Graduate School of Business,
Dept of Financial Contrapreneurship
Adjunct Prof. D. Levine
MBA Course: 501 : Elemental Insider Trading
Student Name____________________ Date____________________________
Instructions: Examinations will be disclosed to all students at the same time. No penalties will be given for students who manage to obtain the exam before disclosure (either in part or in whole) unless incontrovertible evidence can be established as to one's guilt. Perfect test scores will not be considered proof of cheating, however, students who ARE caught red-handed will be made an example of, sent before a disciplinary council and will have their Graduate Student Common Room privileges immediately suspended.
1. "More's Law" of insider trading hypothesizes the relationship between
(a) Trading Intel stock based upon your expert network and receiving a Wells Notice for inside trading
(b) The frequency one trades on inside information with the likelihood that one will be caught
(c) The relative size of one's typical inside trade to one's uninformed trade with the likelihood one will be caught.
(d) The amount of commission one pays his broker with the probability of receiving the first call before the first call
(e) The more money one has to the ability to better-lawyer oneself in order to avoid getting caught or weasel out if one is indicted
2. Insider Trading that contravenes existing laws is far from homogenous. It manifests itself in many shapes and sizes. Match the phrase from Column-A which most closely matches the transgression of the Perps in Column-B, by placing the correct name from Column-B in the center line:
--------A---------------------------B--------------
misappropriation____________________Vincent Chiarella
fiduciary breach____________________Raj Rajaratnum
an inside job_______________________Martin Lipton
sense of entitlement________________The Wily Brothers
friendly advice_____________________SAC/Matthew Martoma
back-scratching_____________________Joe Nacchio
Great Train Robbery_________________David Einhorn
organized conspiracy________________Martha Stewart
financial doping____________________Sam Waksal
opportunistic shoplifting___________Rajat Gupta
f*ck compliance!____________________Todd Newman
3. What statement most closely approximates the insider-trading equivalent of the US Military's "Don't Ask - Don't Tell" policy?
(a) "Your BEST ideas...Just give me your 'BEST, MOST CERTAIN, CAN'T LOSE IDEAS'"
(b) "You're paid to perform: how you do it is your own business"
(c) "Whatever you do, DO NOT bring me into your circle of trust...it's enough that I trust YOU"
(d) "We PAY to be the first call before the first call..."
(e) "The rules are: No tips by e-mail, no tips on recorded lines"
(f) All of the above
4. At which venue is one MOST likely to cultivate material public non-public information? Explain your answer.
(a) A Wall St Bridge Club
(b) The Cotton Club
(c) The Country Club
(d) The Harvard Club
(e) Business Roundtable
(f) Son's little-league game in Greenwich
5. Complete the following phrase: Dumpster diving as a means of gathering material non-public information is NOT illegal because:
(a) they were throwing the away the information anyway
(b) it is public in that anyone could, if they had the same grit and determination as me, dumpster dive
(c) Any simpleton knows to shred confidential information with a powerful cross-shredder if they don't want someone else to read it
(d) most companies don't own the dumpsters. The dumpsters are property of the landlord or the contracted refuse company
(e) It is already public as external lawyers, accountants, bankers, advisors, as well as cleaners, printers, personal assistants, legal & compliance, the CEO, and all manner of other staff members have already disseminated it to friends and family
6. Correctly identify the landmark US legal case aborting the legality of insider trading?
(a) Roe v. Wade
(b) Roe v. O'Hagan
(c) U.S. v. R Foster Winans
(d) U.S. v. O’Hagan
(e) State of NY v Bud Fox
(f) H Kwiatowski v. Angell, Bear Stearns et. al.
(g) State of Texas v. Johnson
7. Which of the following was accused of insider trading but did not or has not gone to jail NOR admitted guilt?
(a) Doug DeCinces and Eddie Murray
(b) Art Samberg
(c) The Wily Brothers
(d) Mark Cuban
(e) Ed Brogan
(f) None of the above
(g) All of the above
8. Complete the sentence with the statement that makes it most accurate:
"Trading in the shares of a stock BEFORE an article is to be published in order to profit from the anticipated reaction in the market is not insider trading because:
(a) it's always "old news"
(b) no one is their right mind would follow what a journalist says since everyone knows everyone who could have traded on it before publishing, will have traded on it.
(c) CNBC and friends of Jim Cramer do it all the time - and HE went to Harvard Law!
(d) The Supreme Court did NOT definitively rule such activity was "Insider Trading" (that decision was 4-4), rather it is mere "Fraud"
(e) the courts are full with more important media cases like, for example, the Duchess of Cambridge's boobs
9. Matthieu, a hypothetical portfolio manager at a large and very profitable hedge fund, discusses a potential trade with his detail-oriented boss. The trade is, for the avoidance of doubt, obviously based upon material non-public information murkily obtained from off-limits sources in ways that contravene existing laws, even by the dubious standards of expert networks. From the point of view of Matthieu's Boss, which of the following statements would most likely constitute "plausible deniability" in regards to the conversation:
(a) "My wife was calling me every two minutes nagging me with questions about whether bathroom #15 should be "periwinkle" or "talcum violet" so I really didn't hear a word he said"
(b) "Matthieu? Never heard of him"
(c) "I thought he was dead - at least he will be"
(d) "I got 700 people working for me and you know what....they all look the same to me"
(e) "When you have more than five kids let's see what YOU can remember"
(f) "We've got a firm-wide policy NOT to use material non-public information. I've got [insert double-digit number here] compliance officers, and [insert another double-digit number here] externally retained lawyers making sure that's the case. Experts we use to supplement our research sign agreements that they won't provide information in violation of existing laws. My guys know that, and they know better than to tell me if in a moment of weakness or greed, they transgressed. THWWAAACK! Ball in your court..."
10. You are a portfolio manager with a LARGE holding in a UK-based drinks company you like. The company and its bankers have privately contacted you wishing to sound out existing shareholders about "possible changes to the firm's capital structure to improve it's balance sheet", which you suspect, but haven't been definitively informed, can only mean the issuance of shares. They want to arrange a conference call. Do you:
(a) Sell your entire position, then ask questions later
(b) Sell your entire position, then inform compliance
(c) Join conference call, confirm suspicions, THEN sell your entire position
(d) Join conference call, confirm suspicions, sell entire position, AND go short
(e) Join conference call, confirm suspicions, sell your entire position crushing the stock, AND go short and then ask compliance if that was OK?
11. It's Christmas time. An old friend on the sell side "in a position to know" calls you bearing a "gift" and tells you that a major Japanese bank is planning a very very VERY large convertible bond issue that is in the final stages of preparation. Do you:
(a) politely decline the "gift" on the basis of ethics
(b) thank him by moving as much PB business as you can to the bank
(c) take down as much stock as your lines will let you borrow
(d) sell-short as much stock as you can whether you can borrow it or not
(e) sell-short as much stock as you can in ALL the Japanese banks whether you can borrow it or not
(f) All of the above
(g) None of the above
12. As a Member of Congress, sitting on important committees, you occupy a powerful position in the world of finance, and have a fiduciary responsibility to your constituents and the bodies you serve. You have just finished attending a briefing from the Chairman of the Federal Reserve Board and the Treasury Secretary about the impending disclosure to the public of the perilous state of a number of the largest banks. Do you
(a) Immediately sell all of your stock mutual funds
(b) Immediately sell all of your shareholdings of perilous banks
(c) Buy shares in Goldman Sachs
(d) Both A&B
(e) Both AB&C
(f) Do nothing yourself, but tip-off journalists that the Reps from the other party might just do something self-servingly unethical with the information despite there not being a prohibition against it
13. You are the Chief Executive Officer of a large listed technology company. You are a driven Type-A personality and you never like to leave any crumbs on the table. You know your quarter is going to be way light both on revenues and net, but that it's likely temporary. You still own mounds of stock and that it will get hammered (not least because some of your less-equified guys are talking to HFs through their Expert Network of choice). Do you:
(a) sell some stock in a disclosable transaction for "diversification purposes"
(b) collar the stock in an undisclosed transaction
(c) insure you have a 10b5-2 plan in place that allows you to automatically sell stock without regards to your material non-public information
(d) re-price your options AFTER the stock is crushed
(e) use your material non-public information of future revenues to team-up with some private equity friends and recommend to the board a buy-out, to take the company private, triggering your golden parachute and guaranteeing a golden handshake
14. Which of the following was neither indicted NOR served time on insider trading charges?
(a) Dennis Levine ;)
(b) Bill Hwang
(c) Ivan Boesky
(d) Raj Rajaratnum
(e) Arthur Samberg
(f) Michael Milken
(g) Sam Waksal
(h) I will pay $500 (cash) to my professor for the correct answer at the end of the exam
15. From a legal point of view, what form of communication leaves the least audit trail, and is safest for trafficking in material non-public information:
(a) Electronic mail
(b) Encrypted electronic mail
(c) Cell Phone
(d) Recorded Landline to recorded landline
(e) Cell Phone to recorded landline
(f) Cell phone to cell phone
(g) Pay-as-you-go Cell to pay-as-you-go cell
16. When speaking to a source of material non-public information, what is the MOST important question to ask:
(a) How certain are you?
(b) Where did YOU get the information?
(c) When is the event likely to happen?
(d Is this conversation being taped?
(e) Are you wearing a wire
17. With respect to insider-trading laws which of the following does NOT constitute material non-public information upon which to trade?
(a) Logging the number of cars in the parking lot of a mfg. co. during the graveyard shift
(b) Twitter tweets about a rumoured acquisition
(c) Yahoo Finance BBs discussion of whisper numbers
(d) Dumpster Diving
(e) Sell-side delivery of ideas via "Alpha-capture" systems
(f) None of the Above
(g) All of the Above
18. Which of the following is the most effective legal defense against spending time incarcerated for insider trading breaches:
(a) Ernest Saunder's "I can't remember, I must have Alzheimers defense"
(b) Peter Young's "I'm Crazy As a Coot" defense
(c) The audacious "I am a Time Traveller" defense
(d) The SAC "Trading is a very complicated Mosaic" defense
(e) The SAC "I trust my Subordinates" defense
(f) The Einhorn "I specifically asked NOT to be an insider" defense
(g) The Sergeant Shultz "I Know Nothing...NOTHING" defense
19. What is the best occupation (excluding being an HFM and getting The Call Before the First Call ) for obtaining material non-public market-moving information upon which to trade:
(a) Financial Printer
(b) Nanny to M&A Banker
(c) Limo Driver
(d) Corporate Finance Lawyer
(e) Auditor
(f) High-end Female Escort with HFM clientele
20. The most effective tool for law-enforcement officials to catch and prosecute insider-trading abuses is:
(a) wire taps
(b) interception of electronic communication
(c) Dissemination of "bogus but plausible" honeypot information
(d) surveillance of market transactions
(e) analysis of improbable HFM returns
21. Rank the ethical justifications for insider Trading in order of their validity (from most to least):
(a) insider trading profits "trickle down"
(b) they represent a source of charitable contributions
(c) if you don't do it, someone else will
(d) it's a victimless crime
(e) it increases market efficiency
(f) it is an important source of employment
(g) it's guaranteed by the 1st amendment
(h) it's legal in Liechtenstein and Mauritius
Extra Credit#1: (Use Separate page if required): You are a PM at a large HF. You are presenting your investment thesis to the Boss, a thesis that crucially is based-upon material non-public information - in this instance, a definitive earnings "miss", that you've obtained through one of your frat brothers. Construct a written case for pulling the trigger without incriminating yourself or entwining The Boss, but nonetheless conveys the opportunity and it's certainty.
Extra Credit#2: Please provide your professor a current real-world example of Material Non-Public Information including relevant dates, and actions, preferably gleaned from your work experience, family or professional connections, or friendly social network, that you believe will impact the company's stock price accordingly, and why and in which direction you think it will move. Please include the details and nature of your source material.(NB: If providing this information in writing creates a moral dilemma for you, then you are encouraged to leave a detailed message on my private answering machine, where the message will be promptly deleted).
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