Stocks Investing – Insider Trading is Faster in Making Money

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May 12 2007
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Insider trading are on the rise, if the the number of reports are anything to go by. Regulators are feeling the heat on Wall Street and begin to compare it to the 1980s when the illegal insider trading was said to be like printing money. Insider trading is not confined to Wall Street but in actual fact it happens almost in any countries especially those which do not have good governance in terms of transparency. It just that country such as U.S. and Hong Kong which has a set of independent and reliable regulations has reported it transparently.

United States authorities froze the account of a couple who are suspected of insider trading on $15 million worth of Dow Jones & Company Inc (NYSE: DJ, stock) shares, arrested an energy banker at Credit Suisse Group (NYSE: CS, stock) who is charged with leaking information on nine deals to a contact in Pakistan and accused another couple of illegally trading on information out Morgan Stanley’s (NYSE: MS, stock) real estate subsidiary.

While the insider traders are younger in the current age of information technology as compare to 1980s, the schemes are basically the same. Investment banker partner with friends or immediate family members, wives team-up with husband and research analysts give away tips in exchange for debt wipe-off. As fast as technology is used to commit the illegal activities, the same technology is equally fast in detecting such deals.

There’re some obvious reasons why insider-tradings are getting out of hand.

  • As a start you can hear more news about M&A deals now – the quantity of such deals have increased many folds and will keep increases.
  • While 1980s deals were often hostile takeovers, transaction today are usually friendly meaning you have two sets of lawyers, company officials and bankers each from both companies. So both sides have valuable inside information from all the parties.
  • The number of people involved in the deal-making has also increased giving the potential of information leakge from the people within the team who can’t resist the temptation.
  • Deals are getting bigger in terms of value, normally in billions of dollars. As such the prospect of the stock(s) gapping up once the news is out is extremely high yielding a very good return for insider traders.

SEC (Securities and Exchange Commission) is cracking their heads in dismay because the insider traders are mostly Wall Street professionals involved in the deals such as investment bankers and advisers, lawyers, accountants and so on.

The most daring reported by New York Times was the case involving Goldman Sachs’s (NYSE: GS, stock) former fixed-income analyst, Eugene Plotkin. Eugene, a graduate from Harvard, teamed up with another onetime Goldman employee, David Pajcin, to leak information on deals to various associates, including an aunt in Croatia who was a former seamstress in an underwear factory. Due to greed, she made $2 million on one trade — setting off alarm bells that ultimately brought the ring down.

Recently FinanceTwitter blogged about the Microsoft-Yahoo $50 Billion Deal Is A Hoax of which someone(s) within Goldman Sachs would surely have pocketed handsome gains. Go on SEC investigate this case, will you? Too bad SEC does not have authority to investigate Malaysia’s recent Maxis Communications Berhad (KLSE: MAXIS, stock-code 5051) privatization deal. Why am I smelling something fishy about insider trading on this deal which have CIMB Bank (Commerce International Merchant Bankers), an investment bank of Bumiputra-Commerce Holdings Berhad (KLSE : COMMERZ, stock-code 1023), and ABN AMRO Holding (NYSE: ABN, stock)?

Furthermore the Star newspaper which is pro-government reportedly said an investor who had bought 1,000 Maxis shares at RM13 each just before trading was suspended on Monday will make RM2,600, or a 20% gain on his investment. Was the reporter trying to say he/she already made some profit and you’re idiot for not making the windfall?

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