I'm hard at work, as always, trying to build a foolproof insider-trading scheme. The central problem is that insider trading really has to be a two-person job: Anyone with regular access to inside information who also trades on it will be easy to catch, so you need an inside guy to get the information and an outside guy to trade on it. But how can you trust your partner? You can't, that's how, your partner will drop a dime on you in a second, even if you've been friends since Touro law school.1
So you should partner with a total stranger, someone whose name you don't even know. And you should avoid all electronic communication and just have in-person meetings. And just in case this stranger is wearing a wire, you should communicate by just writing tickers on Post-it notes and then eating the Post-its. Honestly, this plan is pretty great.
The only problem I've got left to figure out is, if I can't communicate with this stranger, how do I arrange where to meet him? Fortunately, game theory offers a canonical answer: If you need to meet a stranger, and you don't know where, and you can't communicate, you meet him under the clock at Grand Central.
Vladimir Eydelman and Steven Metro are almost, almost, almost my (alleged!) insider-trading heroes:
Metro typically tipped the middleman during in-person meetings at a New York City coffee shop, and the middleman later met Eydelman, who was his stockbroker, near the clock and information booth in Grand Central Terminal. The middleman tipped Eydelman, who was a registered representative at Oppenheimer and is now at Morgan Stanley, by showing him a post-it note or napkin with the relevant ticker symbol. After the middleman chewed up and sometimes even ate the note or napkin, Eydelman went on to use the illicit tip to illegally trade on his own behalf as well as for family members, the middleman, and other customers.
In another really elegant touch, Eydelman then (allegedly!) "returned to his office, typically gathered research relating to the target company, and then typically emailed the Middleman the research and/or Eydelman’s purported thoughts as to why buying the stock made sense," to make it seem like he had a basis for his subsequent trades other than inside information.
So: I love it! Just a couple of minor notes for next time, really just nits, but perhaps worth keeping in mind given that Eydelman and Metro were arrested and charged with civil and criminal insider trading today.
First, despite doing their business at the world capital of solving coordination problems, these guys did know each other. Or, rather, Eydelman and Metro actually seem not to have known each other, but they both knew the middleman: Metro from going to Touro College's law school with him in 1995, and Eydelman from "a party thrown by a mutual friend" in 2003, which must have been a wild party because the middleman "subsequently opened a brokerage account at Oppenheimer for which Eydelman served as the registered representative."
The fact that you don't know the middleman's name -- the Securities and Exchange Commission calls him "the Middleman," like a terrible superhero, while federal prosecutors call him "the CW," like a ... terrible superhero-focused TV network?2 I digress -- tells you all you need to know about how seriously he took the sacred bonds of Touro law school, and about the wire that he eventually wore to his meetings with his (alleged!) co-conspirators.3 The lesson, again: Never trust your partners.
My second quibble is ... actually I'm not sure what it is? Eydelman and Metro were brought down by the middleman, but how did the FBI find the middleman in the first place? The prosecutors and SEC keep a little mum about this, which makes sense; an air of mystery about their enforcement capabilities is good for deterrence.4
But, yes, whatever brought these trades to the attention of authorities would be a good thing to not do, if you are planning a lucrative career in insider trading. I don't know what it is, but to be on the safe side: Probably don't access deal information on your work computer at a major law firm such as Simpson Thacher, especially if you're not working on those deals!5 Probably don't insider trade as a registered representative at a major brokerage such as Oppenheimer or Morgan Stanley! Definitely don't insider trade in customer accounts, especially when you've forged the customer's signature on the discretionary trading form!6
Maybe above all, don't buy short-dated out-of-the-money call options in companies that are about to be acquired. I know it is tempting! It is the most efficient way to leverage your inside information: Pay a little money for premium, get a big reward when the deal is announced before your options expire.7 But the SEC knows that. And it can look at options trading -- which tends to be a lot more noticeable than stock trading. I suspect there's a reason that it keeps catching insider traders who trade in out-of-the-money call options as opposed to, I don't know, narrow-index ETFs.8 And if you do that, then all your good work at staying secret may be for nothing.
Maybe if your partner is your father, or the mother of your child, you can trust them, but that raises its own issues.
3 Points to them, by the way; the stuff they say on the wire is pretty innocuous, all in all.
4 Speaking of an air of mystery: The complaints list a bunch of M&A situations in which these guys allegedly traded, including one deal discussed in 2012 that never went through, for a company referred to as "Company A." The SEC complaint contains a certain amount of detail about Company A's stock price and options trading patterns; a fun (read: terrible) project would be to see if you can figure out what Company A is based on that data. (Here is a theory.) If you can, could Company A sue the SEC for disclosing confidential information?
5 Though "Metro told the Middleman that he did so in a way that he believed would leave no evidence that he had accessed the documents, which would possibly expose the scheme," according to paragraph 45 of the SEC complaint.
6 As Eydelman allegedly did, leading the customer to complain. See paragraph 240 of the SEC complaint.
7 Eydelman allegedly also sold put options to fund his premium. Even more efficient! Even dicier!
8 Right? Or like, a company is being acquired, and you trade in its close peer? I feel like insider trading law has not yet grappled with correlation.
To contact the writer of this article: Matt Levine at firstname.lastname@example.org.
To contact the editor responsible for this article: Tobin Harshaw at email@example.com.