See No Evil
An interesting discussion yesterday over at Zero Hedge, following up an opening comment from a supposed SEC employee:
The problem with attempting to push a market manipulation case is that it is very difficult to make such a case in a court of law with just the tape alone; intent has to be proven, which virtually requires e-mails or phone call logs, and what do you think the chances are of traders leaving a clear record of market manipulation in their e-mails? But I have doubts as to how much of this activity is overtly coordinated. Anybody who has traded the markets knows how traders get to know the patterns of other traders, even to the point of anticipating their actions; and silent coordination is a very real possibility, but nearly impossible to prove. But if you feel like you’re being taken advantage of because there are market participants with far more money than you who can move the market against you at their will, all I have to say is: welcome to the free markets.
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I realize that there’s a lot of anger over market manipulation, but the SEC can’t just dump fines on people because they think they aren’t being nice to other market participants. The law is very clear on what constitutes a violation, and cases don’t stick unless there is solid evidence. The current participants have very effective policies for staying within the gray areas without stepping into the black, and they have very good lawyers, and they have very experienced personnel who know exactly what they can get away with. If you want to grab a prop desk trader from a major firm who bought options before a news announcement and try and push an insider trading case against him, all I’ve got to say is: good luck, you’re going to need it. Unless you’re lucky enough to get an e-mail with his name and the name of a company insider on it, it’s not likely the case will even make it to trial.
Ok, I get it. It’s very difficult to prove any of these manipulation or insider trading cases unless you have hard evidence, so we don’t bother to try. Which means the problem will just get worse and worse as traders become emboldened by the lack of even a threat of any oversight whatsoever.
I found some of the follow-up comments from other readers quite entertaining — and they make a good point: If the SEC isn’t ever going to go after anybody, why do we have them?
From “FischerBlack”:
So, okay, let me sum up what we know so far:
When it comes to catching Ponzi schemers, you’re useless.
When it comes to catching manipulators, you’re useless unless the manipulation is so obvious a ten-year-old can see it (i.e., you’re useless).
When it comes to catching insider traders, you’re useless unless the insider trading is so obvious a ten-year-old can see it (i.e., you’re useless).Bottom-line, you’re useless.
But we already knew that, it’s just refreshing to see you admit it. You’re making excuses for why it’s haaaaaard to catch bad guys. And they’re the same excuses you always make. What do we pay you for? To build your resume before landing that seven-figure compliance job at GS?
And from “Trader Steve”:
As someone who worked in the markets on the floor for 25 years I can only say that your organization (not you) stinks.
Relative to the amounts traded I saw theft that was so blatantly plain that RICO could easily have been shown. Let me make a list of who was contacted and who didn’t care:
1- SEC
2- CFTC
3- Division of Enforcement CFTC
4- All heads of CFTC
5- Office of the Chairman of the SEC
6- Manhattan DA
7- Congressman at the time (Nadler?)
8 – FBI…although they did say if I wore a wire and got the proof they might pursue. Sorry, I like breathing.All are like cancer doctors…they can’t cure and they can’t kill. So in the final analysis, what good are you? You’re good for nothing but catching a secretary do an insider trade for $5,000. Self-regulation stinks. But when it is void from the government what do we have? We have oligacrchs that go further, and further, and further in their theft and they never stop until the market is closed or ruined. We get an occasional show trial.
Congratulations…you collect a check at least and will have your job during a depression. At least you can help your own families while the public is fleeced. For the rest of Americans your office is worse than useless as your ommission fosters the fraud. God forbid you should actually pursue a case like this one.
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Madoff pretty much wrote to them in response to their questions–with a non-answer and no proof he wasn’t running a ponzi scheme. What was done? Zero. Nada. Zip.
Cramer is on tape on TV admitting he’s done some interesting (and illegal) trading.
Zip, nada, nothing. ZEROES.
Comment by Maria — 6/27/2009 @ 12:25 pm
Interesting comments, for sure. I’ve basically come to the conclusion that the SEC is, as Jim Grant puts it, an “irrelevant institution”.
Investors should have avenues to legal protection against fraud and wrongdoing, but do we need an SEC-type agency to ensure access to legal protection through courts/arbitration? As the post above recalls, the SEC could not even address the more infamous frauds that were years, decades in the making.
Comment by David — 6/27/2009 @ 4:56 pm
The problem, David, is that if the SEC is indeed an “irrelevant institution”, then we, as small individual investors, are in deep do-do. The big boys have a lot more money, a lot more influence and access to a lot more information than we do — and it seems that they have the government on their side, or in their pockets, depending on how you want to look at it — and they will spend their lifetimes simply taking our money away from us. Which is what I believe they have been in the process of doing for a number of years now.
If the market becomes nothing more than a rigged casino, then there is no point in participating.
As the BMWife said to me today, they’ll go after Martha Stewart for a couple hundred grand. But someone force feeds them mathematical proof that Bernie Madoff can’t possibly be doing what he said he’s doing — with billions and billions of dollars — and they don’t even lift a finger.
When Goldman Sachs IS the government, and vice versa, we’ve got big problems.
Comment by BMB — 6/27/2009 @ 7:40 pm
Just to clarify: do you feel you would not be able to speculate profitably in the absence of a regulating body like the SEC (assuming you still had reliable access to courts & other means of resolving disputes that might arise)?
I know that the sway of big operators and their pools, manipulations were a part of what kept most of the public out of common stocks in the early 1900’s, so I think I know what you mean when you talk about the rigged casino effect.
Comment by David — 6/28/2009 @ 12:36 pm
Let’s just say this: without any sort of regulation as to what can or can’t be done in the markets, those with the most money, influence and information are going to have a huge advantage over the little guy. Even with proper regulation, the big boys are going to have an advantage. I understand that. All I ask is that the rules be enforced for everybody, and that would help provide a more level playing field.
Trading is hard enough. You don’t need to have the deck stacked against you on top of it.
Comment by BMB — 6/28/2009 @ 12:50 pm
I agree with that. Ideally, everyone should have equal protection from fraud (through courts, etc) & equal access to whatever means are in place for settling disputes.
I’ve heard arguments for and against the SEC or similar outside regulator. Won’t get into it here, but here are a couple of items on the subject I am currently reading/revisiting:
http://slopeofhope.com/2009/06/the-outrageous-sec.html
http://mises.org/story/3273
Comment by David — 6/28/2009 @ 2:54 pm
Geee BMB… You had better stay out of the precious metals market. Not only don’t they regulate, the manipulators get backing from the Treasury.
Comment by EDN — 6/28/2009 @ 5:18 pm
An interesting comment from one of the ‘victims’ of the SEC, from the SOH link provided by David in #6.
Comment by BMB — 6/28/2009 @ 5:34 pm
@EDN and what would you call what is happening with the financials today? Did they not just get HUGE government money (FED) and did that money go to new loans? No. I’m fairly certain much of it was used to push the stock market (ie their own prices up so that they could dump more stock on the market.)
Comment by Maria — 6/29/2009 @ 9:43 am
BMB, thanks for pointing to that comment last night. Very interesting – and appalling. Seems the SEC is not really “looking out for the little guy” so much as it is sticking it to them.
Comment by David — 6/29/2009 @ 12:30 pm
That’s what it looks like, doesn’t it? Go after the little guys — but let the big boys do whatever they want. After all, when you leave the SEC, you might be looking for a job at one of those big firms someday…
Comment by BMB — 6/29/2009 @ 12:38 pm