Sometimes we like to talk about insider trading technique around here. This is the worst way to insider trade:
- Work in the information technology department of a big law firm that advises on lots of mergers.
- Find out about a pending deal from your work computer systems.
- Buy stock in one of the parties to the deal in your law firm 401(k) account.
- Realize that that’s dumb, your law firm might notice that sort of thing.
- Sell the stock out of your 401(k) account at a tiny ($90) profit.
- Then buy short-dated out-of-the-money call options on the same company in your personal account.
- Panic when, completely coincidentally, a lawyer at your firm isarrested for insider trading a week later.
- Immediately sell all of your call options, at a loss.
- Talk to your brother constantly on the phone during all of this, and make sure that he trades after each phone call.
The Securities and Exchange Commission and federal prosecutors are now accusing one Dimitry Braverman of doing all of this in early 2011, which is quite a long time ago. Really if you do that list of things, in that order, they should arrest you by lunchtime. The statute of limitations on that list of things should be a couple of hours. If the SEC doesn’t catch you immediately for doing that, then you should be allowed to go free, with your only punishment being the shame of having done that completely idiotic sequence of actions.
Fortunately for the SEC and prosecutors, though, Braverman (allegedly!) kept insider trading. After the lawyer at his firm was arrested, Braverman did cool it for a year or so, but eventually the lure was too strong. He was more careful when he went back to it, but not that much more careful. Basically he put his trading account in a friend’s name and used a fake Yahoo e-mail address. Somehow they still caught him. Probably because he was buying short-dated out-of-the-money call options on merger targets, that’s usually how it happens. At least he made money on his subsequent trading.
The lawyer at Braverman’s firm who was arrested, Matthew Kluger, is notable for having received the longest insider trading sentence in history, 12 years.1 He was sentenced in June 2012; Braverman was (allegedly!) insider trading again by November. The deterrent effect of that 12-year sentence apparently wasn’t great enough to keep Braverman from insider trading for more than six months, or even to keep him from trading short-dated out-of-the-money call options when he went back to it.
I’m mostly telling you about this because it is dumb, and I have a soft spot in my heart for dumb insider trading. But there also … like, I feel like there’s a statistical interest in this case?
Wilson Sonsini Goodrich & Rosati, the law firm that employed Braverman and Kluger, had two long-running insider trading schemes operating at the same time,2with no connection to each other. Kluger’s was mildly sophisticated; Braverman’s was unbelievably unsophisticated. (The 401(k)!) A month ago I wrote about a Massachusetts golf course that supplied the SEC with two unconnected insider trading conspiracies this summer. Also you may have heard of SAC Capital.
Are Wilson Sonsini and the Oakley Country Club and the artist formerly known as SAC Capital unusual dens of lawlessness? Or is it just, like, wherever you look hard enough, you can find multiple unrelated cases of insider trading? One or two hotbeds of insider trading might be an anomaly, but three’s a trend. And the trend seems to be that more people are insider trading than you’d think. More than I’d think, anyway. The strange thing is that they’re always doing it so badly.
1 Also notable is this quite riveting prison interview with him from July:
The social stuff is very complicated. You’ve got an incredibly diverse crowd. You’ve got everything from inner city drug dealers to — well, I live next door to a Harvard grad. I’m a Cornell grad. There’s a Stanford grad.
2 Barely: Braverman allegedly started in September 2010; Kluger was done by February 2011.