
The Empire of Edge - fragmented
http://www.newyorker.com/magazine/2014/10/13/empire-edge
======
jessaustin
_S.A.C. performed background checks on prospective employees, but it is not
known whether the firm detected this blemish in Martoma’s record. Of course,
S.A.C. could have learned of it and hired him anyway; forging a law-school
transcript and mailing it to twenty-three federal judges demonstrates
impressive comfort with risk._

It sounds as if they got exactly the kind of employee they wanted. Really,
though, how did he think he'd get away with that, in the late nineties? By
that point in time it was well-known that transcripts are provided by the
registrar's office, not by students. Maybe it would have worked in the
seventies...

The insider trading seems much the same. The sheer volume of those trades,
coming less than a week before significant announcements of previously-secret
information, was bound to throw up red flags. Did they have to short the
stocks as well?

If this is the sort of thing that gets caught, there are bound to be billions
of dollars of slightly subtler insider trading going unpoliced. The only thing
I can think of is that possibly the really egregious insider trading crowds
out the less aggressive sort. That's a reach though, and unless there's a good
reason to believe it's true, why do we even bother policing this?

~~~
revelation
There would have been no profit if it wasn't for the shorts, can't exactly
sell $750m worth of shares quickly and without losses.

~~~
jessaustin
My reading of TFA was that they liquidated their holdings _and_ sold the
stocks short. Of course short-selling can hedge a non-liquid position, but
that wasn't what was portrayed. After all, they didn't just not-lose; they
"won" big.

------
danielweber
_In the fall of his second term, he sent applications for judicial clerkships
to twenty-three judges. But when a clerk for one of the judges scrutinized
Martoma’s transcript, something looked off, and the clerk got in touch with
the registrar at Harvard. On February 2, 1999, the registrar confronted
Martoma. His transcript had apparently been doctored: two B’s and a B-plus had
all been changed to A’s. (A remaining B-plus, an A, and an A-minus were left
unchanged.) Martoma initially insisted that “it was all a joke.” But the
school referred the matter to Harvard’s Administrative Board, which
recommended expulsion._

 _He fought the decision vociferously, hiring a lawyer and taking two
polygraph examinations. There had been a misunderstanding, Martoma explained:
he had altered his transcript not for the judges but for his parents. He
brought the faked transcript home over winter break, and they were ecstatic.
(The panel evaluating his case noted that Martoma was “under extreme parental
pressure to excel.”) But, after showing his parents the transcript, Martoma
continued, he had to leave town abruptly, so he asked one of his younger
brothers to compile the clerkship applications that he had left out in his
bedroom. Unwittingly, the brother picked up a copy of the forged transcript,
and included it in the mailing for the judges. Martoma had discovered the
mistake before being confronted by the registrar, he insisted, and had sent
e-mails to the secretaries of two professors from whom he had sought
recommendations, asking them not to send the letters, “as I am no longer
looking for a clerkship._

This sounds like the stories that distant relations who have drug problems
make up, right down to a crazy amount of detail on things that aren't really
important.

------
trhway
>Cohen has announced that he will institute more robust compliance measures to
prevent insider trading, and he has hired the Silicon Valley security company
Palantir Technologies to monitor his traders.

nice twist. What smells worst, HBGary or Cohen? Does Palantir have the sense
of smell?

------
harmegido
It's my opinion that any active trader (of which hedge fund is a subset) that
consistently beats the market is engaged in some form of insider trading.

~~~
leroy_masochist
I'd agree with you to a large extent; a better, more precise way to put it
would be to say that long/short equity hedge funds have to be engaged in de
facto insider trading* in order to consistently generate enough alpha to
attract investors. It's just too hard to consistently be smarter than the
market on both your long and short bets, especially when it's a larger cap
stock whose float has constant inflows and outflows of institutional capital.

That said, there are other asset classes which, ipso facto, do not lend
themselves to insider trading, such as commodities and distressed debt. And
there are definitely many traders in these spaces who consistently post
outsized returns, which is why they get paid so much.

* I include in this definition not just stuff that will get you sent to jail, such as solicitation of MNPI from company employees, but also the more gray-area tactics commonly used by long/short analysts. Chief among these is speaking to "industry consultants" who give traders their "personal perspective" on certain companies, which in other words means paying them to relay the gossip they hear from their loose-lipped friends who work at various publicly traded companies.

~~~
bdkoepke
We had a manager at BP come and present at my University a few years ago on
commodity trading.

When he as discussing how BP consistently outperformed the market he didn't
call it insider trading directly. If I recall his words were "BP leverages our
superior market knowledge to outperform the market". In other words they had
significant non-public information due to the fact that BP owns a significant
amount of the commodities market. Supposedly the trading branch works at arms
reach, but they still have access to production information that isn't
available to the public...

One of my favourite university professors invited him to come and speak after
the BP Canada Trading Competition:
[http://people.ucalgary.ca/~sick](http://people.ucalgary.ca/~sick),
[http://haskayne.ucalgary.ca/bp-canada-trading-competition-
de...](http://haskayne.ucalgary.ca/bp-canada-trading-competition-details)

~~~
Mikeb85
You do know that insider trading rules don't apply to commodities, right?

Furthermore, BP produces the commodity they sell... They're going to make
money no matter what. But of course they're going to sell for the most they
can.

~~~
bdkoepke
That isn't completely true, there are some insider trading laws that apply to
commodities, in the US anyway. That is besides the point though, the fact that
it is legal doesn't mean that it isn't insider trading.

I was commenting on "And there are definitely many traders in these spaces who
consistently post outsized returns, which is why they get paid so much."

They outperform the market because they have superior market information...

And of course I realize that BP is going to sell their own commodity for as
much as they can. It is just that there are actually pretty strict rules
around how much information the trading branch is allowed to receive from the
parent company.

~~~
Mikeb85
See here:
[http://www.marylandbusinesslitigationlawyerblog.com/2012/09/...](http://www.marylandbusinesslitigationlawyerblog.com/2012/09/insider_trading_in_the_commodi.html)
And here: [http://ccrow.com/newsletters/insider-trading-in-
commodities-...](http://ccrow.com/newsletters/insider-trading-in-commodities-
and-the-eddie-murphy-rule/)

And all the rules are available online. Most of the rules pertaining to
commodities are to prevent fraud on the part of brokers, and the few that deal
with insider trading deal with government employees that have information
concerning subsidies, tariffs, environmental regulations, etc...

> They outperform the market because they have superior market information...

And because of their distribution, economy of scale, storage capacity (so they
can wait out the market to get a higher price), refineries, etc...

BP has the advantage of being able to extract oil from the tarsands, store it,
transport it, and refine it (their largest US refinery has been repurposed to
refine oil sands crude), and their traders expedite the sale of it.

BTW, I happen to be in the same neck of the woods, and have spoken to BP
traders here. Not sure what you're trying to read into, but what they do is
legal. 100%. Company information is not considered to be 'insider' information
for the purpose of commodities trading. Government regulations matter much
more to commodities, as do natural events.

~~~
bdkoepke
Hmm, perhaps it is just Canada then. I thought there was stricter regulation
around commodities trading in the US as well. In Canada we do have some
regulation around this though (at least in some provinces:
[http://www.e-laws.gov.on.ca/html/statutes/english/elaws_stat...](http://www.e-laws.gov.on.ca/html/statutes/english/elaws_statutes_90c20_e.htm))
The manager from BP was very adamant about the fact that little communication
was allowed between the traders and anyone else at BP.

Part of the issue is that BP also sells futures, and they have the ability to
influence the futures price. (That is relating to your comment about economies
of scale, storage capacity, etc).

I wasn't arguing about whether what BP is doing is legal or not. I was
commenting on the initial post which implied that some traders are capable of
making commodities trades based on some form of "skill". I was saying that
they outperform the market because they have non-public information that gives
them an advantage. (i.e. I was trying to dissuade laymen from thinking that
they can make a quick buck off of commodities).

Thank you for those articles though. The second one in particular seems very
interesting.

~~~
leroy_masochist
"Part of the issue is that BP also sells futures, and they have the ability to
influence the futures price."

BP is a huge company for sure, but it produces about 4mm bbl/d of oil and
world production is 90mm. So they definitely can influence the price, but they
don't exactly have the market cornered.

What they can do (and other companies with more of a trading mindset, like
Glencore, do really well) is utilize the information they get in real-time
from the entire length of their supply chain. This isn't non-public
information at all, and it'll make its way to the market within hours or days.
And it also pertains only to BP's own order/production/delivery flow, which is
tightly correlated to the market on a week-to-week, month-to-month basis but
not on an hour-to-hour basis.

------
acqq
Mods, please replace the linkbait title ("Biggest-Ever" "Scandal") that's
_nowhere_ on the linked page. The proper title for HN would be the title of
the article, "The Empire of Edge."

Other sources about the event covered by the article also don't use "the
biggest":

[http://online.wsj.com/articles/judge-allows-sac-capital-
insi...](http://online.wsj.com/articles/judge-allows-sac-capital-insider-
trading-lawsuit-to-proceed-1408035799)

"Mr. Martoma was found guilty in February of making illegal trades in what
prosecutors have called one of the most lucrative insider-trading schemes in
history."

Note " _one of_ the most lucrative."

Note that the amount involved is just $276 million:

[http://www.rediff.com/money/report/indian-origin-fund-
manage...](http://www.rediff.com/money/report/indian-origin-fund-manager-
indicted-in-insider-trading/20121225.htm)

Orders of magnitude less than what Bernie Madoff did:

[http://en.wikipedia.org/wiki/Madoff_investment_scandal](http://en.wikipedia.org/wiki/Madoff_investment_scandal)

"$64.8 billion"

~~~
azylman
From the article: 'The Department of Justice announced...that Cohen had
presided over insider trading "on a scale without known precedent in the
hedge-fund industry."'

~~~
acqq
It's still not the biggest ever scandal.

And the title on HN is still against the HN guidelines:

[https://news.ycombinator.com/newsguidelines.html](https://news.ycombinator.com/newsguidelines.html)

"use the original title, unless it is misleading or linkbait."

The current title here "Inside the Biggest-Ever Hedge-Fund Scandal" is not the
original content title (even if it is inside of the title tag in the HTML, as
karkarlawawa noted) and _is_ as linkbait as linkbait can be.

~~~
dang
I don't quite agree; the document title is a legit option for "original title"
and gets used all the time on HN. This title also isn't the worst linkbait
we've seen (or even seen today). But you're right that it is hyperbolic
and—uncharacteristically for the New Yorker—a bit breathy, and also not
something whose accuracy we're in position to verify, so we'll adopt your
suggestion. Hopefully that will not lead to another big off-topic discussion
the other way.

