Showing posts with label Galleon. Show all posts
Showing posts with label Galleon. Show all posts
Wednesday, October 21, 2009
Rich Fools?...More Like Poor Buffoons
The NY Times has an interesting article this morning about the extent of Galleon's insider trading savvy, or lack thereof. In its final complaint against the now fully sunk fund, the SEC alleges that Galleon amassed a long position in AMD off insider information about the company's pending transaction with two Abu Dhabi entities. However, as the NY Times astutely notes, the SEC sweeps one small fact about these transactions under the rug: they ended up losing Galleon close to $30 million, an amount larger than all of the fund's alleged ill-gotten gains combined. The fact that Galleon didn't profit (and heavily lost) from certain material nonpublic information doesn't blow a hole in the government's case, but it does weaken it. The SEC should've just left the AMD matter out of the complaint altogether. After all, Judge Rakoff, no fan of the organization, may not be so keen to side with the SEC against a fund that on net lost $10 million from insider dealing.
Tuesday, October 20, 2009
A Ship of Fools?
First, I’ll preemptively apologize for the nautical allusion – yes, Galleon is a hedge fund named after a boat as basically every media outlet has realized, and yes, it is now sinking (couldn’t resist that last double entendre, sorry).
After reading the SEC complaint in full, I wanted to call attention to an earlier post about my surprise regarding the paltry size of the alleged insider trading. Noting that $20 million was an infinitesimal fraction of Galleon’s assets under management and Rajaratnam’s wealth, I gave three possible explanations for the activities. At the time, having not read the complaint, I forgot to mention a fourth possible cause – perhaps the companies in question were too small to permit large scale insider trading. As several insiders have found out, attempting to commit large scale fraud with small stocks is very stupid. The SEC isn’t run by rocket scientists, but they will catch you.
To be more specific, when people have insider information, they often try to maximize gains by trading options. As I noted in an earlier post, options provide leverage, magnifying wins and losses. If you know what’s going to happen to a stock on account of insider information, trading options therefore seems like a great bet – you’ll get the best bang for your buck. Indeed, it can be quite lucrative. However, in many cases, it can be a big red flag to the SEC. Many stocks don’t support very liquid options markets. This is to say, the open interest (number of existing options contracts on a stock) and volume are often very small, so it takes only a few extra trades to cause a big spike in activity. And the SEC will catch such volume spikes as Reza Saleh recently found out the hard way when he bought 9,332 Perot Systems call options on insider knowledge of a buyout.
So, returning to the Galleon case, I’m not that surprised that some of the reported gains were quite small. For example, options on Polycom (one of the companies in question) have very low open interest and rarely trade. The complaint alleges that one of the parties purchased 200 Polycom calls from April 13 to April 18, 2006 at $1.35 a piece. Now, this was a very small outlay (resulting in a profit of only $22,000), but anything larger could have tipped off regulators then and there since on average only about 200 calls trade per day in the stock.
But the same can’t be said for some of the other companies in the complaint. Google, for example, supports a much more liquid market. One of the parties purchased 566 put options in the two weeks leading up to Google’s 2007 second quarter earnings announcement. While this trade led to more than $500,000 in profits, the party probably could’ve put on much more of it without alerting regulators. By my estimates, roughly 7500 puts on Google exchange hands every day. Now I don’t know how the SEC’s volume spike algorithm works, but I see no reason why the party couldn’t have bought 500 puts (across strikes) per day without tipping off regulators. If the party had amassed 2500 puts in total, it would still probably account for less than a quarter of the open interest across strikes and would’ve made several million dollars more in the process.
Was this person just overly concerned about getting caught or simply a fool?
After reading the SEC complaint in full, I wanted to call attention to an earlier post about my surprise regarding the paltry size of the alleged insider trading. Noting that $20 million was an infinitesimal fraction of Galleon’s assets under management and Rajaratnam’s wealth, I gave three possible explanations for the activities. At the time, having not read the complaint, I forgot to mention a fourth possible cause – perhaps the companies in question were too small to permit large scale insider trading. As several insiders have found out, attempting to commit large scale fraud with small stocks is very stupid. The SEC isn’t run by rocket scientists, but they will catch you.
To be more specific, when people have insider information, they often try to maximize gains by trading options. As I noted in an earlier post, options provide leverage, magnifying wins and losses. If you know what’s going to happen to a stock on account of insider information, trading options therefore seems like a great bet – you’ll get the best bang for your buck. Indeed, it can be quite lucrative. However, in many cases, it can be a big red flag to the SEC. Many stocks don’t support very liquid options markets. This is to say, the open interest (number of existing options contracts on a stock) and volume are often very small, so it takes only a few extra trades to cause a big spike in activity. And the SEC will catch such volume spikes as Reza Saleh recently found out the hard way when he bought 9,332 Perot Systems call options on insider knowledge of a buyout.
So, returning to the Galleon case, I’m not that surprised that some of the reported gains were quite small. For example, options on Polycom (one of the companies in question) have very low open interest and rarely trade. The complaint alleges that one of the parties purchased 200 Polycom calls from April 13 to April 18, 2006 at $1.35 a piece. Now, this was a very small outlay (resulting in a profit of only $22,000), but anything larger could have tipped off regulators then and there since on average only about 200 calls trade per day in the stock.
But the same can’t be said for some of the other companies in the complaint. Google, for example, supports a much more liquid market. One of the parties purchased 566 put options in the two weeks leading up to Google’s 2007 second quarter earnings announcement. While this trade led to more than $500,000 in profits, the party probably could’ve put on much more of it without alerting regulators. By my estimates, roughly 7500 puts on Google exchange hands every day. Now I don’t know how the SEC’s volume spike algorithm works, but I see no reason why the party couldn’t have bought 500 puts (across strikes) per day without tipping off regulators. If the party had amassed 2500 puts in total, it would still probably account for less than a quarter of the open interest across strikes and would’ve made several million dollars more in the process.
Was this person just overly concerned about getting caught or simply a fool?
Monday, October 19, 2009
Drunken Sailor?
I was about to go into a several post-long detour on sales and trading performance in Q3 and 2009 as a whole. But, prone as I am to distractions, I am taking yet another turn off the highway. With all the attention that this whole Galleon insider-trading thing is getting, I thought I might as well put in my two cents. If you somehow haven’t heard about the matter, check out one of the billion articles that have been written over the last four days. Here is a link to the NY Times piece and for the more sexually adventurous, the WSJ article, titled Colleagues Finger Billionaires.
For those too lazy or conservative to read about fingering, here’s the brief overview: very rich and ostensibly successful hedge fund honcho gets in trouble for supposedly relying on an intricate network of other important people to obtain and profit off insider information. On the face of it, we have the standard insider trading theatrics – there’s the non-public information, the foul-mouthed characters, and the ill-gotten gains.
But something strikes me as rather odd about this affair. Galleon is a BIG hedge fund, with almost $4 billion in assets under management. Yet the numbers being thrown around here are extremely small. The government accuses Raj Rajaratnam (props to anyone who can pronounce that name, by the way) of illegally making $20 million. $20 million? Is that a joke?
Raj is a big dude, and not just in girth. The guy is listed on Forbes as having a net worth of $1.8 billion (which made him the 262 richest American) and producing a 21% return net of fees since 1997. Last time I checked, $20 million is about 1% of $1.8 billion and about 0.50% of $4 billion – in other words, a very small number in Raj’s life. So, he’d have to do a lot more insider trading to make a meaningful impact on his fund’s (and thereby his) bottom line. Why would somebody risk so much (in the way of jail time, ill repute, career suicide) for so little in the grand scheme of things?
I can think of three answers:
1) Mr. Rajaratnam thought he could get away with it either because the SEC wouldn’t catch him or because his case would be difficult to prosecute (it very well might be despite the preponderance of evidence against him).
2) He didn’t think what he was doing was truly illegal. The evidence suggests that the cast of characters involved certainly wanted to keep their operations quiet, but there’s a big difference between doing something sketchy and committing a crime.
3) He is an idiot, a drunken sailor at the helm of a large ship, who simply never weighed the costs against the benefits. Now, I’m not saying that you should engage in securities fraud when the potential benefits loom large, but there is clearly no reason to when they don’t.
For those too lazy or conservative to read about fingering, here’s the brief overview: very rich and ostensibly successful hedge fund honcho gets in trouble for supposedly relying on an intricate network of other important people to obtain and profit off insider information. On the face of it, we have the standard insider trading theatrics – there’s the non-public information, the foul-mouthed characters, and the ill-gotten gains.
But something strikes me as rather odd about this affair. Galleon is a BIG hedge fund, with almost $4 billion in assets under management. Yet the numbers being thrown around here are extremely small. The government accuses Raj Rajaratnam (props to anyone who can pronounce that name, by the way) of illegally making $20 million. $20 million? Is that a joke?
Raj is a big dude, and not just in girth. The guy is listed on Forbes as having a net worth of $1.8 billion (which made him the 262 richest American) and producing a 21% return net of fees since 1997. Last time I checked, $20 million is about 1% of $1.8 billion and about 0.50% of $4 billion – in other words, a very small number in Raj’s life. So, he’d have to do a lot more insider trading to make a meaningful impact on his fund’s (and thereby his) bottom line. Why would somebody risk so much (in the way of jail time, ill repute, career suicide) for so little in the grand scheme of things?
I can think of three answers:
1) Mr. Rajaratnam thought he could get away with it either because the SEC wouldn’t catch him or because his case would be difficult to prosecute (it very well might be despite the preponderance of evidence against him).
2) He didn’t think what he was doing was truly illegal. The evidence suggests that the cast of characters involved certainly wanted to keep their operations quiet, but there’s a big difference between doing something sketchy and committing a crime.
3) He is an idiot, a drunken sailor at the helm of a large ship, who simply never weighed the costs against the benefits. Now, I’m not saying that you should engage in securities fraud when the potential benefits loom large, but there is clearly no reason to when they don’t.
Subscribe to:
Posts (Atom)
