Editor’s note: This article was first published in October 2014, as a news piece about SEC charges filed in September 2014. The outcome of the case is not reported and should not be taken as current.
In May 2014 we wrote about a young man who had made a lot of money betting against Herbalife the day before Bill Ackman’s famous presentation, in which he questioned the legitimacy of the company’s business.
At the time the figure being reported was around $20,000, but in the end the young man’s profit came to $47,000. Not bad for a trade that lasted only a few days.
Since we recently looked at the different kinds of white-collar crime, here is a clear example of how the justice system, at least in the United States, deals with them.
The SEC has charged this young man and his roommate with insider trading. According to the regulator, the roommate, who worked at Pershing Square Capital, told him that his boss, the fund manager Bill Ackman, was about to give a presentation that would send Herbalife’s share price tumbling.
There would be nothing illegal in that so far, except that the young man allegedly used the information to open a short position on Herbalife the day before the presentation, in December 2012. That speculative bet earned him a profit of $47,100.
Now he has been formally charged and will have to pay a penalty of $47,100, exactly the amount of the profit he allegedly made through fraud.
However, according to FoxBusiness, neither the Pershing Square employee nor the young “winner” has admitted the charges, and their lawyers will fight the penalty on the grounds that it was an investment that just happened to coincide with the presentation.
The truth is that it is too much of a coincidence for someone to land the windfall of their life the day before an event that only Bill Ackman’s own staff knew about, and for one of those staff members to happen to share a flat with him. That is probably one coincidence too many.
Although we do not have all the details, it seems the roommate who passed on the confidential information no longer works at Pershing Square, and he has stained his record and his reputation for any future job on Wall Street.
This is what happens when you make money this way and do not cover your tracks properly. Whatever anyone says, insider trading is one of the most common and frequent practices in the financial markets, but it is also the hardest to prove.
In this case, even though the amount is tiny for a crime of this kind, it is not hard to prove because the two men lived under the same roof. Had that not been the case, the young man would be enjoying his $47,000 right now and nobody could accuse him of anything other than being very lucky.
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