Comments
Trust the US to come up with a name for everything from hurricanes to hush-hush operations to terminate terrorists.
In keeping with this tradition, they have come up with a name to cleanse Wall Street of insider trading and make it clean and green — Operation Perfect Hedge.
It is apparent that the name arose due to the fact that a perfectly organised hedging transaction can bypass rules and yet miss the eye of the regulator.
The chief of the FBI has stated that if you’re armed with that insider’s information, you can initiate the perfect hedge and you’re always protected — on the upside and on the downside.
Operation Perfect Hedge
Operation Perfect Hedge commenced in 2008 and is in the midst of declaring itself a success. It has resulted in some marquee insider trading cases being judged and some high-profile people being proved guilty of the offence — Raj Rajaratnam and Rajat Gupta being illustrative examples.
An expanding US investigation into insider trading reached the inner circle of a hedge fund — SAC Capital — when authorities charged Michael Steinberg, a 17-year veteran of the firm, with trading in advance of Dell and Nvidia earnings. He is the eighth employee of SAC, a $15-billion hedge fund, to be convicted in the six years since the FBI launched Operation Perfect Hedge. Civil charges brought by the Securities and Exchange Commission implicated an additional portfolio manager who also allegedly traded shares of Dell. The SEC alleges SAC and Sigma, an affiliate, made profits and avoided losses totalling $6.4 million.
The modus operandi appears to be simple — an analyst at Sigma passes on information that Dell earnings are going to be weak to Steinberg. The e-mail mentions the fact that the information is sensitive.
Another Sigma trader corresponds with Steinberg with a positive view of Dell and Steinberg asks him to compare notes with the other trader who had an opposite view.
Twenty four minutes after the notes were exchanged, the second trader began selling shares of Dell, thereby avoiding loss of $2 million. A similar strategy appears to have been followed in the case of Nvidia shares too.
In early March, SAC agreed to pay $616 million to settle insider trading charges without admitting or denying wrongdoing.
By now, it is obvious that insider trading is such a dangerous game to get into that even a supposedly harmless action can get you charged — on hindsight, one is sure Rajat Gupta repents making that call to Raj Rajaratnam and Steinberg repents asking the traders to compare notes.
SEBI Regulation
The Securities and Exchange Board of India (SEBI) formulated insider trading norms in 1992 which have been amended over time.
Price-sensitive information has been defined to pertain to periodical financial results of the company, intended declaration of dividends (both interim and final), issue of securities or buy-back of securities, any major expansion plans or execution of new projects, amalgamation, mergers or takeovers, disposal of the whole or substantial part of the undertaking and any significant changes in policies, plans or operations of the company.
The regulations state that to prevent the misuse of confidential information, the organisation/firm shall adopt a “Chinese Wall” policy which separates those areas of the organisation/firm which routinely have access to confidential information, considered “inside areas”, from those areas which deal with sale/marketing/investment advise or other departments providing support services, considered “public areas”.
Price-sensitive information is to be handled on a “need to know” basis, that is, it should be disclosed only to those within the company who need the information to discharge their duty.
As always, the necessary laws seem to be in place in India; it is in enforcement that we seem to come a cropper. Existing cases of insider trading in India have arisen because of specific information being given to SEBI.
The fact that you can get away from insider trading charges by signing a cheque seems to be egging on quite a few to continue the practice in some form or the other, and needs to be countered.
There can be no denying that Operation Perfect Hedge has been effective due to the use of wiretaps. If wiretaps were to be introduced in India, one can expect many skeletons to come tumbling out.
(The author is Director, Finance, Ellucian.)
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.