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"It wasn't widely known that trading on secret information was wrong..."

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Posted by:   bobo 6/2/2006 7:06 AM

Here's a fun article from Thestreet.com, which discusses hedge funds who traded in advance of PIPE deals, in violation of insider trading rules and misappropriation.

My favorite quote:

"They note that, until recently, it wasn't widely understood that it was wrong to short shares of a company while the transaction is still a secret."

Huh.

Yesssss. I seeee.

Who knew that trading on material non-public information was a no no? Why, if only these rules were set down somewhere these investing professionals could refer to......like a code, or something......

And it isn't like the underwriters contact the hedge funds and tell them they need to suspend all trading in the issue for a week while they get them the details, and have them sign an NDA pledging them to complete secrecy and no trading, or anything. I mean, it isn't like that is the STANDARD PRACTICE IN THE INDUSTRY!!!!

This typifies two things in my mind. First, the level of unbridled arrogance that some in the miscreant hedge fund community possess. They clearly believe that they can float the most pathetic of excuses for market manipulation, and that investors are stupid enough to buy whatever they cobble together.

Second, it highlights the sorts of abuses that are endemic to the genre. These guys will do whatever they feel like, and if caught, after the fact, "consider" a workout with the SEC.

Does anyone understand that there is a problem here?
Copyright ©2006 Bob O'Brien
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Comments (22)
Re: "It wasn't widely known that trading on secret information was wrong..." By clearthinker on 6/2/2006 8:34 AM
yes...morality was just recently discovered...and a patent is pending....
Re: "It wasn't widely known that trading on secret information was wrong..." By harryofanguslane on 6/2/2006 9:09 AM
Hmmmmmm. Not all that different from Home Depot's reaction after all the Board of Directors exvcept for the CEO failed to show up for the annual meeting. And then the CEO refused to speak about his obscene compensation that went up as the stock price went down.

And they were surprised when shareholders, including institutions manifested their displeasure. Ah, if corporate America could only export arrogance for a good price. The trade deficit would vanish!
Re: "It wasn't widely known that trading on secret information was wrong..." By Patchie on 6/2/2006 9:27 AM
And that is why Hedge Funds need to be registered. So audits can be made to insure these "super intelligent people" know what teh hell they are doing.
Re: "It wasn't widely known that trading on secret information was wrong..." By bburrell on 6/2/2006 10:05 AM
WTF? Wasn't widely known? It is the only rule there has EVER been since the 33-34 ACTS. This comment is total BS.

May the Bird of Paradise leave droppings in this Schumck's eyes, hopefully with strains of H5N1 virus in them.
Re: "It wasn't widely known that trading on secret information was wrong..." By mhelburn on 6/2/2006 10:15 AM
Some hedge funds have argued the SEC crackdown on the PIPEs market is misguided. They note that, until recently, it wasn't widely understood that it was wrong to short shares of a company while the transaction is still a secret. But this argument doesn't seem to be holding much weight with the regulators."

This has provided me with my laugh of the day. Sell non-existant stock naked..and cover with the new issue... hmmmm... oopsy.
Re: "It wasn't widely known that trading on secret information was wrong..." By rtway1 on 6/2/2006 10:27 AM
It always comes down to the same conclusion or answer to solve the problem. If there is no law enforcement i.e. jail time, no one is ever going to read the fugging law. If you know you can go to jail you are going to do some soul searching and risk assessment before pulling off the crime. Until the DOJ and the SEC work together this will keep on , keeping on. Politicians no this better than anyone and thats why no new laws are ever passed or old laws enforced, you,d loose the gravy train.
Re: "It wasn't widely known that trading on secret information was wrong..." By Jim on 6/2/2006 10:42 AM
This is outrageous! Illegal activity in Wall Street seems to be like speeding on the freeway. Everybody is doing it, and when a few get caught, they pay a financial penalty and start speeding again. Insider transactions should = jail time and massive fines.
Re: "It wasn't widely known that trading on secret information was wrong..." By mhatmccane on 6/2/2006 11:36 AM
What is unbelieveable is that the firm that got caught is "considering" making a settlement. How 'bout getting the DOJ involved and getting some jail time so they can read up on the law in the prison library.
Re: "It wasn't widely known that trading on secret information was wrong..." By jcline on 6/2/2006 12:55 PM
And don't you just LOVE these statements by Larry at the DTCC:

"The court's decision and the forceful statements made by the SEC underscore what DTCC has been saying since this misguided litigation campaign began," said Thompson. "Short selling and naked short selling are trading strategies and are not connected to the post-trade clearance and settlement of securities transactions. There is nothing in DTCC's operating procedures, activities or conduct that justifies these frivolous suits."

http://biz.yahoo.com/bw/060602/20060602005257.html?.v=1

Anyone for taking all this stuff to the Supreme Court yet?

Strategy THAT!
Re: "It wasn't widely known that trading on secret information was wrong..." By dave on 6/2/2006 1:41 PM
This has always been a common strategy. It's a variation of the death spiral where the death spiral comes first.

Attack a stock that needs to raise money and send it into a freefall. No one else will invest as they assume there must be some undisclosed problem to justify the problem.

When the company is desperate to meet payday, come in on your white horse and rescue them. You do a financing that covers every single short you've made at a guaranteed profit.

If they do a financing with someone else, you are still safe as they were forced to dilute at such a low level that the average price per share should be a lot lower than when you started shorting.
Re: "It wasn't widely known that trading on secret information was wrong..." By dave on 6/2/2006 1:47 PM
Another place we need to concentrate is on forcing the OTC and Pinks to disclose under rule SHO.

Currently, they only disclose companies with a high enough market capitalization / liquid assets or companies that also trade on a more senior exchange.

The OTC and Pink mess is the part of the iceberg that no one has looked at yet. Those fails are huge and in many case really old.

Good deal if you can get it.

1. As a market maker, short $10,000 worth of a penny stock. Put up $200 of your own money, so that you have the required $10,200 (102%) collateral.

2. Now the stock has been driven down and is only worth $7,000. Your new collateral requirement is only $7140 (102%). Withdraw $10,200 - 7,140 = $3060.

Your $200 is now worth $3060 which you can go spend. You have your original investment and the short position is still outstanding and could make you even more money.

If it tries to run, then hold the stock. For example, if the penny stock only trades $5,000 per day, you can put a $50,000 order for sale to stop it from going up. People won't keep buying on the ask if the price refuses to go up.

That $50,000 order only requires $1,000 of your own money (1/3 of your profit) and only if you get filled.
Re: "It wasn't widely known that trading on secret information was wrong..." By Wonder Boy on 6/2/2006 1:51 PM
I am beginning to wonder why we need a Congress anymore. It seems that none of the laws are enforced.

In fact, if we got rid of them, then Wall Street couldn't bribe them!
Re: "It wasn't widely known that trading on secret information was wrong..." By dave on 6/2/2006 2:31 PM
MM margin requirements to back a naked short.

http://www.law.uc.edu/CCL/34ActRls/rule15c3-1.html
Re: "It wasn't widely known that trading on secret information was wrong..." By anon on 6/2/2006 3:22 PM
I've been observing since the very beginning and found a pratical example of the effect of failure to delivers in the market...

Check out William Lyon Homes (WLS). Hot-markets CA homebuilder been on SHO a while. Controlling shareholder tendered for remaining minority shares and got over 90% WHEN SHARES TENDERED SUBJECT TO GUARANTEED ELIVERY are counted, but didn't hit 90% without them. (you need 90%+ to tender for you to do a short-form merger and take the company private w/o approval of 10%) Normally anybody who is short WLS stock says so what and gives the prime broker $109 (the tender price) and the pb gives the holder of the tendering shares money, but this time the actual beneficial ownership needs to be transfered so people are being bought-in. Vast majority of stock is tendered and can't withdraw, so unfortunate shorts (or more likely their prime broker) is being forced to buy in the market. Stock is trading good volume at huge premiums to the tender. (over 20%). Amazing....
Re: "It wasn't widely known that trading on secret information was wrong..." By sealman on 6/2/2006 3:39 PM
CFALA meeting has been cancelled per CFALA web site www.cfala.org.
If and when it is rescheduled, anyone can attent for $40 reg. fee. Damn it. I was hoping this event would trigger some great press against NSS/FTD. I smell a big rat to cause this event to be cancelled.
Re: "It wasn't widely known that trading on secret information was wrong..." By dave on 6/2/2006 3:40 PM
The shorts are happy. They buy in at 20% over the tender offer.

If they had to buy in a squeeze, it could be 100 times current prices.
Re: "It wasn't widely known that trading on secret information was wrong..." By sealman on 6/2/2006 4:00 PM
Sorry, CFALA meeting has been "postponed" not cancelled. I am anxious to learn the reason and when it will be rescheduled.
Re: "It wasn't widely known that trading on secret information was wrong..." By anony on 6/2/2006 6:47 PM
Not everybody is getting bought in; the prime broker has discretion and has to make a "business decision" as they say. Only enough shares need to be bought for WLS to get to 90%, then anyone short just needs to pay the $109 tender consideration. Stock loan people are saying that a hedge fund has a big chunk of the 11% that didn't tender, so whoever is unfortunate enough to be getting bought-in has to face a very thin market. It gets bizarre when you look at the volume traded over $115... according to the numbers I saw of shares that were tendered subject to guaranteed delivery, (from someone who works at stock loan @ pb) WLS should have gotten past 90% a while ago if the folks getting bought in were indeed getting real shares. (Only about 100k were needed to get to 90%) Since WLS was on SHO, we know at least 400k FTD's were out there (.5% of shares out). There is no active options market, so it isn't the options market maker naked shorting to save a few bps on short rebate like in QQQQ. Something weird is going on.

Anyway, hope you can use this as another data point. I hope you can make friends with some junior-mid level stock loan people at the prime brokerages, they usually know what is going on.
Re: "It wasn't widely known that trading on secret information was wrong..." By Rob on 6/2/2006 6:49 PM
It seems an Audit would require disclosure of Naked Short sales as contingent liability and/or illegal activity.

Surely many of the Naked Short Sellers get audited by CPA's. Does this slip by the Auditors?

Why hasn't Naked Short Selling been brought to the forefront by Auditors?

Rob
Re: "It wasn't widely known that trading on secret information was wrong..." By Wonder Boy on 6/2/2006 7:08 PM
Re: WLS

NEWPORT BEACH, Calif., May 25 /PRNewswire/ -- General William Lyon today affirmed his intention to complete the previously announced short-form merger with William Lyon Homes (NYSE: WLS - News). Upon completion of the merger, stockholders of William Lyon Homes, other than General Lyon and certain of his affiliates, will receive the merger consideration of $109.00 net per share in cash, which is the same price paid by General Lyon in his recent tender offer to purchase all of the outstanding shares of William Lyon Homes not already owned by him.
ADVERTISEMENT


Based on information provided by Computershare Trust Company of New York, the depositary for the tender offer, General Lyon had previously announced that the shares tendered in the offer, together with the shares already owned by General Lyon, The William Harwell Lyon 1987 Trust and The William Harwell Lyon Separate Property Trust (the "Trusts"), represent over 90% of the outstanding shares of William Lyon Homes, which would be sufficient to enable General Lyon to effect a short-form merger with the Company under Delaware law. However, a portion of the shares tendered in the offer was tendered through guaranteed delivery procedures, and certain stockholders and eligible guarantor institutions have required additional time to satisfy their delivery obligations.

Since the commencement of the tender offer, neither General Lyon nor any of his family members or affiliates (including the Trusts) have purchased shares of William Lyon Homes other than shares delivered pursuant to the terms of the tender offer. General Lyon intends to complete his acquisition of the remaining shares of the Company through the short-form merger as soon as practicable following receipt by the depositary of the remaining shares tendered through guaranteed delivery procedures. Stockholders and eligible guarantor institutions which have not yet fulfilled their commitment to deliver shares should promptly comply with their guaranteed delivery obligations. Questions can be directed to Georgeson Shareholder Communications Inc., the information agent for the tender offer, at (800) 868-1362.

This press release is intended for informational purposes only and is not an offer to buy, a solicitation of an offer to sell or a recommendation to sell any shares of William Lyon Homes common stock.


It appears to me that the General is paying the $109/share and has committments for 'good delivery' from certain parties. It also appears that those 'certain parties' are not 'delivering' or perhaps are 'unable to deliver'. This could provide a REALLY interesting situation! If there are REALLY 400k shares that have been counterfeited, I sure would love to have the certificate for that 'one last share'!
Re: "It wasn't widely known that trading on secret information was wrong..." By hwh on 6/2/2006 9:14 PM
"These guys will do whatever they feel like, and if caught, after the fact, "consider" a workout with the SEC."

Profound does not cover the context of your statement. If I may add, "Without admitting or denying guilt" and see the largest fine for the above mentioned crime was against AMRO for 1mm.

Pennies on tenths of cents on the dollar and no admission of guilt, now that is not deterence. It is inducement...hwh
Re: "It wasn't widely known that trading on secret information was wrong..." By Freddo Cazzo on 6/2/2006 9:17 PM
Many people need to be taken out of the gene pool........i just pray its the government that decides with true justice, (not the wrist slapping we are used to seeing)..........and not the common citizen who is finally totally fed up, and decides to take that 5 pound .50 cal, and show the nation how pissed off they really are.........in fact in saying that.....I am suprised we havent seen it already.


.........very possible it's not far off......(insert stupid grimace please, and thank you) ..........................................


........................still Freddo.....................waaay more Cazzo!


Black Friday 4-14-06!



Bloody Sabath to surely follow...............soon i say....very soon..........

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