A reconstruction of the crime scene. Photographer: Jin Lee/Bloomberg.
A reconstruction of the crime scene. Photographer: Jin Lee/Bloomberg.

Here's a delightful piece of regulatory police work. The Securities and Exchange Commission brought a case today against Lawrence Robbins, a former accountant and current independent film producer who seems to have funded his films by insider trading ahead of corporate takeovers.

It alleges that Scott Allen, who worked at a human resources consultancy, found out about some pending takeovers, and he told his friend John Michael Bennett, and then Bennett told his friend and business partner (in film production), Robbins. Bennett and Allen pleaded guilty to criminal insider trading a while back, while Robbins -- who was one further step removed from the source of the inside information -- settled a civil SEC case today by agreeing to pay back about a million dollars without admitting or denying the accusations.

Like a lot of SEC insider trading complaints, you can read this one as a how-to guide for insider trading though, I mean, you could also just not do that. You are free to be a law-abiding citizen. I will do the former but purely for entertainment purposes, this is not legal advice, or illegal advice I guess, don't actually do any of these things.

Obviously Rule No. 1 of insider trading is that if you're an insider -- like an HR consultant on a merger -- you shouldn't trade. You'll get caught. So you tell your friend, and your friend trades, and then he hands you a bag of cash. Division of labor! These guys got that part down: Allen never traded a share, says the SEC, and Bennett paid him with bags of cash.*

Also, you don't tell your friend stuff on a recorded phone line. These guys managed that, though they did occasionally communicate on un-recorded phone calls, which is also sub-optimal, since the SEC can cite phone records showing that Allen called Bennett on days that he learned new information.**

Most important, you keep your hand-offs of bags of cash secret. Really, though, this seems like it should have worked:

For example, on July 1, 2008, Bennett withdrew $5,200 from a Citibank branch located near his office at 10:52 am. Allen swiped his Metrocard at the 47-50 Rockefeller Center subway stop (the subway stop closest to Allen's office) at 12:36 pm and then again at the 59 Street Columbus Circle subway stop (the subway stop closest to Bennett's office) at 1:54pm. Also on July 1, 2008, Allen had an appointment on his Outlook Calendar for 1 pm entitled "BR @ 1," and Bennett had a $106.80 credit card charge at Blue Ribbon Sushi, a restaurant located in the Time Warner Center at Columbus Circle.

I like it! The temptation to write "Secret Insider Trading Tip-Off Meeting & Bag of Cash Handoff" on your Outlook calendar is no doubt strong, but Allen successfully resisted it. And one does think of the subway as being pretty anonymous. Next time I guess buy a $10 Metrocard with cash?***

Of course, nobody thinks the SEC will be reconstructing his mass transit trips, and generally the SEC won't be. The problem here is that these guys violated one of the most important insider trading rules, which is, don't trade in a way that makes it obvious you are insider trading. What that means is: Don't buy out-of-the-money short-dated call options.**** You know Company X is getting bought for $25 next week? Great, buy some Company X stock. Don't put on a giant bet that only pays off if Company X is getting bought for $25 next week:

In an account at Merrill Lynch, Robbins purchased a total of 2,351 out-of-the-money call options between Friday, February 29, 2008 and Thursday, March 6, 2008. Specifically, Robbins purchased: (i) 125 May $17.50 call options and 75 May $15 call options on Friday, February 29; (ii) 1,100 May $20 call options on Monday, March 3; (iii) 751 May $20 call options on Wednesday, March 5, 2008; and (iv) 300 May $20 call options on Thursday, March 6, 2008.

All of the call options Robbins purchased had a strike price above Millennium's share price, which never closed at a price above $14.11 between February 29 and March 6. The $20 strike price for all but 200 of these call options was more than $5.50-more than 35%- above the highest Millennium share price traded during this time frame. In total, between February 28 and March 6, 2008, Robbins invested over $46, 100 in Millennium call options and stock.

They look at that stuff you know. I at least almost always come away from reading insider trading complaints thinking "boy these guys are dumb"; even the ones who are tricky enough to put the SEC to some police work still blow themselves up by trading like insider traders. Not that many way out-of-the-money call options trade, especially just before mergers, and if you're going to look for insider trading that's where you start.

One possible interpretation of the evidence is that insider traders are dumb, as a class, which is a possibility that you should take seriously. But another possibility is that regulators are really only equipped to catch dumb insider traders.***** "Round up the usual out-of-the-money call buyers," they say after each merger is announced. Easy pickings, but not necessarily central to protecting the fairness of our financial markets etc. etc. etc. etc. etc.

Possibly further evidence of these guys' dumbness:

"Robbins plotted with his business partner to perpetrate an insider trading scheme that enabled him to invest a portion of his illegal profits in their film production company,” said Sanjay Wadhwa, Senior Associate Director for Enforcement in the SEC’s New York Regional Office.

Nonononononono. You take your illegal profits and you invest them in an estate in a non-extradition country. Not in, say, a movie whose tag line is "Lying Is Easy, Love Is Hard." That's a good way to lose all your profits. Also, the tag line isn't great for your defense.

* Actually the SEC isn't clear on how the cash was packaged, unlike in other cases, where there are photos and detailed descriptions of the cash packaging.

** For instance:

Similarly, on February 28, 2008, Allen sent an email to a colleague indicating that Takeda "raised the tender offer price to $25." That day, Allen travelled from New York to Atlanta, and, at 10:13 pm, there was a phone call placed from Allen's home number (in Atlanta) to Bennett's cell phone lasting approximately nine minutes. Shortly after ending his call with Allen, Bennett called Robbins's cell phone from his cell phone. This call lasted approximately three minutes.

*** Like, wait, does the MTA track Metrocard use and associate it with a credit card? Or did they only catch these guys by saying "hey can we look at your Metrocard for a minute?"? Or what?

**** Especially if you've never traded options before.

***** And SAC Capital, but that's a special case.