
The incredible stock-picking ability of SEC employees - jasonwatkinspdx
http://www.washingtonpost.com/blogs/wonkblog/wp/2014/02/27/the-incredible-stock-picking-ability-of-sec-employees/
======
jcrites
> Nester explained that before staff can work on an issue that involves a
> company, they have to sell any holdings of stock in that firm. As a result,
> he said, there shouldn't be any surprise that a sale would precede the
> announcement of an enforcement action.

Can I use this fact to detect upcoming potential investigations or enforcement
actions which may not be public knowledge, and use that to my advantage?

[Edit:] This also seems to have the unfair effect that SEC employees get an
"out" from previous investments in companies that the SEC is about to
investigate. Isn't that ultimately another form of trading on insider
knowledge, even if it's mandatory?

On the other hand, if SEC employees are not forced to sell, then their
holdings may diminish their impartiality. It seems like the only fair and
neutral approach is to require SEC employees to hold no individual stocks at
all during their employment - or any type of financial instrument issued by
organizations they might potentially investigate.

(Is this perhaps what the SEC means, that employees are forced to sell because
they've just joined the SEC? If they're forced to sell an individual
instrument only at the beginning of a specific investigation into a single
organization who issued the instrument, then that seems like a loophole.)

~~~
toomuchtodo
> On the other hand, if SEC employees are not forced to sell, then their
> holdings may diminish their impartiality. It seems like the only fair and
> neutral approach is to require SEC employees to hold no individual stocks at
> all during their employment - or any type of financial instrument issued by
> organizations they might potentially investigate.

The solution is blind trusts, with the additional cost picked up as part of
their compensation package. The way to guarantee impartiality is to remove any
chance of impropriety.

I would also settle for extremely common ETFs like the SPDR S&P 500.

~~~
JumpCrisscross
SEC employment is often preceded by time in the industry. This means a large
fraction of high-value employees are likely entering their roles with existing
holdings. Requiring immediate divestment for all SEC roles sounds extreme.

It makes sense that any _new_ investments made during one's time at the SEC
should be made into index funds or accounts managed at the independent
discretion of a non-SEC manager. But banning all SEC employees from holding
any individual stocks during their employment is a deterrent to recruiting.

~~~
toomuchtodo
But what do you with existing holdings? Do you "lock" them so the employee is
prohibited from dumping/purchasing them in the event of insider information?

~~~
JumpCrisscross
SEC employees should be able to sell at any time after review by their
supervisor and a compliance officer - this would treat the employees no
differently than the securities employees they regulate. I also agree with
mandatory divestment prior to an expected conflict of interest.

To incentivise against insider trading: anonymous public disclosure of all un-
forced stock sales by SEC employees. This would expose suspicious trades _ex
post facto_. In the event of prosecution or investor lawsuits (a) the name of
the employee would be unsealed during discovery and (b) the SEC, the employee,
and the supervisor and compliance officer who approved the trade(s) would
jointly share civil and criminal liability.

~~~
toomuchtodo
I believe we're in violent agreement!

------
steverit
The SEC's response: "Nester explained that before staff can work on an issue
that involves a company, they have to sell any holdings of stock in that firm.
As a result, he said, there shouldn't be any surprise that a sale would
precede the announcement of an enforcement action."

I don't know about anybody else, but this seems pretty plausible to me.

~~~
tlrobinson
If you change "sell any holdings of" to "short" that statement sounds absurd,
but they're roughly equivalent.

How about not allowing staff to hold stock in companies they might have to
deal with?

~~~
pseut
That would be "all companies."

~~~
tlrobinson
I was thinking certain employees could deal with certain sectors or something.

------
spikels
My two favorite government investing scams:

(1) Congress's insider trading exemption - Until recently legislators and
their staff were completely exempt from insider trading laws while they were
often privy to insider information[1]. It's no wonder they do so well in the
market. Too bad some minor restrictions recently were enacted - but no worries
they just got rid of them as soon as the noise died down[2].

(2) Tax-free portfolio rebalancing - Big shots like the Secretary of Treasury
often sell billions in stock without paying any capital gains tax. This allows
them to fully take advantage of the free step up in basis when they die. So
they can never pay anything on the fortune they made at Goldman Sachs[3].

Fuck these assholes!

[1] [http://www.thewire.com/politics/2011/11/hustle-
defuse-60-min...](http://www.thewire.com/politics/2011/11/hustle-
defuse-60-minutes-congressional-insider-trading-story/44952/)

[2]
[http://www.techdirt.com/articles/20130416/08344222725/congre...](http://www.techdirt.com/articles/20130416/08344222725/congress-
quickly-quietly-rolls-back-insider-trading-rules-itself.shtml)

[3] [http://www.celebritynetworth.com/articles/entertainment-
arti...](http://www.celebritynetworth.com/articles/entertainment-
articles/the-200-million-reason-henry-paulson-became-treasury-secretary/)

~~~
AjithAntony
As to the tax-free sale, unless I misunderstand, this is extremely limited and
far from "often". Few people will ever have the opportunity, it occurs once in
a lifetime, and it is offered as compensation for the forced liquidation of
one's entire stock portfolio to become a public servant.

~~~
spikels
Yes you get to sell all your stock in one company and buy a diversified
portfolio. Maybe you haven't heard but diversification is good. And NOT FREE
for everyone else. Do you understand the value of this?

In my view everyone should be able to do this under the ancient English law
principle of like-kind exchange. But in the US today it is "special people"
only.

To recap: Why are you taxed for something? Because they can tax you. There are
no principals just opportunity. Much like why did your car get broken in to.
Because they can.

------
Oculus
This is absurd. Why would we ever let _regulators_ of the market be active
participants in it. Certain jobs in the government require for one's assets to
be in a blind trust for there to be no conflicts of interest. If anyone in the
government is doing it, it should be the _SEC_.

~~~
devindotcom
If you read the article, the SEC states that the reason they sold is because
they were forced to by law, as they were soon going to being regulators of the
securities they were going to regulate.

However it does appear to be a good indication that something is coming down
the line if SEC people sell...

~~~
nostromo
They should be barred from changing any position they have the moment there is
a whisper of some sort of regulatory action against a company.

This policy is forcing them to act on non-public information, which is very
illegal for everyone outside of the SEC.

~~~
Oculus
Maybe allow for two options:

Option A: Blind trust with some capital gains incentives?

Option B: Ability to manage your own portfolio, but can't act on SEC+company
news until x hours after publicly disclosed?

~~~
bagels
How about C: They aren't allowed to trade at all.

~~~
mkartic
Isn't that a bit extreme? I'm not saying there should be implicit trust or
that there is no risk of insider trading, but still. Its not right to deny
them of all rights to have other sources of income apart from their job. I
mean, having to sell all their stocks of a certain company before
investigation is forfeiture enough.

My two cents,

D: Some sort of anonymized peer review of transactions? Maybe even automated.

------
sixQuarks
SEC employees should not be allowed to trade stocks, period! Fed chairman
abides by these rules, it's ridiculous that employees of SEC do not.

~~~
JumpCrisscross
In an ideal world. In practice the most qualified people for SEC roles have a
background in industry, and prefer to have a say on their portfolios.
Prohibiting discretionary trading (or worse, stock ownership) would likely
catastrophically restrict the pool of applicants to the clueless and
unqualified.

~~~
001sky
"catastrophically restrict the pool of applicants"

This is amusing, but false. This is similar reasoning to why CEO's should make
10-20million dollars a year, rather than say...$10MM/yr. There is actually no
shortage of people to be the CEO of any company (or the top rank in any
hierarchy) and truth be told, Boards of Directors could not tell the
difference for 9/10 candidates. As the saying goes, "graveyards are filled
with the people thought previously indispensible". And empirical examples
abound. Just imagine Apple without Steve Jobs, or Yahoo without whoever the
guy was before Marissa Mayer. The only thing keeping quality applicants out of
the SEC is power, presitige, and respect. There are many jobs that people work
for low pay (eg Academia) provided that their social status is secure.

~~~
ahomescu1
> Just imagine Apple without Steve Jobs

Ironically, Steve Jobs is the best counterexample, IMHO. He took a failing
company and propelled it to market leader, launching several great products
(the iPod, iPhone, iPad; disclaimer: I'm not a particular Apple fan and don't
own any of these devices, but I have to give credit where it's due). We'll see
where Apple is going from now on, but my bet is they're never going to have
huge hits like the iPhone again; instead, they'll just keep doing incremental
updates of their current products.

Another good example is Bill Gates. Regardless of the man's moral qualities
(or lack thereof), he was great at running Microsoft. After Gates left,
Ballmer has only been dropping the ball on everything except consoles. Apple
and Google are slowly but surely taking Microsoft down (how many people own
Windows Phones, versus Android or iPhones?).

It may seem easy to keep a profitable company going as usual, but it's really
hard to take a failing one or a startup and make it succeed.

------
mherdeg
Cool, so can you trade on this?

Specifically, is the SEC's turnaround time to Freedom of Information Act
requests fast enough that you could make a viable trading strategy out of "ask
for the last week's worth of trades and rebalance appropriately"?

------
jvm
Insider trading seems unfair. But after a lot of thinking and listening to
arguments on both sides, I now actually find the argument in favor of
legalizing insider trading fairly compelling. I'd suggest that anybody with
strong feelings against it take a little time to consider the arguments for.

The argument for has two levels:

1) The trade is a victimless crime. Given the way markets worse, the naïve
party would have bought or sold the asset anyway from someone else. Think
about how you buy stocks: you just call your broker and ask to buy at the
market price. If you do that and end up buying from an insider, you are no
worse off.

2) Insiders actually move the price in favor of the naïve party they trade
with. If a stock is being sold on the market $29 and the insider knows its
true value is $20, they must sell below the other offers (e.g., $28.99) to
make the trade. This is in favor of the buying party relative to the outcome
without the insider: the buyer will lose $.01 less per share. At large trading
volumes, insiders will actually move the market strongly in the direction of
the fair price, making all trades of that asset more fair.

Unfair though it may be, society at large does not benefit banning insider
trading, and allowing it would make stock market prices more accurate which is
actually probably a fairly strong benefit to society.

~~~
nostrademons
The victim is trust in the market. If you know that someone else may have
better information than you do, you get a "market for lemmings" situation
where everybody assumes that the only reason someone would sell a stock is
that they know it's going to tank, and so nobody buys. Liquidity collapses,
and with it, the market.

The SEC isn't intended to protect individual investors, it's intended to
protect the market as a whole. That's why they don't care when individual
people get screwed, only when people _get screwed to an extent that they won
't invest in the market_. People change their behavior based on what other
people do; without full public information, the result of that tendency is to
tend towards zero liquidity.

~~~
dnautics
forgive me if I don't shed any tears for 'trust in the market'. Shouldn't we
be more suspicious about the market? People blindly throw their money at the
hands of fund managers etc, which means our society is overleveraged on risky
propositions.

~~~
nostrademons
There's a lot wrong with the financial markets today, but I'm pretty certain
life would be significantly worse if they didn't function at all. I don't
think that most people realize the extent that our modern, industrialized,
highly complex society depends upon efficient capital markets.

You can order a TV off Amazon and have it shipped to your doorstep tomorrow.
That TV was probably assembled in Taiwan from parts made in China and Vietnam,
shipped across the Pacific, loaded onto a trailer, sent to an Amazon
warehouse, FedEx'd in a jet plane and driven to your house. The majority of
firms in that value chain are public companies; what they do is capital
intensive. Without functioning capital markets that money would've been used
to buy up city real estate and drive up rents.

------
JumpCrisscross
The paper [1] finds "at least some of these SEC employee trading profits are
information based, as they tend to divest (i) in the run-up to SEC enforcement
actions; and (ii) in the interim period between a corporate insider’s paper-
based filing of the sale of restricted stock with the SEC and the appearance
of the electronic record of such sale online on EDGAR."

On (i): SEC employees are required to divest of their holdings in a company
before working on an issue relating to it. The findings thus demonstrates an
alignment of ethics and private interests.

On (ii): there is potential for abuse. When an insider sells stock, the sale
must be reported electronically to the SEC via Forms 3, 4, and 5. When an
insider sells _restricted_ stock it is reported via Form 144. Form 144, unlike
Forms 3, 4, or 5, may be filed electronically _or by paper_ \- over 90% of
Form 144s are filed by paper. These paper filings are only available through
third-party data providers, e.g. Bloomberg, and even then at a delay from
filing.

[1]
[http://www.darden.virginia.edu/web/uploadedFiles/RajgopalSEC...](http://www.darden.virginia.edu/web/uploadedFiles/RajgopalSECtradingpaper.PDF)

------
tosseraccount
The TSP (fed retirement) plan has 5 basic funds: Large , Small, international
equities and corporate and government bond funds. Perhaps allowing a similar
mechanism to invest a private portfolio in these funds and allowing re
balancing once a year would be a good policy. Investments and withdrawals will
be weighted based on selected allocation.

~~~
TheBiv
Very good idea, and one that I hope they had brought to the table (I wasn't at
the table and I would love to know if you were). I have to imagine that
something like this was brought up as an option, and it was struck down due to
a counter argument that these are former stock traders and to disallow the
stock traders to do what they love to do, would not allow the SEC to get the
best talent.

------
erikpukinskis
Is it really that hard to do a t-test comparing the buys and the sells to find
out if the difference is statistically significant at this sample size? I'm
sure there are better tests, but that one is literally the first test you
learn in a statistics course. Are there no journalists at the Post who have
taken a basic stats course?

They could literally just punch in the 10 numbers (buys and sells for each of
the five events) into [http://studentsttest.com/](http://studentsttest.com/)
and get a result.

We should really figure out some way to enable more science students to pursue
journalism. What's the point of having thousands of brilliant scientists doing
research if journalists are just going to mangle it every time? Distribution
is just as important as production.

------
mkempe
Quis custodiet ipsos custodes?

The wealthier our societies, the more numerous and lucrative the government
positions, relative to the population median. At some point, the social fabric
is likely to rip in awful ways.

~~~
dragonwriter
> The wealthier our societies, the more numerous and lucrative the government
> positions, relative to the population median.

Evidence?

~~~
mkempe
The abusive stock-profits of these SEC employees is not an isolated event. The
enormous difference in salary levels and wealth accumulation around DC vs the
rest of the country over the last few years should be a clue.

Similar disparities in economic fate --between government employees and those
they perceive as subjects-- are visible in most Western European countries I
know well.

As our societies have gotten wealthier, governments have grown in
disproportion -- and opportunities for steady income (including very early
retirement) and indirect graft have increased.

~~~
notacoward
What a load of crap. While it is true that the number of government employees
tends to be higher in more prosperous countries (e.g. OECD), the total share
of wages going to government employees is lower and therefore the (relative)
wages per government employee must be _much_ lower. Check out table 3 on page
9 of this:

[http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-1806](http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-1806)

It's disgraceful that SEC employees seem to be engaged in insider trading, but
to extrapolate there to "government employees and those they perceive as
subjects" is quite literally insane.

~~~
mkempe
I think we're using different lenses. The WorldBank stats you reference are
very restrictive, being limited to central government employees in the 90s.
But today's actual government cost is more than that.

If we look at recent OECD and local numbers for what one would more
expansively consider the "public sector" the proportions are much higher in
e.g. Sweden [1] and Greece [2]. Further, I would suggest that to measure the
full impact of government on society, one should include the pension costs of
retired public sector employees (one of the major driver in the PIGS crisis in
recent years) as well as public works contractors (e.g. hundreds of millions
of dollars for recently failed IT projects in the US). One could also argue
that the cost of mass unemployment caused by government policies should be
factored in as well (e.g. contrast Spain and Germany).

[1]
[http://www.oecd.org/gov/pem/OECD%20HRM%20Profile%20-%20Swede...](http://www.oecd.org/gov/pem/OECD%20HRM%20Profile%20-%20Sweden.pdf)
[2]
[http://www.sant.ox.ac.uk/seesox/pdf/IordanoglouPatronageandP...](http://www.sant.ox.ac.uk/seesox/pdf/IordanoglouPatronageandPublicEmployment.pdf)

~~~
notacoward
"Different lenses" is a cute term for cherry-picking. Using Sweden as an
example is bad enough, since they're well known for having one of the most
"social democratic" governments in the world. Using Greece is even worse, and
I shouldn't even need to explain why. It's like using Iceland as the only data
point in a discussion of bank regulation, or Ukraine in a discussion of
nuclear safety. Also, the numbers for local government (including US states)
are likely to be even worse for your point. I challenge you to show that the
numbers measured _across the whole world_ (not just OECD and certainly not
just two outliers) have changed significantly.

It's probably quite reasonable to include pension costs. You also forgot to
mention the salaries of government contractors (especially military). On the
other hand, the numbers we have are already limited to people in the workforce
so adjusting separately for unemployment would be double-counting. Nice try.
When all reasonable adjustments are made, the results might show a slightly
greater advantage for government workers, but still _very_ far from your wild
claims about government workers getting super-rich off the backs of the rest
of us. Those remain utterly unfounded, and the burden is still on you to
provide more than a few shreds of pseudo-evidence.

------
jellicle
Just think about how good Mt. Gox employees must be in bitcoin speculation.

------
lutusp
This problem is trivially solved -- force new SEC hires to buy one or more
market index funds and put them in a blind trust for the duration of their
employment.

Historically, market index funds do as well as active portfolios (on average),
unless brokerage commissions and tax implications are included in the
assessment, in which case they do better (a fact proven by the now-famous WSJ
dartboard contest). So SEC employees would have a more profitable portfolio
than usual for the duration of their employment, and they would avoid even the
appearance of impropriety.

How is it that this obvious solution hasn't been put in practice?

------
Rangi42
Aren't the employees' sales a useful contribution to the stock market? They're
turning private knowledge about upcoming SEC actions into public information,
assuming that the public bothers to correlate stock sales with SEC employee
lists. (If either of those pieces of information isn't publically known, then
an SEC employee selling stock doesn't contribute any more information than any
random shareholder's sale.)

------
mikeyouse
Are we just going to ignore that this data only began to be collected in 2009,
at a stock market bottom? _All_ stocks have done well since then..

------
alexjfowler
Members of the sec could be required to register their trades (tested against
IRS records yearly to ensure 100% accuracy and eventually automated).

Now, place all holdings in a database table.

When a company is going to be investigated, select only sec employees who are
not listed as having holdings in that company.

My solution is obviously incomplete, but maybe it could be the basis for a
more robust system.

------
loumf
Seems like a pretty small sample size. Shouldn't we expect it to be less like
the overall market?

------
nazgulnarsil
6 out of 56 doesn't seem "incredible" to me.

------
notastartup
Isn't this like telling people to not to break the law but we can because we
are the law?

What stops a hedge fund manager from being extra nice to the boys that turn
Bud Fox?

------
boon
What do you expect in a perfect libertarian free market system??? Oh. Wait.

Sorry, I had to after reading all the bitcoin hate in other threads.

