Insider trading – what starts with greed invariably ends in fear…

2 mins. to read

Billionaire Carl Icahn

What do investment, golf and gambling have in common & what connects Carl Icahn, Phil Mickelson and William Billy Walters? On the face of it, they barely know each other but, according to the latest leaked information coming from the SEC and the FBI, greed is what connects them. It never hurts to be just a little bit richer!

News broke this week that prosecutors are investigating leads on insider trading connecting these three public figures, in particular regarding a case involving a bid on Clorox securities and some underground option trading on the same stock.

While some investors are naturally “enlightened”, and thus able to enjoy excess returns relative to the market, they are most certainly the exception to the rule. Even the so called ”professional” fund managers sometimes need to use “not-so-legal” information to get the boat afloat as the spate of insider trading cases brought in recent year has shown. Indeed over the past few years we have witnessed many scandals that ended with severe punishments for portfolio managers, traders and entire companies who were found to be trading on non-public information in order to produce the much-coveted “alpha” (and fat bonuses). One such case in point is that of our old friend Steve “Stevie” Cohen, which resulted in his SAC Capital being demoted to a mere family business after paying record fines for insider trading scandals.

It seems that the “insider” story never ends however with almost every day w new cases coming to light involving investment professionals. In stark contrast we come across reports like the one from Citigroup which argues that the hedge fund industry is facing an epic opportunity as a growing number of institutional investors perceive them as the best risk managers in the world. It can only be taken with a veritable mountain of salt and after allowing oneself a cynical chuckle!

After being contacted regarding the case, Mr Icahn stated that he knew nothing about the on-going investigations but, helpfully, elaborated that his firm carefully observes all legal requirements in all of its activities Yada yada yada… A lawyer representing Phil Mickelson also denied knowledge of any on-going investigations of his client but people familiar with the case say Mickelson has actually been approached by two FBI investigators after he finished a round of golf in Ohio. As for William Walters, he has so far declined to comment.

The case in question relates to trading in Clorox shares. In February 2011, Carl Icahn accumulated a 9.1% stake in Clorox. Then on 15th July of the same year, he made a $10.2 billion offer for the company which boosted the stock price by almost 10%. While there was, on the face of it, nothing wrong with that, the Feds subsequently discovered suspicious trading activity in advance of the deal. Just four days before the formal bid announcement, a well-timed, large and very risky position was opened in Clorox options. We don’t know for sure what exactly happened, but it seems that both Phil Mickelson and William Walters were somehow involved in that trade.

One thing is for certain though, if they are formally accused, the odds are massively against them. The Feds have brought 90 insider cases since 2009 in the Manhattan jurisdiction, of which 85 resulted in convictions or guilty pleas. The other five are still open, meaning that no one has escaped so far! What starts with greed, seems to end with fear!

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