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How this form of insider trading on RIM and Apple stock became so common

We're In...
By Chris Umiastowski on 19 Jun 2012 02:22 pm EDT
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There was a story published by Reuters today talking about a former AT&T executive who has pleaded guilty to conspiracy to commit wire and securities fraud.  Alnoor Ebrahim, 57, apparently got himself involved in a highly enticing and all-too-common illegal practice over the last few years.

Besides poor ethics, this boils down to heavy use of expert networks by hedge funds, and high compensation for experts who provide information to these hedge funds.

What is an expert network?  It's an organization consisting of hundreds or thousands of industry experts who offer their consulting services in return for pay.  Over the last decade the use of expert networks grew widely, and it became an easy way for experts (who already had a day job) to consult to Wall Street on topics that money managers wanted to learn more about.

The concept is logical.  If you're a semiconductor manufacturing expert at Intel, somebody at a Wall Street hedge fund may hire you to walk through details of a new technology being pitched by a small company claiming to have an edge over existing manufaucturing methods.  The Intel engineer wouldn't have to divulge corporate secrets to add real value to the Wall Street firm in terms of providing a professional opinion on a technology.  

But another (illegal) way to use expert networks was to pay corporate insiders for information pertaining to sales trends, product releases or some other sensitive information that would be valuable to a trader.  

In this case, Ebrahim admitted to giving up sales data of iPhone and BlackBerry handsets from AT&T.  Since AT&T was, at the time, the sole US carrier for the iPhone, this data would be highly meaningful to Apple's future stock price.  Same argument goes for RIM, because AT&T was a very significant BlackBerry seller.  It would be against AT&T's policy to divulge this information to anyone outside the company, and it would be illegal to use this information to trade stocks.

But the temptation is significant for people who have access to this kind of information and are participating in expert networks.  It's easy to get paid $500+ per hour of "consulting time", when all the hedge fund manager really wants is a couple of data points.  And I wouldn't be surprised if some consultants arranged larger (separate, outside) payments in return for their consulting services (aka insider information).

Being part of an expert network is not wrong.  It's a completely legitimate way to get paid for consulting.  Here's a perfectly good example.  Say you're running a large website pertaining to a particular technology savvy audience.  You may have proprietary data about user behavior, opinion polls, and more.  This is not insider information, but could be immensely useful to an investor conducting research on a topic.  

Obviously, selling proprietary data that you have no right to sell is going to get you in trouble.  Especially when such data will move the price of a stock when it is made public. It gives someone an unfair advantage in the market.  It's illegal.

22 comments

polytope

So basically the stock market is quite corrupt.

martinjdub

So we can blame Alnoor Ebrahim for our share prices? ;)

neteng1000

What? stock market corrupt? That's news to me....LOL

BB10FTW

Gordan Gecko did insider trading before it was cool. Gotta love Wall Street, it was a great movie. Nice article Chris, thanks for the break down.

G-bone

Tip of the iceberg...

dentynefire

Here's a perfectly good example. Say you're running a large website pertaining to a particular technology savvy audience. You may have proprietary data about user behavior, opinion polls, and more. This is not insider information, but could be immensely useful to an investor conducting research on a topic.

Sounds like you're commenting on Mobile Nations here Chris? Its okay. We want everyone to know BB isn't dead. Spread the word!

BerryRipe

This is just a needle in the hay stack. There's so much fraud/corruption in business, politics and religion.
I do admire the guy for coming clean. I honestly don't give a hoot about the stock market all that much but when will people just be and quit trying to play God.

Mamaluka

Usually, when you 'plead guilty' to a crime, you are seldom admired for "coming clean". More often than not, you are admitting guilt for something you got caught doing and that if you hadn't been caught, you would be sipping pina coladas on a beach yelling "feeling good louis" to your cohort on his yacht with jaime lee curtis in a bathing suit.

stackberry369

Jim cramer wants his brain back.lol

adamschuetze

Wait, you mean people with money and connections have an advantage over those who don't? And they're willing to use it to screw anybody in their path? *boggle*

NateFulton2010

Does anyone know what kind of legal ramification this might have impact on for RIM and Apple? Obviously, I don't believe anyone could provide an accurate amount of damages.

br14

Might help to support an action against naked short selling. There's a distinct smell of that around RIM shares.

All those financial blogs encouraging small investors to sell RIMM.

br14

Not much of a stretch from selling information to manipulating corporate strategy for personal gain.

If this guy was making a fortune selling data that indicated RIM sales dropping, there'd be a hell of an incentive to actively discourage the sale of BlackBerry devices, and promote Apple.

What is needed is real competition in the cell phone industry. Not just the corporate hegemony we see today in the market.

houshinto#IM

Chris you and the mods may want to check out the #$@%storm brewing in the forums with regards to this topic. While I'm impressed by the passion both sides it is kinda sad as to how the level of infighting is.

On the topic, it's pretty damning but the penalty is a slap on the wrist. For the potential millions that can be made on such proprietary information, and the high probability of never getting caught this is merely another example of saying one thing to the cameras but doing another under the table.

That's the stock market, believe it or not.

mmcpher

With due respect to Chris, I think it gets murkier still. This site is not one where there's daily trading in anonymous rumors from manufacturing insiders or from carriers. Many times there are posts here from the staff where you can tell they've bumped up against some line and they go no further. Maybe there were additional conversations or details, but those were not for public dissemination so the article or post leaves it at that. Where and when there are brain-storming articles, or when someone writing here is teasing out some trend from partial or rumored information, it is clearly presented as such.

There are other sites, however, that routinely trade in purported insider rumors, very often about sales and manufacturing decisions, or purported advanced figures on sales, right in the insider trading wheelhouse and those other sites disseminate those rumors with glee. And the more notorious among them are often picked up by the tech press and the rumors are repeated and amplified and there have been times when stock prices have impacted (dare we say manipulated) by such narrowly targeted rumors.

And it gets even more complicated when you have manufacturers and carriers leaking stuff for offensive purposes to undermine their rivals. Leaks are often suspiciously timed to coincide with earning calls, etc. One thing I had noticed in some of these problematic posts and in the corresponding tech press articles that picked up and commented on the rumors, were how often there was an expert or consultant at-the-ready to make a very detailed analysis on what should be an obscure topic (because at the time of its publishing, the information should be closely held by only a small group of people). Sometimes the analyst/consultant is the stalking horse for the publication of rumors, as when a highly-speculative "report" is publicized and sets off a brief stock-feeding frenzy.

tonyrenier

mmcpher,
If you read the financial press you see a much more suspicious mode of reporting.
1. Only partial stories are reported to cause a slant.
2. The timing is definitely coordinated with Quarterly reports.
3. The reporters are totally unfamiliar with the tech world.
4. Many reporters are amateurs who can sign up to give their opinions; these are then quoted on the major stock market websites.
5. I've watched RIM's stock for over a year and it is clear that the reporting is based on emotion not facts. One "reporter" even mentioned "hating" RIM! I still don't understand what that means.
6. I have suspected that RIM's stock has been manipulated for about a year now. Buyout, privatization, pure gain by shorting over and over? "BR" mentioned "naked short selling", it makes a lot of sense. Not sure of course.
My 1.5 cents

janeka

Why do I feel no one gives a flying f*ck because RIM name was included in this article?

Liquid_Revolver

RIM and the lack of WOW factor is the reason it will crumble nothing else. RIP RIM

litig8or98

Thanks Chris. I always enjoy your posts. Don't stop.

ckl_88

I have no respect for these people. Since everyone involved in the financial meltdown got away with it, I say we should make an example out of this guy.

I find it amazing how a country like Singapore can effectively enforce a no chewing gum or no spitting law... then it dawned on me that the punishment for doing these activities is public caning. This is a severe punishment that leaves you unable to sit or walk for at least a day - let alone the humiliation of being spanked in public.

Severe punishment is what we need. Personally, I would love to see these guys publicly caned.