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JP Morgan: Legal insider trading?

NoStateofMind

Diamond Member
Oct 14, 2005
9,716
6
76
Whistleblower exposes insider trading program at JP Morgan

Legal insider trading in three easy steps, brought to you by JP Morgan and the SEC

KEVIN WILSON, MARIA CHRISTINA PADRO, JULIAN ASSANGE & staff
Monday March 17, 2008

A confidential memo obtained by Wikileaks shows that not only has the U.S. Securities and Exchange Commission created an insider trading loophole big enough to drive a truck through, but that Wall Street is taking full advantage of it, establishing 'how-to' programs and even client service divisions to help well-heeled clients circumvent insider trading regulations.

Most of us think of insider trading as illegal. It allows those with inside knowledge to tilt the playing field, with the small investors invariably losing to the privileged few. Unfortunately for the small investor, the big boys get to play by different rules, and it has all been made legal, thanks to the SEC.

In 2000 the SEC promulgated Rule 10b5-1. The new Rule was designed to address the confusion caused by a series of court decisions that had left investors uncertain about what constitutes insider trading. Rule 10b5-1 was designed to "clarify" what constitutes illegal insider trading.

But top Wall Street houses were not to be deterred from advantaging their big clients at the expense of their small ones. Wall Street firms like JP Morgan found loopholes in Rule 10b5-1 that allowed them to continue trading on inside information "legally." Indeed, JP Morgan has gone so far as to set up an entire 'selling program' within its Securities division to help their clients profit from the loophole.

Documents obtained earlier this month by Wikileaks from JP Morgan Private Bank, which subtitles itself as "World class solutions for wealthy individuals and families", show the firm has a dedicated '10b5-1 Selling program,' along with a 'dedicated 10b5-1 team' to help its clients take advantage of the loophole.

Here's how it works:

1. An insider client transfers all or a portion of their company stock into a JP Morgan Securities Inc. brokerage account.

2. The insider then develops, in conjunction with the 10b5-1 team, a 'phased, pre-planned sales program to be executed at either market or specified prices'.

3. Depending on the information available to the insider (but not the public), the insider can decide whether to execute the sale or not.

By gaming the system this way, JP Morgan teaches insiders how to use their knowledge to create a rigged market, one in which it is the "house" that always wins, and the small investor that always loses.
Can't say I am really surprised. With insider trading and government backing, how can you lose? But this type of corruption will not stop, it will continue and the taxpayer will fund it.

EDIT: I tried to download the PDF but the "server not found" error comes up.
 

LegendKiller

Lifer
Mar 5, 2001
18,261
68
86
I read this a few days ago. It's nothing unethical. It's essentially portfolio immunity, which is a common practice in which risk is reduced through derivatives. 10b5 wasn't created as a loophole, nor are they abusing one. They are allowing people without insider information to protect the prices of their assets.
 

Phil21

Golden Member
Dec 4, 2000
1,015
0
0
Er.. am I reading this completely wrong then? How can this NOT be classified as an "insider trading" loophole?

From what I gathered, it goes something like this:

I tell my bank to do the following on a schedule, depending on share prices.

1. On Jan 1 if share is more than $25 sell 10,000 shares
2. On Feb 1 if share is less than $20 buy 10,000 shares
3. On Mar 1 if share is more than $28 sell 5,000 shares
etc.

Then, at any time I can simply tell my banker "hey, you know that Jan 1 trade? Yeah.. don't do that one please" if the prospects don't look good.

Seems pretty much like a loophole to me. Give me a calculator, and a few days and I'm certain I could work out a "fool proof" plan to make a decent amount of cash. Even if I don't make a dime, my risk is essentially zero as I never have to execute a bad trade...

Or, perhaps I'm completely misunderstanding?
 

wetech

Senior member
Jul 16, 2002
871
6
81
Originally posted by: Phil21
Er.. am I reading this completely wrong then? How can this NOT be classified as an "insider trading" loophole?

From what I gathered, it goes something like this:

I tell my bank to do the following on a schedule, depending on share prices.

1. On Jan 1 if share is more than $25 sell 10,000 shares
2. On Feb 1 if share is less than $20 buy 10,000 shares
3. On Mar 1 if share is more than $28 sell 5,000 shares
etc.

Then, at any time I can simply tell my banker "hey, you know that Jan 1 trade? Yeah.. don't do that one please" if the prospects don't look good.

Seems pretty much like a loophole to me. Give me a calculator, and a few days and I'm certain I could work out a "fool proof" plan to make a decent amount of cash. Even if I don't make a dime, my risk is essentially zero as I never have to execute a bad trade...

Or, perhaps I'm completely misunderstanding?

That's not quite how it works. Take a look at this link and search for "Written Trading Plans" and then read that section.

Link


Once you call in and cancel the order for Jan 1, you've terminated the original plan. Which is legal, even if you possess non-public insider info:

15. After the written trading plan described in Q&A 11(a) has been in effect for several months, the person terminates the selling plan by calling the broker and canceling the limit order.
(a) Does the act of terminating a plan while aware of material nonpublic information result in liability under Section 10(b) and Rule 10b-5?

No. Section 10(b) and Rule 10b-5 apply "in connection with the purchase or sale of any security." Thus, a purchase or sale of a security must be present for liability to attach. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975).
So you need to make an actual trade to be guilty of insider trading, which makes sense.

If you still wanted to make the other trades, you'd have to enter into a new plan. The rules say that you may only enter into a new plan if you don't possess insider info.

(c) Does canceling one or more plan transactions affect the availability of the Rule 10b5-1(c) defense for future plan transactions?

The cancellation of one or more plan transactions would be an alteration or deviation from the plan, which would terminate that plan. The Rule 10b5-1(c) defense would be available for transactions following the alteration only if the transactions were pursuant to a new contract, instruction or plan that satisfies the requirements of Rule 10b5-1(c). See Release 33-7881 at n. 111 and Answer 14, above.
To me, this doesn't seem any different then any other insider trading rules. Having to state that they're not in possesion of insider info when starting one of these plans is the same as having to state it when doing a regular trade.




 

ericlp

Diamond Member
Dec 24, 2000
6,079
186
106
Money is like gravity.... The feds will protect any of the big wigs at all cost... Even if they have to take it from the little guys... The game is rigged in their favor!

Your corrupted tax dollars at work!
 

BrownTown

Diamond Member
Dec 1, 2005
5,314
0
0
Originally posted by: ericlp
Money is like gravity.... The feds will protect any of the big wigs at all cost... Even if they have to take it from the little guys... The game is rigged in their favor!

Your corrupted tax dollars at work!
Do you have any proof of this cocnernign the topic in question or is this just some rheteric you are trying to post? I mean I'm poor and not exactly happy about that situation, but I'm not sure where you (or someone at WikiLinks) are qualified to decide if this constitues insider trading...
 

smack Down

Diamond Member
Sep 10, 2005
4,507
0
0
Originally posted by: BrownTown
Originally posted by: ericlp
Money is like gravity.... The feds will protect any of the big wigs at all cost... Even if they have to take it from the little guys... The game is rigged in their favor!

Your corrupted tax dollars at work!
Do you have any proof of this cocnernign the topic in question or is this just some rheteric you are trying to post? I mean I'm poor and not exactly happy about that situation, but I'm not sure where you (or someone at WikiLinks) are qualified to decide if this constitues insider trading...
What the hell you might as well break out the chewbacca defense. ladies and gentlemen of jury if your not a doctor can you really decide if that corpse is dead.
 

smack Down

Diamond Member
Sep 10, 2005
4,507
0
0
Originally posted by: LegendKiller
I read this a few days ago. It's nothing unethical. It's essentially portfolio immunity, which is a common practice in which risk is reduced through derivatives. 10b5 wasn't created as a loophole, nor are they abusing one. They are allowing people without insider information to protect the prices of their assets.
Right, Let says I make a plan to buy 10000 shares the day before earning come out. Get my insider info that implies that the price of the shares is going to drop so I cancel my order. Do you really expect anyone to believe your crap when you say that isn't insider trading.
 

MadRat

Lifer
Oct 14, 1999
11,607
3
76
Slashdot covered this about as much as it is going to be discussed. I invite you to read their commentary.

Joe Public: That's bull****!!!!!!!!!!!
Investors: Its ethical, legal, and fully within our rights to exercise these options...
 

Phil21

Golden Member
Dec 4, 2000
1,015
0
0
Thanks wetech, makes a lot of sense.

IMO, still a loophole. Could care less if it's technically legal - it shouldn't be. Unless we're going to allow insider trading.

The scenario is still largely the same.. I setup a trade on date X, and using insider knowledge just decide to cancel it or not depending on if it likely make money.

Granted, it still takes some luck to MAKE money. However, there is almost zero downside to it at all (e.g. no risk) other than (I presume) brokerage fees of some sort.
 

Phil21

Golden Member
Dec 4, 2000
1,015
0
0
Just to add...

If these sorts of trades are allowed (e.g. "a trading plan") and not considered "actual trades" there is likely absolutely no means to enforce this. As, as etech stated, it's not an *actual* trade - thus, you cannot be guilty of insider trading.

Basically IMO the banking system is looking more and more like a trip to the casino - with the odds possibly stacked far in your favor if you happen to be a "whale".
 

JS80

Lifer
Oct 24, 2005
26,297
4
81
So how is this insider trading?

By gaming the system this way, JP Morgan teaches insiders how to use their knowledge to create a rigged market, one in which it is the "house" that always wins, and the small investor that always loses.
Is the writer retarded? Stock market is not a zero sum game. Small investors aren't affected at all by insider trading. In fact insider trading should be legal.
 

Fern

Elite Member
Super Moderator
Sep 30, 2003
26,916
172
106
Originally posted by: Phil21
Er.. am I reading this completely wrong then? How can this NOT be classified as an "insider trading" loophole?

From what I gathered, it goes something like this:

I tell my bank to do the following on a schedule, depending on share prices.

1. On Jan 1 if share is more than $25 sell 10,000 shares
2. On Feb 1 if share is less than $20 buy 10,000 shares
3. On Mar 1 if share is more than $28 sell 5,000 shares
etc.

Then, at any time I can simply tell my banker "hey, you know that Jan 1 trade? Yeah.. don't do that one please" if the prospects don't look good.

Seems pretty much like a loophole to me. Give me a calculator, and a few days and I'm certain I could work out a "fool proof" plan to make a decent amount of cash. Even if I don't make a dime, my risk is essentially zero as I never have to execute a bad trade...

Or, perhaps I'm completely misunderstanding?
The people/execs that work for big company's are allowed to sell the stock they either purchased or acquired through a stock option plan.

By (almost) everyone's definition here that would always constitute insider trading.

You can't prevent these people from selling their stock. And yes, they get to pick when and at what price they sell.

While I'm sure there are details I'm ommitting, such sales must be disclosed so everyone else knows what the "insiders" are doing with their stock holdings.

Fern
 

glutenberg

Golden Member
Sep 2, 2004
1,942
0
0
Originally posted by: Fern
The people/execs that work for big company's are allowed to sell the stock they either purchased or acquired through a stock option plan.

By (almost) everyone's definition here that would always constitute insider trading.

You can't prevent these people from selling their stock. And yes, they get to pick when and at what price they sell.

While I'm sure there are details I'm ommitting, such sales must be disclosed so everyone else knows what the "insiders" are doing with their stock holdings.

Fern
Management and large shareholders have to file Form 4s that list out their company holdings including derivatives. Every time there's a change in balance whether it's a sale, purchase, or transfer, they have to file one. On top of that, the option plans are disclosed in the proxy statements that should list what the company's employee stock option plans are.

The rule was basically meant to force management to only sell there stocks on set dates. The loophole for management, I suppose, is that they could delay delivering bad news until the period after their options vest. Of course, if they sell right before the release of bad news, they can still be held viable for withholding information. That's where the securities class action industry comes in. There's really no perfect way to handle the situation outside of not allowing management ownership of company stocks, which is unrealistic.
 

JS80

Lifer
Oct 24, 2005
26,297
4
81
Originally posted by: MadRat
Explain yourself JS80.
You need an explanation on how the stock is not zero sum or why I think insider trading should be legal?
 

spidey07

No Lifer
Aug 4, 2000
65,481
4
76
Originally posted by: glutenberg
Originally posted by: Fern
The people/execs that work for big company's are allowed to sell the stock they either purchased or acquired through a stock option plan.

By (almost) everyone's definition here that would always constitute insider trading.

You can't prevent these people from selling their stock. And yes, they get to pick when and at what price they sell.

While I'm sure there are details I'm ommitting, such sales must be disclosed so everyone else knows what the "insiders" are doing with their stock holdings.

Fern
Management and large shareholders have to file Form 4s that list out their company holdings including derivatives. Every time there's a change in balance whether it's a sale, purchase, or transfer, they have to file one. On top of that, the option plans are disclosed in the proxy statements that should list what the company's employee stock option plans are.

The rule was basically meant to force management to only sell there stocks on set dates. The loophole for management, I suppose, is that they could delay delivering bad news until the period after their options vest. Of course, if they sell right before the release of bad news, they can still be held viable for withholding information. That's where the securities class action industry comes in. There's really no perfect way to handle the situation outside of not allowing management ownership of company stocks, which is unrealistic.
I had blackout dates where I couldn't sell/buy and they were driven by when quarterly reports were released.

So there is no "they can buy and sell when they want".
 

MadRat

Lifer
Oct 14, 1999
11,607
3
76
Originally posted by: JS80
You need an explanation on how the stock is not zero sum or why I think insider trading should be legal?
No, you made a general claim linking two disimilar ideas as one. Explain it.
 

Fern

Elite Member
Super Moderator
Sep 30, 2003
26,916
172
106
Originally posted by: spidey07
I had blackout dates where I couldn't sell/buy and they were driven by when quarterly reports were released.

So there is no "they can buy and sell when they want".
Thanks, I did not know thta.

Is there some period begining before the reports are issued that ends just after they are issued?

Makes sense, it would prevent those with "earlier" knowledge of the report's info from benefiting unfairly.

Fern
 

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