The Cityboy Column - Insider Trading

Here's the latest from Cityboy.

Why do people take an instant dislike to bankers ? I’ll tell you why... because it saves time. And if there’s one thing that really gets people’s goat about Cityboys, it’s insider trading.

It upsets Main Street that a bunch of minted jokers choose to supplement their already hideously large pay packets by trading illegally in shares on information that only they are privy to. It also confirms the general public’s absolutely valid suspicion that the City and Wall Street are close-knit clubs, dedicated to making their members as much cash as humanely possible as quickly as possible.

This week a former vice president of a Californian chipmaker became the 10th person to plead guilty to charges of insider trading in the ongoing Galleon hedge fund case. The fun and games related to what is allegedly the biggest insider trading case in US history looks likely to keep public interest in this white collar crime running for some time.

During my twelve year tenure as a City analyst, it became clear that insider trading was ‘rife’ (the word used by FSA head John Tiner in 2006). For example, all five UK utilities that were acquired during my last three years in the City (Scottish Power, Viridian, awg, Kelda and South Staffordshire) experienced such an extremely rapid rise in their share price that they were obliged (probably by the Takeover Panel) to reveal publicly that they had received a ‘preliminary approach’ by another company wanting to buy them.

Any dramatic share price appreciation like this obviously results from an unusually large amount of stock being bought in a short space of time. So every time a company makes this kind of announcement (and they’re pretty damn frequent these days!), it suggests the possibility that there's been some serious insider trading going on. If there were any justice in the world, every single person or firm whose buying had pushed up the share price in the day or two before these announcements were made should the subject of an investigation by the Financial Services Authority.

However, there's a major problem getting evidence to convict insiders, and hence the number of successful prosecutions over the last decade can be counted on one hand. Even if the FSA had definitive proof that a notoriously loose-tongued corporate financier involved in a specific takeover had a candle-lit dinner with some greedy toe-rag the night before the latter purchased shares in the target company, it would be hard to get a conviction.

If there were no witnesses or tape recordings, how can it be proved that they talked about nothing more innocuous than which one of the Pussycat Dolls floats their boat ? That’s why Martha Stewart’s insider trading conviction was the exception that proves the rule, and why most insider traders can sit at home counting their ill-gotten gains as happy and innocent as O J Simpson.

Insider trading is like a German joke - it’s no laughing matter. It’s also not a victimless crime. Every time some scallywag uses his inside knowledge to make a fast buck, the sucker he bought his shares off suffers as a result of no longer owning shares that would have benefited from the premium that a predator is willing to pay. And since some of these schmucks can be people running your pension or ISA, these insider traders are stealing directly off you!

Geraint Anderson is author of ‘Cityboy - Beer and Loathing in the Square Mile’. His words of wisdom can be found on www.cityboy.biz

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