
        • I agree with you, I'm currently studying insider trading in law school and can't find anything illegal here. It could be over my head, and I would be interested to hear an explanation of what exactly the illegal part is. It seems to me to be a guide on how an insider can trade without violating the law.
        • If I may... (Score:5, Insightful)

          by aleph42 ( 1082389 ) * on Wednesday March 19, 2008 @08:23AM (#22794466)
          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 [wikipedia.org]): 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: (Score:3, Informative)

            by Hemogoblin ( 982564 )
            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:Not a "leak" ? (Score:5, Insightful)

      by Whiney Mac Fanboy ( 963289 ) * <whineymacfanboy@gmail.com> on Tuesday March 18, 2008 @10:26PM (#22791596) Homepage Journal
      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" ? (Score:4, Interesting)

        by quanticle ( 843097 ) on Tuesday March 18, 2008 @11:42PM (#22792040) Homepage
        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.
    • by nguy ( 1207026 )
      if this is the intenal policy manual, then it is a leak. In fact, it's arguably a leak even if the document is handed to private banking clients but not generally public.
  • The loophole (Score:3, Interesting)

    by aleph42 ( 1082389 ) * on Tuesday March 18, 2008 @09:46PM (#22791314)
    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 (Score:5, Insightful)

      by Creepy Crawler ( 680178 ) on Tuesday March 18, 2008 @10:20PM (#22791562)
      Who said the lawmakers missed anything?
    • 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.
      This is bad... how? Sounds like a good idea to me.

      Don't know about the rest of you, but if I've got actionable information... I'm going to exploit it for every damn possibility I can.
  • Stocks Fluctuate (Score:2, Insightful)

    by xactuary ( 746078 )
    Human nature, not so much.

  • by Psionicist ( 561330 ) on Tuesday March 18, 2008 @09:55PM (#22791392)
    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.
    • 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.
      • He hints the nail on the head - insider trading works only when the insiders doing the trading can do so without others following their lead.
      • by Shihar ( 153932 ) on Tuesday March 18, 2008 @10:27PM (#22791608)
        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.
        • by Fishead ( 658061 ) on Wednesday March 19, 2008 @12:01AM (#22792144)
          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!
          • If the original sale is at a loss, then this is currently illegal (wash sale). Otherwise, deliberate market manipulation is the sort of thing that can cause an SEC investigation.
            • Re: (Score:2, Informative)

              by Apu ( 325126 )
              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.
        • Re: (Score:3, Informative)

          by TubeSteak ( 669689 )

          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 [sec.gov]

          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 kee

        • If, as you assert, there are legal ways(more than one!) for a CEO to trade on his stock based on inside information, I would like to name one.
      • by evanbd ( 210358 ) on Tuesday March 18, 2008 @10:34PM (#22791636)

        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...

        • by Travoltus ( 110240 ) on Tuesday March 18, 2008 @11:07PM (#22791832) Journal
          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.
          • by evanbd ( 210358 ) on Tuesday March 18, 2008 @11:38PM (#22792004)

            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.

          • by cfulmer ( 3166 )

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

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

            Secondly, though, consider what you're saying: get rid of the inside trading rules and American capitalism just disappears. Suddenly there are no investors, which means that you end up with only a few closely held companies. As a result, everybody loses their jobs and the economy goes into a permane

            • That will never happen, because "what happens next" is this: Companies attract investors by placing their own limits on the ability of insiders to trade.

              That is, assuming those limits actually have any teeth. Corporate rules can and often are ignored for the favored few. It's called corruption. If you get busted, you can still negotiate your way out of trouble at the ol' country club. The worst you can get is to lose your profits, but the stock value has already been irreversibly dinged. Other smaller time

            • Re: (Score:3, Informative)

              by Forbman ( 794277 )
              /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 acquie
          • "What happens next is fairly obvious."

            Profit?
    • by TheLink ( 130905 ) on Tuesday March 18, 2008 @10:08PM (#22791488) Journal
      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.
      • You're doing it wrong.
        • Re: (Score:3, Insightful)

          by TheLink ( 130905 )
          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 :).
      • I think his point is exactly that the stock market is not like a casino. Noticing someone dumping stock is an open indicator... and a good one. The trouble arises when someone makes a play and then damages the company to make earnings take a shit. THAT, I think everyone would agree, is the sort of "insider trading" that people are generally worried about.
        • by Forbman ( 794277 )
          Well, it's entirely possible for an insider to dump the stock based on yet-to-be-disclosed information as part of shorting the company's stock... maybe the insider doesn't directly benefit, but his friends and colleagues might. Just ask Martha Stewart how much fun that was for her.
      • If there are other Casinos around, nobody will want to play at your "Milton Friedman approved" Casino.

        May be that's the point, no one should be investing in large companies they literally nothing about. Invest in your local barber shop, invest in your community business, invest in a business you can audit the books of, demand that those types of businesses be included in your 401k plan, scream if your employer/government doesn't want to hear you, and do not give away your shareholder's proxy vote to your e

    • by SirSlud ( 67381 )
      Insider trading is insider trading. How does "making the public aware of that" relate to insider trading?

      Insider trading relates to giving you an edge in a stock market on other investors. If you think press releases filled with euphemisms that the average small time investor can't decode, never mind probably doesn't read, constitutes making the public aware, I'm at a loss.

      No one would be surprised if these banks helped their clients to avoid paying specific corporate tax, for example.

      Does that make it righ
    • 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
    • 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.

    • by 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
    • that's toally and utterly retarded.


      by the time the insider has done his trade, it's too late for everyone else you idiot.


      oh and if tax lawyers could allow you to pay less tax, why the fuck aren't you doing it? i'll tell you why, because it's a greatly over exaggerated myth that rich people do this and save heaps of tax. sure they can BREAK the law and pay less tax, but shockingly revenue services know all the loopholes since they wrote the laws.

    • That is only good for you if you're an insider. This "information" you speak of is entering the market in the form of a price change, which means someone with inside information has just managed to buy shares from some poor sap who was not in possession of the information. The real upside would be that you wouldn't have to pay anyone to run companies because they would make far more money insider trading than by doing anything else. Whether they would run the company well is another story, but they would
    • by mwvdlee ( 775178 )

      "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."


      As opposed to a press release containing the same information?
  • by SirSlud ( 67381 ) on Tuesday March 18, 2008 @10:00PM (#22791420) Homepage
    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: (Score:3, Interesting)

      by demachina ( 71715 )
      "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 s
    • by pnuema ( 523776 )
      Markets are intended to reward performance and promote capitalization, not provide and easier way for individuals to make money.

      You do not understand the stock market.

      Stocks were invented to provide an easier way for individuals to make money. Instead of starting and running a business, they can buy stock in someone else's, without doing any of the work. That's why they call it a stock market.

      You also don't seem to understand why this isn't a big deal. The only time an executive can exploit this rule is

    • Re: (Score:3, Insightful)

      by localman ( 111171 )
      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
  • by gc8005 ( 733938 ) on Tuesday March 18, 2008 @10:20PM (#22791558)
    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!!!
  • by Dr Reducto ( 665121 ) on Tuesday March 18, 2008 @10:38PM (#22791664) Journal
    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.
    • by pitchpipe ( 708843 ) on Tuesday March 18, 2008 @11:55PM (#22792114)

      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: (Score:3, Informative)

      by Alascom ( 95042 )
      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
  • by EdIII ( 1114411 ) * on Tuesday March 18, 2008 @10:54PM (#22791760)
    I bet Martha Stewart wishes she was a JP Morgan client right now :)
  • 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 no
    • Thanks for a nice summary - appreciated! Now, if only people would read it before spewing forth their usual garbage ...

      -- Ravensfire
    • RTFA, idiot (Score:5, Informative)

      by Alex Belits ( 437 ) * on Wednesday March 19, 2008 @01:28AM (#22792588) Homepage
      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.
    • Re: (Score:2, Insightful)

      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 ar

    • Re: (Score:3, Informative)

      by mgblst ( 80109 )
      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 sto
  • SEC Rule 10b5-1, which has long been considered ripe for abuse. Now this abuse is publicly documented and will be hard to ignore^H^H^H^H^H^H^H understand.

    Fixed that for you.

  • ...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.

  • There is another part of the picture.

    When insiders were expected to pre-announce their trades, large amount of announced sales could be used by investors as a sign that insiders have low confidence in company's long-term profitability, and act accordingly. With this scheme being known and believed to be widespread, this communication channel is lost -- everyone can announce that he is selling everything then cancel at the last moment, and helpful brokerages will make sure that no one (except for the general
  • by gabeman-o ( 325552 ) on Wednesday March 19, 2008 @06:26AM (#22793716)
    Where is the mainstream media coverage? Why is this not on CNN, Bloomberg, etc?

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