Why does today's stock market seem to reward the well-connected
while working against the everyday investor?
It's not only that the market has necessarily changed (and has
never really been a "level playing field"), says Charles Gasparino
in his new book
Circle of Friends: The Massive Federal Crackdown
on Insider Trading -- And Why the Markets Always Work Against the
(Harper Business, 2013), it's also that there are more "regular
folks" in the markets than ever before.
"In these days, even blue-collar workers are forced to save and
invest for retirement given the erosion of guaranteed retirement
plans that corporate America has replaced with 401(k) plans and
other investments," he writes.
), formerly of CNBC, and a contributor to
The Daily Beast
, Gasparino has the relationships, connections, and experience to
get inside investigations and offer a rarely-seen look at the inner
workings of financial crime and the enforcement apparatus trying to
stop it. With dozens of convictions obtained by the US government
for insider trading in recent years, but not a single case brought
against the bank executives who triggered the 2008 economic
meltdown, Gasparino maintains the SEC, Justice Department, et al
are simply looking to "satisfy the public's demand for Wall Street
scalps," without going after the real culprits. Why has no one from
), an institution Gasparino calls "an evil empire" for "radical
risk taking," been prosecuted? Or anybody from
), an entity that Gasparino says "shared honors" in this area with
Whatever your perspective (some agree with Gasparino's thesis that
less public harm comes from insider trading than the SEC would have
you believe, others strongly dismiss it),
Circle of Friends
is a fascinating read.
Minyanville recently sat down for a Q&A with the author.
Circle of Friends
, it's clear you had extraordinary access to not only Wall
Street insiders, but also regulators, law enforcement agents, and
other highly placed sources. Can you explain some of the "story
behind the story"? How did you go about researching the book? Was
it difficult getting people to talk?
Very difficult. On the law enforcement side, investigations such as
these need to be kept confidential, and the defense bar doesn't
want to do anything to get clients in even more trouble. But you
look for ways into the story by tapping into sources who work at
hedge funds, people who are friends of the accused, and former
investigators with direct knowledge of what went down. After a
while you develop a pretty good outline narrative of what happened,
e.g., how long the government has been pursuing SAC Capital and how
exactly and what methods were used.
The book certainly makes clear how tight these cliques are, and it
is difficult to overestimate the effects of human nature and money.
How deeply entrenched is the culture of insider trading?
I don't want to say everyone is doing it, but at least for a time,
insider trading was business as usual at hedge funds. I should
caution that some stuff that looks like insider trading, e.g.,
trading on "material non-public information," doesn't really fit
the legal definition of what is a dirty trade. But hedge funds run
on information that isn't generally known. The pressure to post
better returns ramped up dramatically with the expansion of the
hedge fund business. Put all that together and you know why people
stepped over the line, which they obviously did a lot. What I found
so interesting is that most of the people caught up in this stuff
had no idea what the consequences were. If you told me that if I
committed insider trading I could be put in jail for a decade, I
wouldn't do it. I think most of these guys who were caught had no
idea what the sentencing guidelines were. Yes, many were arrogant
because they didn't think they would get caught. But they also had
no idea that insider trading is treated as the equivalent of armed
robbery by the criminal justice system.
In telling the intertwined tales of David Slaine, Raj Rajaratnam,
Steven Cohen, et al, you are critical of the government's
priorities in prosecuting "victimless" insider trading cases versus
holding top executives at large institutions responsible for big
gambles that had negative effects on the broader economy. If
insider trading was sort of "decriminalized," what would that look
like in practice? Wouldn't traders just have to be quickly reined
back in with a new raft of regulations, after realizing they don't
have to worry about trades looking suspicious anymore?
By decriminalizing it, you wouldn't be giving insider trading a
free pass. The SEC can bar people from the business, which to me,
seems like the appropriate remedy to something that simply doesn't
add up to armed robbery, as the Justice Department treats insider
trading. It also frees the feds to focus on real white-collar
rip-offs. Remember, the insider trader isn't really hurting anyone,
Ã la Bernie Madoff. The person on the other side of the trade
would lose money anyway even as the person with the inside
information gains from his knowledge of what isn't public yet. I
don't think we should give cheats a free pass, but the punishment
should fit the crime. Does Raj Rajaratnam really belong in jail for
11 years? He's in jail as long as people who commit violent crimes.
congressional insider trading
? Do you see any hypocrisy in the politicians' actions?
, remember: Insider trading is hardly black-and-white-that's one of
the problems prosecuting it. It's a crime based on a series of
court rulings, which is why the congressional stuff, where public
officials trade on non-public legislative information, doesn't meet
the standard. If the government wants to expand the definition,
they should do so by first enacting a law, though I wonder how the
courts will deal with this. Insider trading is still very murky
(there are differing opinions on what really constitutes
"misappropriation" or stealing non-public information and trading
on it), and that's after years of court decisions.
What is the most important idea you would like for people to take
Circle of Friends
That as much as the government tries to make the stock market a
"level playing field," it isn't, that professionals will beat the
average investor every time, with or without inside information,
and that there is a
reason why the government has made insider trading such a big deal
in recent years. After the 2008 financial collapse, the feds needed
scalps from Wall Street; they couldn't bring charges against the
big bailed-out firms for many reasons, including they didn't
understand the complexity of bank balance sheets and how they could
be manipulated. All of a sudden they had this easy, sexy crime with
people like Raj on wiretaps doing stuff that had nothing to do with
the financial collapse but instead were guilty of "cheating the