It seems like no week goes by without another action by the SEC alleging insider trading or other misconduct by members of the securities industry. This week was no exception.
According to a litigation release issued Feb. 17, 2012,the SEC has charged John Kinnucan and his Portland, Oregon-based expert consulting firm, Broadband Research Corporation, with insider trading. The SEC complaint (the allegations of which have to be proven in Court) alleges that Kinnucan and Broadboard tipped off clients with material, nonpublic information they obtained from "prohibited sources" inside publicly traded technology companies. The clients were allegedly portfolio managers and analysts at prominent hedge funds. In addition to the civil case, Mr. Kinnucan was arrested and charged with one count of conspiracy to commit securities fraud, one count of conspiracy to commit wire fraud, and two counts of securities fraud.
Insider trading appears to be an epidemic on Wall Street. According to the Wall Street Journal, 36 hedge fund managers have been convicted or pleaded guilty to insider trader charges. The most prominent case involved Raj Rajaratnam, the founder of Galleon Group, a hugely successful hedge fund, who was convicted in May 2011 on all 14 counts securities fraud and conspiracy, based on insider trading allegations. The government alleged that this scheme generated over $63 million in illegal profits and avoided losses for Galleon.
I find it intriguing that well-educated, successful people would engage in this conduct. It raises these questions: If hedge fund managers have the secret mojo that permits them to obtain outsized returns without taking commensurate risks, why do they have to resort to illegal conduct? Does greed alone explain a willingness to engage in criminal conduct and risk a lengthy term in prison?
A study at a Swiss University reported in Der Spiegel may provide a sane explanation for insane behavior. The study found that stockbrokers behaved more egotistically, and were more willing to take risks, than a group of psychopaths who took the same test. The brokers appeared to be motivated not just by greed, but by a desire to achieve a competitive advantage. One of the researchers likened the conduct displayed by brokers to seeing their neighbor had the same car so "... they took after it with a baseball bat so they could look better themselves." Scary stuff.
Previously, I was of the view brokers were just emperors with no clothes, pretending to have a "market beating" skill that doesn't exist, in an effort to justify what they do for a living.
Whatever the reason for this conduct, you don't want to be a part of it -- or them.
Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read and The Smartest Portfolio You'll Ever Own. His new book, The Smartest Money Book You'll Ever Read, was published December 27, 2011.The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.