Johnson, a former managing director of The NASDAQ Stock Market, with insider trading on confidential information that he misappropriated while working in a market intelligence unit that communicates with executives at listed companies about impending public announcements that could affect their stocks. Joseph F. Yves Benhamou, a medical researcher overseeing a clinical drug trial.
Former Law Firm Technology Manager and Brother-in-Law - SEC charged a former information technology manager at a Delaware law firm and his brother-in-law with insider trading on confidential information about impending mergers and acquisitions by the law firm's clients. Benhamou tipped the hedge fund manager with non-public negative details about an experimental drug ahead of a public announcement by the company that manufactured the drug. Self, Jr. Goldfield, a former hedge fund manager, with insider trading in advance of an announcement that AstraZeneca would acquire MedImmune, Inc.
One of the defendants was the head of a research arm at Banco Santander, S. Flanagan, with insider trading in the securities of several of the firm's audit clients. Through their positions on the company's Board, the Wyly brothers knew that the company had decided to put itself up for sale. The SEC separately charged a former Microsoft employee who later worked at Pequot for allegedly tipping the firm and Samberg with non-public information about Microsoft's earnings.
The traders used coded e-mail messages in an attempt to conceal their unlawful trading.
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Gowrish and Adnan S. Zaman, former employees at major global financial institutions, and two of their friends in a serial insider trading scheme to profit on highly confidential merger and acquisition information. A total of 34 defendants have settled the SEC's charges. He served on the U. Midway and gained expertise in accounting and supply-chain aspects of technology.
Twenty Years of Wall Street on Main Street
Paul Dublino, who lives near Orlando, Fla. Parmigiani a friend. Dublino says his old Navy buddy impressed him with his intelligence and honesty. Dublino says. He tells it how it is. View all New York Times newsletters. Parmigiani resigned from active duty in , went to college on the G.
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He joined Lehman in At that time, Wall Street research was under a microscope. Eliot Spitzer, then the New York attorney general, had exposed how analysts routinely slanted research to win lucrative investment banking business. They all promised to wall off research operations from other parts of their business. Parmigiani says he was asked to break those new rules. Lehman bosses, he contends, told him to write research that would support investment banking business — a violation of the Spitzer settlement. He says he was warned not to make negative comments about companies, even when he thought they were merited, lest he antagonize corporate executives.
Most alarming, Mr. Parmigiani says the Product Management Group often delayed the announcements of recommendation changes for no apparent reason. On March 30, , Mr. Parmigiani had been scheduled to meet with a series of hedge fund clients, including Moore Capital, to discuss his research. In an e-mail to Mr. Parmigiani, Mr. While Mr. Parmigiani did not learn precisely what Mr. Demark meant by that e-mail, it fueled Mr.
Chris Boehning, a lawyer at Paul Weiss, said his client, Mr. Demark, would not comment. Boehning said. That same day of the e-mail, Mr. Parmigiani said, another salesman told him that he had received a message about an imminent industrywide downgrade and had to start alerting clients. Before long, Mr. Parmigiani and his superiors butted heads. He recalled Stuart Linde, then director of United States equity research, prodding him to be positive in his analysis, to help ensure that the deal got done.
When he questioned whether this followed the rules handed down in the Spitzer settlement, Mr. Linde took offense, he said. But he says he stood his ground. Linde, now director of United States equity research at Barclays Capital, declined to comment. A Barclays spokesman said Mr.
Linde had never received a subpoena from the S. For Mr. The next morning, he sent his upgrade to the research committee, which agreed that he should discuss Amkor on the squawk box at 10 a. But before he could speak, Amkor stock jumped in unusually heavy trading. He accused firm officials of distributing his upgrade ahead of time. He filed a wrongful-termination case in May , which was eventually settled for an undisclosed sum. The check was signed by Richard S. Fuld Jr. Waning Interest at the S. Unable to find work on Wall Street, Mr.
Parmigiani took his story to the S. The next Monday, an enforcement attorney called back and invited him to conduct a conference call with S. A two-hour conversation ensued, during which he described his experiences at Lehman. Then, that April, S. He spent a day with four enforcement lawyers. They were shocked. Was it allocating capital to its most productive uses? At first, like most economists, he believed that trading drove market prices to levels justified by economic fundamentals.
If an energy company struck oil, or an entertainment firm created a new movie franchise, investors would pour money into its stock, but the price would remain tethered to reality. The dotcom bubble of the late nineteen-nineties changed his opinion. Between June, , and March, , Woolley recalled, the clients of GMO—pension funds and charitable endowments, mostly—withdrew forty per cent of their money. During the ensuing five years, the bubble burst, value stocks fared a lot better than tech stocks, and the clients who had left missed more than a sixty-per-cent gain relative to the market as a whole.
After going through that experience, Woolley had an epiphany: financial institutions that react to market incentives in a competitive setting often end up making a mess of things. And the outcome was a complete Horlicks. One is the role of financial intermediaries, such as banks. Rather than seeking the most productive outlet for the money that depositors and investors entrust to them, they may follow trends and surf bubbles. These activities shift capital into projects that have little or no long-term value, such as speculative real-estate developments in the swamps of Florida.
Both impose social costs on their own, but in combination they create a perfect storm of wealth destruction. Woolley originally endowed his institute on dysfunctionality with four million pounds. By British standards, that is a significant sum. The institute opened in —Mervyn King, the governor of the Bank of England, turned up at its launch party—and has published more than a dozen research papers challenging the benefits that financial markets and financial institutions bring to the economy.
Dmitri Vayanos, a professor of finance at L.
In the nineteen-seventies, Schlosstein worked on Capitol Hill as an economist before joining the Carter Administration, in which he served at the Treasury and the White House. In the eighties, he moved to Wall Street and worked for Lehman with Roger Altman, the chairman and founder of Evercore. Eventually, Schlosstein left to co-found the investment firm Blackrock, where he made a fortune. Part of what has distinguished the U.
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Ultimately, that drives down the cost of capital in the U. Still Schlosstein agrees with Woolley that Wall Street has problems, many of which derive from its size. In the early nineteen-eighties, Goldman and Morgan Stanley were roughly the size of Evercore today. Now they are many, many times as large. In a private partnership, the people who run the firm, rather than outside shareholders, bear the brunt of losses—a structure that discourages reckless risk-taking. Big firms, however, have to take on more risk in order to generate the sorts of profits that their stockholders have come to expect.
This inevitably involves building up their trading operations. Some kinds of trading serve a useful economic function. One is market-making, in which banks accumulate large inventories of securities in order to facilitate buying and selling on the part of their clients. The bank would then make a series of trades in the oil-futures markets designed to cover what it would have to pay American if the price of fuel rose.
Banks often design complicated trading strategies that help a customer, such as a pension fund or a wealthy individual, circumvent regulatory requirements or reduce tax liabilities. They redistribute it—often from taxpayers to banks and other financial institutions. One is proprietary trading, in which they bet their own capital on movements in the markets.
However, it is not yet clear how the rule will be applied or how it will prevent some types of proprietary trading that are difficult to distinguish from market-making. If a firm wants to place a bet on falling interest rates, for example, it can simply have its market-making unit build up its inventory of bonds. Schlosstein picked out the growth of credit-default swaps, a type of derivative often used purely for speculative purposes. At the height of the boom, for every dollar banks issued in bonds, they might issue twenty dollars in swaps. By late , the notional value of outstanding credit-default swaps was about sixty trillion dollars—more than four times the size of the U.
Each time a financial institution issued a swap, it charged the customer a commission. But wagers on credit-default swaps are zero-sum games.
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For every winner, there is a loser. In the aggregate, little or no economic value is created. Since the market collapsed, far fewer credit-default swaps have been issued. But the insidious culture that allowed Wall Street firms to peddle securities of dubious value to pension funds and charitable endowments remains largely in place.
On Wall Street, this was the accepted way of doing business.
The expertise needed to win at stock picking is measured in years, not days
The big banks insist that they have to be big in order to provide the services that their corporate clients demand. They have cash-management needs all around the world. They have capital-market needs all around the world. We can meet those needs. In Brazil, Citi helped Petrobras, the state-run oil company, to issue stock to the public; in the United Kingdom, it helped raise money for a leveraged buyout of Tomkins, an engineering company.
The biggest mistake Citi and other banks made during the boom, he said, was coming to believe that investing and trading on their own account, rather than on behalf of their clients, was a basic aspect of banking. Its investment-banking arm, which has grown rapidly over the past decade, still accounts for about three-tenths of its revenues close to twenty billion dollars in the first nine months of this year and more than two-thirds of its net profits upward of six billion dollars in the same period. And within the investment bank about eighty cents of every dollar in revenues came from buying and selling securities, while just fourteen cents of every dollar came from raising capital for companies and advising them on deals.
Many banks believe that trading is too lucrative a business to stop, and they are trying to persuade government officials to enforce the Dodd-Frank bill in the loosest possible way. Morgan Stanley and other big firms are also starting to rebuild their securitization business, which pools together auto loans, credit-card receivables, and other forms of credit, and then issues bonds backed by them.
There have even been some securitizations of prime-mortgage loans. I asked John Mack if he could see subprime-mortgage bonds making a comeback. I say that because it gives tremendous liquidity to the markets. A share of stock in a company on the Nasdaq is a very liquid asset: using a discount brokerage such as Fidelity, you can sell it in seconds for less than ten dollars. A chocolate factory is an illiquid asset: disposing of it is time-consuming and costly.
The classic justification for market-making and other types of trading is that they endow the market with liquidity, and throughout the financial industry I heard the same argument over and over. Banks provide liquidity. But liquidity, or at least the perception of it, has a downside. The liquidity of Internet stocks persuaded investors to buy them in the belief they would be able to sell out in time. The liquidity of subprime-mortgage securities was at the heart of the credit crisis. Home lenders, thinking they would always be able to sell the loans they made to Wall Street firms for bundling together into mortgage bonds, extended credit to just about anybody.
But liquidity is quick to disappear when you need it most. Everybody tries to sell at the same time, and the market seizes up. The recent crisis cost about ten per cent of G. It made tackling climate change look cheap. In the upper reaches of Wall Street, talk of another financial crisis is dismissed as alarmism. Now that Morgan Stanley and Goldman Sachs, the last two remaining big independent Wall Street firms, have converted to bank holding companies, a legal switch that placed them under the regulatory authority of the Federal Reserve, Mack insists that proper supervision is in place.