Elemental Insider Trading - Mid-Term Exam

Mid Term Examination
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).

Storting Socks

Quickly scanning Wednesdays' Abnormal Returns, I saw a link Tadas culled entitled "How To Efficiently Sort Stocks" which as a quantitatively-oriented investor, thought might be of interest given Berk's provocative though now dated, paper Sorting Out Sorts (or his JoF article which followed).  I rolled up my sleeves and sharpened my pencil, and was very amused by the Kotke.org post  (detailed below):

How to efficiently sort socks  JAN 22 2013
From Stack Overflow, a question about how to efficient sort a pile of socks.

Yesterday I was pairing the socks from the clean laundry, and figured out the way I was doing it is not very efficient. I was doing a naive search -- picking one sock and "iterating" the pile in order to find its pair. This requires iterating over n/2 * n/4 = n^2/8 socks on average.

As a computer scientist I was thinking what I could do? sorting (according to size/color/...) of course came into mind to achieve O(NlogN) solution.

And everyone gets it wrong. The correct answer is actually:

1) Throw all your socks out.

2) Go to Uniqlo and buy 15 identical pairs of black socks.

3) When you want to wear socks, pick any two out of the drawer.

4) When you notice your socks are wearing out, goto step 1.

QED

Of course, it was Socks, and not Stocks, and I smiled amusedly at my brain's sloppy shortcuts. But upon reflection, given the increasingly short half-life of most quantitative or systematic strategies, the post might just as well have been describing investment strategies, their allocators, and how they are seemingly implemented:

1) Throw out all your old stocks (or underperforming portfolio managers).

2) Go to Clarifi, Tradestation or your data-miner of choice and rank all potential strategies. (or to save time, or if you're a cloner, rank all stocks by something resembling their active weight presence in the portfolios of top-performing hedge funds based on 13F-HRs and intermediate filings)

3) When you need new stocks, pick the top 5 performing strategies, or the aggregate high-conviction clone portfolio

4)  When you notice your Stocks are wearing out or your strategy returns decaying, goto step 1.

This is not a lament, nor a mean-spirited poke at cloners, though it highlights the potential, increasingly severe, feedback effects, more fundamentally-oriented practitioners must navigate.

(H)Edge(s)

In the event you haven't read it, there is superb essay in n+1 entitled Edge and The Art Collector. In it, Gary Sernovitz (whom I'd never read before) compares/contrasts edge in art with edge in investing, with particular respect to Steve Cohen and SAC. Of acute interest (in the factual realm vs. the philosophical or aesthetic) is a good description of SACs systematic exploitation of paying up for the call before the first call, honed by SAC, but also (not mentioned therein) well-employed by Marshall Wace's TOPS and similar first-mover strategies.   This symbiotically leads directly back to the enablers on the sell-side are always seeking ways to monetize research, maximize revenue and get paid for even the slightest perceived info leg-up (release of research report, recommendation change, analyst estimate change etc.) that they themselves cannot legally exploit.

Olympus & TeamJapan (as Explained By S. Suzuki)

I've written a lot about Olympus Corporation. I unconciously mentioned their zaitech first in "We Are All Zaitech Now" - a post primarily about Repo-105, back in October 2010 - that almost a year before FACTA! Long-Term Memory was my first discussion of the FATCA revelation which set the ball rolling. It correctly connected the dots suggesting Gyrus et. al. was an attempt at zaitech cleanup, NOT fraud. "Throwing Good Money After Bad" further expanded upon my belief that bizarre advisory fees were an attempt to finally dispose of losses - a discussion  that  was a full three weeks before Olympus' ex-President Woodford even suspected it was  zaitech related. The clean-up attempt paradoxically was the opposite of fraud in the sense it is trying to reverse the fraud and ineptitude committed years in the past. Unfortunately (and amusingly), the  attempts were themselves fraudulent, and even more inept than the original sins. Kikukawa Quits - Olympus Soars...But Why? still two weeks before Woodford himself knew, laid out in detail why I was virtually certain it was a cover-up of a cover-up. In Capitulation, marking Olympus' "come-clean day", I suggested that confirmation of the obvious removes the risk and uncertainty. Despite that, SWFs and other non-Japanese investors liquidated on baseless fears of criminal prosecution delisting or further bad revelations. Monkey On Your Back further explained why Olympus was cheap and why the market was wrong at YEN700. End Run makes analogies to the excellent WSJ schematic of the Company's two decades of zaitech cover-up. Finally, The Cats In The Hat Won't Be Coming Back was my post-mortem on the near-anniversary  - one that took the form of a somewhat unflattering review of former Olympus President's Woodford's book "Exposure". In it, I suggest while fraudulent, and dumb it differs from Enron-like malfeasance, and that there is no words or phrase in the english language to describe the lack of personal profit and different intention of what Olympus management did over the years.

Through the affair, this "je ne sais quoi" of intention that we see as willfull shareholder neglect is a recurrent theme which Mr Woodford, activists, and foreign investors would have, and should have been more aware. It explains  the behaviour of what in a 2008 post I called TeamJapan, (i.e. Olympus Senior Management, their Board of Directors, their bankers, and Olympus' large corporate shareholders, service providers, as well as regulators). I wrote the post to explain why TCI's run at 9513 (Elec Power Development) was assinine and stupid (from the point of view of TCI's Investors'). It goes to the heart of the behavioural response of almost all Japanese actors and is reprinted for you below....

TEAMJAPAN (AS EXPLAINED BY S. SUZUKI)

Christopher Hohn and his TCI are obviously NOT Suzuki parents, for if they were, they would have better understood what they up against in terms of TeamJapan.

Shinichi Suzuki's Nurtured by Love, The Classic Approach to Talent Education is an illuminating account of his philosophy regarding life, music, and learning. For those who do not know of Mr Suzuki, he is the father of a global musical instruction movement which posits that everyone has the aptitude  and is capable of reaching a decent level of musicianship with consistent effort and  practice. Teaching begins young, and employs a methodical progression focused upon sound and mastery and continued practice of prior achievements. It is wonderfully Japanese, in the the most admiring sense - the love part of my love/hate with Japan.

In the book, (which I recommend to everyone whether they are interested in music or not) he recounts an anecdote from his days at the Nagoya Commericial School where he was class president for four years running. The motto of the school was "First Character, Then Ablity". Noble enough. And so he explains:

During the final examinations, one of the students whom I shall call A, was discovered by B to be cheating and B announced the fact loudly to the teacher in charge. A was then sent out o the classroom, which was by then in an uproar. But when the examination was over, and as soon as the studentswere out in the passage, another student C, leaped upon informer B, a big boy, asking him what kind of friends he thought he was, and hit him. The others joined in and they all gave 'B' a sound thrashing. I was still in the classroom. It all happened in the twinkling of an eye. Presently they sent for me, the class president to come to the faculty rom. "What is meaning of this outrageous attack? Were you aware of it?"

Suzuki replied (and recall that he is a pacifist, a thoroughly gentle human being with the highest moral character displayed is countless ways throughout his life):

Suzuki: "I was. I struck him too."

Faculty: What? who are the students that struck him?

Suzuki: All the members of the class, Sir.

Faculty: And you think you did right, do you?

Suzuki: I do not sir. I think it was wrong to cheat. But I think it was extremely unfriendly to report him sir. Please punish us....

If only Hohn had learned violin the Suzuki-way, he could have saved his investors a lot of money, not to mention loss of face....

SAC Intrigue - Current Bookmaker Odds

BetUnfair Limited : Current Bookmaker Odds
Event: Outcome of SAC/Steve Cohen Investigation

EVENT/OUTCOME SELECTION .............. Price
------------------------------------- -------
Martoma U-Turns by 30th June............1/4
> than 1 other SAC Mgr Indicted.........3/5
SAC Redemptions Suspended...............2/1
Cohen Personal Assets Frozen............3/1
Blackstone Redeems < Jul 1 2014.........3/5 
SAC AUM Jan 1 2014 > $10bn..............8/1
Cohen  Deal Struck - Profit Forfeit.....3/1
+Int+Huge Fine BUT No admission Guilt
SAC Pays At least 8-Digit Fine.........2/11
SAC Pays At least 9-Digit Fine..........3/8
SAC Pays > than 10-Digit Fine...........2/3
Cohen Indicted..........................3/2
Bail Set at < $5,000,000................4/3 
Bail Set at > $5mm < $10mm..............5/4
Bail Set at $10mm++.....................5/4
No Bail................................99/1
Cohen Case Goes to Jury Trial...........4/1
Ex-Wife Testifies at trial..............7/2
Cohen Found NOT Guilty in Jury Trial....3/2
Cohen Found Guilty in Jury Trial........3/2

Cohen Appeals...........................2/9

Guilty - Fine but No Jail..............10/1

Guilty - < 1 years.....................10/1

Guilty - > 1 < 3 year...................4/1

Guilty - > 3 years......................5/1
Cohen on Cover Time Magazine............5/1

Cohen Indicted under RICO Act...........4/1
Cohen retains Geoff Boies...............6/1
Cohen retains Alan Dershowitz...........5/1
Cohen Consults With OJ.................50/1 
Elan Investors File Civil Suit..........2/3
Ruth Madoff sues SAC .................100/1
Fred Wilpon sues SAC..................100/1
Cohen Admits Guilt/Plea bagains........75/1
Feds File Charges Then Drop Case .....100/1
No Charges/No Trial/No Fines Dec 2014..25/1 
Cohen Seen Mowing Own Grass...........500/1

Learning to Be A Central Banker in 10 Easy Steps (Update)

Welcome Mark Carney! I am certain many people have been offering you advice on what to me appears to be a rather thankless task. Undoubtedly  your experience at the Squid will have given you the necessary sharp elbows and diplomacy to thrive, and your Canadian upbringing arms you with the right amount of earnestness for public service. Nonetheless, I thought you might find something worthy below in the primer  I penned for Mr Bernanke in the waning days of 2007. Best of luck in your mission! Oh, and one final piece of advice: No matter how seductive and enthralling you might initially find the quality of life here in Blighty (considering the digs the Old Lady will finance for you), DO NOT NOT SELL YOUR CANADIAN BOLTHOLE. The novelty wears off quickly and England all-too-quickly becomes Moosonee without the clean air and the blue Walleye...

* * * * * * * * * * * * * * * * * * * *

Learning to Be A Central Banker in 10 Easy Steps

Start with one policy - for example - interest rates. Place the policy ball in your right hand and begin by lowering rates. which causes the ball be tossed-up into the air, in an arc, and land in your left hand. Note how, when the policy ball is in your left hand and you raise rates, the ball returns in an arc to your right hand. Repeat several times to get the feel. (Note this doesn't work if you are left-handed)

Now with he first policy ball in your left hand, take a second policy ball in your right hand, say the value of the US dollar. Notice how when you lower interest rates while the PBoC, and other official buyers in BRICs and GCC countries buy Long Bonds, the 2nd policy ball, the Dollar, feels heavy as if it wants to fall to the ground. Exerting appropriate pressure, you must force it up to arc, after which it should fall back down landing in the left hand.

Now with interest rates in your left hand, and the FX value of the dollar in your right hand, try to toss the rates lower, and as they arc downwards, you will need to jettison the dollar. Be certain to avoid the common mistake of throwing up rates too high if the dollar is NOT falling.

After letting the dollar fall for a while (note the nice concave arcing pattern in the picture), you will need to catch it with your right hand firmly by attempting to pay some lip-service to a strong-dollar policy. This permits the official entities who are at once your friends and your enemies, to get off the hook by buying dollars under the premise that you do care about its value.

Warning: Under no circumstance should you allow the policy balls to collide by lowering rates AND letting the dollar fall. Or else you might ultimately have to raise rates, making the introduction of the 3rd policy ball very difficult.

Get the hang of things by practicing tossing the two balls, raising and lowering interest rates as required, and jawboning (and where necessary) letting the dollar fall to floor. See if you do this while reciting Humphrey-Hawkins-like testimony, and answering your wife's questions.

Now quickly, you will find a third ball in your hand whether your ready for it or not, for as rates have been raised to pay lip service to inflation and the falling dollar, the third ball, economic growth, needs to be tossed into the air. Be careful NOT to make the common mistake of walking in circles while juggling the balls.

Irrespective of how high you toss it, will begin arcing lower as the economy begins to falter. Just before you catch the falling economy with your left hand, you will have thrown the rates ball back your right, while the dollar accelerates its decline towards your left, such that you can start all over again. It is essential to avoid changing the policies in a staggered rhythm.

As the economy climbs back on its arc to your right, you will be catching interest interest rates with your left, having sent the dollar on a stronger trajectory with your right, before repeating the exercise. Be sure not to launch the interest rate ball too high or too far in front of you.


Congress at this point will be demanding that you pay the most attention to the economy ball, so you must learn to turn your back (on them), and see if you can juggle behind your back as in the diagram (right).


CONGRATULATIONS! You are now ready to set monetary policy for the largest economy in the world!!

NEXT WEEK: In your next lesson we'll introduce balls 4 and 5 in the form of a sub-prime crisis, and banking system solvency issues, just for fun!

Hank's Chutzpah

Sorry, Hank. You got screwed. But by Joe Cassano - NOT by the Government. At least not in the AIG bailout. In the case of you versus Elliot Spitzer, one might argue that you got a raw deal - but you must accept some culpability for that since you sorta kinda challenged The Spitz to a proverbial duel when you clearly were breaking the law which it must be said, wasn't a terribly clever thing to do (the duel thing) if you'd wanted to keep your seat at the table. After all, on your watch, AIG got caught manipulating earnings, changing the characterization of your earnings, helping others "manage" their earnings, participating in reinsurance bid-rigging. Ignorance is hard to argue given your legendary reputation for knowing everything about everything that went on at your company including anyone who sold a share of your stock. Yet, like WB, you might still have gotten off if you'd been polite, regretful, apologetic, donated some dough to the Spitzer's favourite charity, and gotten one of your faithful to do a Ron Ferguson* for you and take the bullet.

The world knows you're sore and bitter. And that's OK since, after all, who wouldn't be if they saw the value of assets they control (whether directly or even through an Irish Orphanage) dwindle from double digit billions to less-than-a-unit. Yet the argument you make that somehow the US Government egregiously misappropriated or stole AIG from the shareholders is simply balderdash, and a waste of civic time and money. AIG was toast. Not worthless (as it turns out), but in the absence of government support certainly insolvent since there was no way for you to meet your margin calls. You were Merriweathered*. And if you'd been forcibly dismembered (like LTCM) on your creditor's terms, rather than the government's, you and the other shareholders would have gotten ZERO NOTHING NADA NIL, irrespective of whether it caused a Herstatt-like financial circle-jerk meltdown. The ONLY equity value AIG had at that moment in time resulted from our massive and generous backstop and the outcome even then was not assured which is why so many other things WITHOUT GRAVE LIQUIDITY CONSTRAINTS traded at 10cents on the dollar, or indeed, worse. Equity on risky leveraged financials is always short the put - and you got exercised and it was your own fault. Indeed, if I were King at the time, I would have taken EVERYTHING from AIG shareholders on the one side for the extension of US Public liquidity to AIG for the sake of the system, and, on the other side demanded large haircuts from AIG counterparties on the other side of the mortgage CDSs, else the US Govt cuts AIG FP loose and they take their chances in bankruptcy court with everyone else. And if I were King, I wouldn't have done this to maximize return for the public, but rather to inflict punitive damages upon those who needed (and deserved) a spanking.  This wouldn't have been perfect justice, but it would have effectively sent an unmistakable message where it needed to be sent. Then, as King and now-owner of AIG, I would have pursued criminal suits in an attempt to claw back the several-hundred-million Mr Cassano took down in bonus for wrongly-accounted-for up-front profit for deals that were effectively still open.  

So it is with something other than amusement that I look upon your lawsuit, and your encouragement of AIG to join you in your Jonah-like case against the big white government whale. Disdain comes close to what I feel. Contempt perhaps comes closer. But neither fully describes the brass-balled chutzpah being displayed by your royal failure to accept culpability and pin the blame elsewhere. I only regret that those filing a lawsuit deemed to be without merit aren't - like in the UK - obliged to pay ALL the costs of the court and the defense. 

The Doomsday Gene or Just Awful Trading?

There seems to have been no shortage of bears in the world over the past several years. A re-read of investment letter writers,  strategy pieces from buy side firms, or most notoriously, ZeroHedge, can attest to this. And despite the dour headlines, of sovereign debt crises, one macroeconomic disaster after another, or the dire state of political confidence and leadership across the western world, few of the curmudgeonly uber-pessimists have made money in what should have been proverbial salad-days for the Kaczynski-ites. So despite the near torpedoing of the PIIGS, their sovereigns and their equity markets,the best returns have more reliably been on the long side, while the one's who have been most vocal in trumpeting the impending apocalypse have little to show for it in terms of banked investment returns for their investors.

Ignoring whether from the unrequited pessimist's perspective this should, or shouldn't be, or why it is or hasn't been something else, one can not entirely reject the potential mitigating excuse that "it ain't over 'til 'it's over".  Keynes of course would have countered that "the market can remain irrational longer than you can remain solvent". The nihilist would add that in the long-run, we are all dead. And all could agree , at the very least,  on this much.  That "they" - the uber-bears, the financial eschatologists, the doomsdayers, the macro-dispensationists - haven't in the main made money needs some explaining that consists of something more convincing and durable than government conspiracies, plunge protection teams, cabals of jewish elders of zion. Their failure to capitalize says something important that is worthy of examination by anyone who invests or trades. 

Of course it could just be bad luck, or simple ineptitude. But I fear something bigger is at work. There is an adoption of a fundamental belief that is not far removed from doomsterish cults that believe "The End of the World Is Nigh". For en-masse, this group is making the same mistake - they   believe that a trade is more than a trade. What does it take to believe that a trade is more than a trade? Conviction? Yes. Phobias and self-doubt? Indeed. Psychological projection of something-or-other? Likely.  Ideology? That helps. Righteousness - both absolutely and relatively? Black & white thinking? Yes, and yes. Even I am not sure where I am going with this but it seems to lead to a rather provocative thought.

Perhaps, just as some have suggested that there might be a "God Gene" which proposes that a specific gene (VMAT2) predisposes humans towards spiritual or mystic experiences, so too might there be a Doomsday Gene, a yet-to-be-identified gene that predisposes humans towards a belief in "The End of The World As We Know It". This would account for unitary market views, the failure to cover or reverse positions in investments when events are quite obviously changing and/or pessimism towards underlying causes is shifting right before everyone's eyes. They would be prone to see only the negative, interpreting every glass of water as half-empty, and dismissive or oblivious of things that run counter to a highly-anchored and well-insulated belief system - one that they undoubtedly feel they've arrived at through independent thought but which they, one might posit, likely acquired as a result of their genetic predisposition. It would explain a lot with a little.

The existence of this genetic predisposition likely extends to the beginning of time. Within hunter-gatherer societies, it might have provided a counter-balancing cautionary fear that was useful in preventing overly-bold expeditions such as assaults upon woolly-mammoths armed but with a table spoon. During agrarian times, it might have helped insure villagers kept sufficient grain reserves to protect against periodic  drought and resulting famine. As a result, like homosexuality, it's usefulness within the gene-pool has carried it through time to survive modernity.

Every religion has deep eschatological roots, both within their mainstream, and their offshoots.  From the Jews and the Book of Daniel, to Jesus himself, to the second coming, along with all manner of historic and modern dispensationalism, from the Zoarastrian Frashokereti to the hindu Pralaya, the Norse Ragnarök to the Buddhist, Yam, Nostradamus, even Isaac Newton (who was afflcited) have developed and subscribed to apocalyptic doomsday end-of-world belief systems that bear striking resemblances to the financial versions that repeatedly cause shorts to overstay their welcomes and not recognize when things are getting ... errr .... ummm let's just say "less bad".  Like the burning embers of a fire, it smolders, fanned perhaps by the same predisposition that drives Stendhal's Syndrome, Jerusalem Syndrome and, for the Japanese, Paris Syndrome.

What IS different today, from days of old, is that (apart from the world NOT having ended) there now is a system of instantaneous mass distribution. Those potentially sufferering, and those who may be so genetically predisposed can now meet up at any hour of the day or night, excite each others' fears and worries, with all manner of topical charts, and half-truths, and together, figure out ways to undermine the action that might lead to political and/or economic improvement as well as sabotaging their belief that something, anything, might be improving and require a painful change in dearly held belief structures.

Before we completely dismiss those afflicted however, we must appreciate their virtues and accept that they can be perceptive and bring lateral or alternative perspectives to the foreview. And they often have good senses of wit (though don't expect them to buy the beers since they usually are in need of money for obvious reasons). It is likely that we all have friends that fall into this category. And this is fine and is as it should be. Just be careful when they are offering financial or trading advice, and whatever you do, under no circumstances, give them your money to invest. There are much cheaper and more constructive ways to be otherwise occupied or entertained.

The Cats In The Hat Won't Be Coming Back

It is approximately one year since Olympus' two-decade cover-up of zaitech  losses was outed.  Former Chairman & President Kikukawa and the other most culpable officers and directors have pleaded guilty; Mr Woodford has been exonerated and published his "Kiss & Tell"; Olympus lives on (with the aid of its domestic saviours) still a world-class med-tech unit attached to a sinking legacy ball & chain imaging unit, and, little has changed in Japanese corporate S.O.P.

It is no coincidence then, on the anniversary, that I have just finished reading Mr. Woodford's account entitled "Exposure" published by Portfolio Penguin. It is a good read. Not because it is well-written (few, if any, business biographies are). Not because good triumphs over evil. Not because we like him (I am agnostic, not having met him), nor because he is a superhero (which by most measures, he is not). It is a worthy read because at its essence, it is a good story - one that has the requisite suspense and that, in the end, satisfies the reader because Truth, with an upper-case "T") DOES resoundingly trump Deceitful Lies. While it is billed as a story where virtuous David will be victorious over Goliath, in reality, Goliath, (to mix metaphoric fables) is felled by a mouse who shoves a proverbial thorn into his foot, after which Goliath brings about his own syphilitic-like misfortune before committing seppuku. Given the current state of financial markets, corporate governance and transparency in Japan, the triumph of Truth is a moderate victory, albeit within a seemingly endless losing war.

Whatever else Michael Woodford may or may not be, he is earnest. He defines the word. He does everything correctly (even his eventual defiance is diplomatic with the perfect amount of rectitude) respecting convention and culture, from the non-Japanese corporate point of view. From where I sit, as a jaded, borderline-cynic, financial-markets person, this is both refreshing and amusing. He is parachuted into boardroom-central from the periphery, oblivious of what is about to hit him. His first surprise and disappointment: despite the billing and the hype, he's not really CEO. The wily Chairman has given Mr Woodford a title, the grunt work, while keeping the cat-bird's seat for himself. Woodford is perplexed, but not as much as the curious reader who is wondering why these details weren't agreed before. Surely Nissan's Ghosn and Sony's ex, Howard Stringer, despite Japanese cultural aversion to litigiousness have quite detailed contracts. This and a few other slights, seemingly causes Woodford to change his opinion of his former mentor, Mr Kikukawa. Twenty years is a long time to work with someone, get drunk with them, and still not know *who* they are. I joke sometimes that one doesn't really *know* someone until they come and stay at one's house for a while, nonetheless two decades of corporate carousing salary-man-style seems like plenty of time to peer inside your bosses character and realize that he is a dick (even if he was your protector), and you should watch your back. Was the cultural gulf THAT wide?

Earnestness is not far removed from naiveté. Woodford comes across as being an uncomplicated person, seemingly giddy that he has arrived at the top. Perhaps because of his humble origin, he's fearful of risking or losing it all. Iconoclasts, in any event, rarely rise to the top from within Japanese organizations. Mr Woodford, it appears, hasn't violated this rule and rose to his level having respected protocols and conventions in a way necessary to fit in and adapt. Woodford, by his own account makes it clear from early in the story that he isn't The Boss - which miffs him, but not enough to make a stand. He rationalizes, but whatever he does appears to be from a point of weakness because it's a plum job, and he is now in rarefied air that few gaijin have reached. Likewise, despite voicing his concerns about the Gyrus acquisition, he backed off and didn't press the issue - one that if he had, might have brought the affair to conclusion several years prior. By comparison, FDR was reported to have respected General Marshall because even though FDR was known to be bully, making demands and getting his way, Marshall apparently could NOT, would not, be bullied by his boss (or anyone), such that Marshall would threaten to withdraw his services if his wishes were not acceded-to - threats FDR knew to be serious, and that resulted almost universally in FDR's (rare) retreat. One wonders if Kikukawa would have treated him so, had Mr Woodford displayed more of that mettle.

The book's billing readies the reader for the heroic fight of a virtuous whistle-blower pit against the nefarious greedy forces trying to silence him. The actual details, however, differ and complicate the story, First, Mr Woodford wasn't the whistleblower. An anonymous loyal, but conscience-troubled Japanese employee provided the information to an investigative journalist who exposed the scandal in his magazine, Facta. Facta broke the story, revealing the allegations, which got sufficient traction to not only impact the share price, but cause some large shareholders (including Nippon Life) to ask the company for clarification. At this stage, it is unlikely the affair would have gone away. The numbers were too large. The details provided and published by Fatca, too specific. More importantly, the truth was too pregnant, and the scheme to dispose of the losses, too half-baked and ridiculous to stand up to outside scrutiny. The newly appointed Woodford, excluded from any prior knowledge about the zaitech losses or earlier and repeated attempts to repair and prevent discloure, was quickly caught in the cross-fire as the revelations were made shortly after his appointment. Here, we must be clear, that as a result, he was fighting for HIS life and reputation, and new position at the pinnacle, as much as that of the Company. For HIS sake as an officer and director and now man-sort-of-in-charge, he needed answers, for which there no reasonable ones provided or, for that matter available.

Early-on, there is a question that keeps popping into my mind. What would Mr Woodford have done if Chairman Kikukawa, upon offering him the job - but before official appointment - had sat him down, confided in him, and said "this is the situation, my boy". "It's a mission you do not have to choose to accept, but we're up to our necks in nattō*, and we need you to tow the line. No hard feelings if you don't accept, but for the sake of everyone, we need your silence if you balk..." Would he have walked away quietly and acquiesced, given he wasn't under personal attack? Would he have been content to remain European Chairman and await a moment of revelation that might be another opportunity lead the company in the future? Would he have kept the confidence for the sake of friends and colleagues? It's easier to be brave when you're cornered and have no other reasonable course of action. I cannot say with honesty what I would do, despite what I think my moral compass would tell me to do. Mr Woodford may not honestly know the answer. I would suggest that few could answer it until they are actually there, however well-intentioned or perfect their hindsight.

* * * * * * *

The Investigation Report dated January 12, 2012, available on Olympus' official website here: http://www.olympus-global.com/en/corc/ir/tes/pdf/nr120110_2.pdf is the apex of investigative forensic accounting. It resembles an epic tragedy, both in terms of its cast of characters and plots twists. The report was a formidable effort, completed in less than two months. It displays the single-mindedness that the company applies to its product engineering combined with Japanese thoroughness and wholesale effort in pursuit of a goal. No detail, however small, is excluded. Only after reading, can one imagine how many people must have been complicit. Clerks, lawyers, accountants, bankers, advisors. And however discreet and loyal they may be, one cannot help wondering what a payment is for, why an entity is being created, whether a circular collateral arrangement isn't odd. Only after reading the report can one realize how much effort and expense they went to hide to prevent disclosure of the losses - both in terms of time, and money. This metaphorical financial bath-tub ring (original zaitech losses) like the one in "The Cat & Hat Comes Back", will not go away as they try to clean up what is a simple (though significant) problem, only to see it morph, and grow into a larger more intractable problem with the application of each half-baked solution, until it is so bad they need the extraordinary "Voom!". But Michael Woodford was NOT Voom! There is no Voom! for what ails the Japanese system. In the Olympus case, Voom! was old Japan, the status quo of time-honored alliances and obligation between banks, industrial enterprise and government, sending out the army of little Cats in the Hat, to repair the exterior as quickly as possible, and so, making it disappear from view, back under the Hats of the Cats, after which it looks clean, it looks as it was, and if we didn't KNOW it was there, we would be none the wiser. "That's right...nothing here to see...move on please!"  But the behaviour that felled Olympus is  not gone - just hidden, again, in order to remove the unpleasantness from public consciousness.

There are numerous important lessons here for readers in general and managers, and traders in particular. Others may have touched upon a few. But many of the most important ones have been ignored, I think. These include: (1) Never, ever, EVER try and trade yourself out of a loss; (2) Operating companies should not speculate outside their area of expertise for speculating is hard-enough for dedicated speculators; (3) Coming clean early with mistakes almost always trumps getting caught later with dishonesty. (4) If following the herd down a perditious route, one must take care not to be the last one left; (5) Listen to all approaches by investment bankers with the utmost of cynicism; (6) There are few free lunches. (7) If your excuse is too implausible or convoluted to convince your old schoolteacher, it is half-baked and you will be caught in your deception. Japanese organizational inertia carries unstoppable forces that can be harnessed for much good, but, when it goes awry, is capable unthinkable stupidity.

All these lessons are highly pertinent. There were warrant bonds issued (free money). They could have arbitraged a reasonable profit with no risk. They got greedy and speculated. And lost, bearing witness to the maxim: pigs get slaughtered. They then threw good after bad. Lost again. Then they tried to repair with risk of loss, and lost. They tried to hide them (their only success), but this was costly, and time consuming, and in any event, hiding is NOT the same thing as settling or disposing. To continue the deception, the circle of trust necessarily must be enlarged making it ever-more risky. Several times in the interim, other listed companies  confessed to the same, and came clean clean. Olympus missed or willfully ignored all of them. Time, can be your your friend in deception, but it is just as often your enemy. Laws change. Windows of opportunity close. Auditors change. Comrades leave. You look around...you are now all that's left of the herd. Oooops. The rest is history.

Despite the foregoing, having downplayed Mr Woodford as The Hero, one must ask whether Kikukawa and the other co-conspirators are truly villains, rats or fraudsters? Let's try and see it from their perspective. Consider if revelation at the time of incurring them would have caused bankruptcy or similar? Have Olympus' constituents (employees, suppliers, bankers, customers, service providers, shareholders) - which it was Kikukawa's role and duty to shepherd - of which shareholders are but one, done better in the long run with the scheme? Does it not bear some similarity to what governments and monetary authorities did in 2008, and continue to ("extend and pretend", or "kick the can down the road")? To be clear, this is not a question about judging or exonerating Olympus corporate behavior. Laws were, of course, transgressed. But it feels like it needs to be asked...if only to establish intention, and by extension, shades of guilt. The world has been harsh in the language used in describing events, and to some extent it clouds their predicament, response and attempted resolution. There is a harsh linguistic for malfeasance and cheating for parochial gain. There is something again for bad behaviour involving organizational gain but NOT involving personal gain, and something wholly other - something the descriptive english language not yet invented, something peculiarly Japanese which relates to actions meant to protect one's affiliated organization and constituents against organizational harm and loss. I posit that Olympus' management and board, being guilty of the latter, have been universally accused and vilified for the former - of being John Grisham-like villains, where in reality, they were Laurel & Hardy-ish in their buffoonery and cock-ups - each action intended to make it better, but in practice, as events conspired, literally compounding the problem. Never failing to miss an opportunity to miss an opportunity to come clean, it festered like a huge repugnant white zit until ooooozensplattersploozing over the guilty.

Enron, Adelphia, Tyco, Worldcom, by contrast, were entirely different. They were frauds. They were driven by the parochial greed of likely sociopathic individuals, in a zero-sum war of "For me and mine at the expense of everyone else". Kikukawa and Olympus, for all their flaws and even personal his vanity as described by Mr Woodford was, at worst unrelated to such motivations, and at best the complete opposite of the sociopath driven by individual greed. Mr Kikukawa, and the other complicit officers and directors, rather than being hung and quartered as racketeering fraudsters, might be seen through an entirely different lens, one in which they were, in their own albeit warped and twisted way, defending the complex web of affiliations and obligations called Olympus - something bigger than any of them, to which individually honest men will conspire to no end in order to protect the honor of the organization. Their crime(s) - reflecting a society where a proposed marriage of relations might get torpedoed due to the stigma of family member's affiliation with a disgraced organization, or that spawned The Seven Samurai - through this lens, are poor judgment, and despite intentions that could be seen as not less-than-self-serving, being inept in failing to achieve their objective of repairing losses, and missing the opportunity to come clean and spare greater shame, once the initial bankruptcy threat had passed.

Entertaining such thoughts is undoubtedly repulsive to western shareholder-first and good corporate governance sensibilities. But it must be remembered that in the early 1990s, Olympus was a much smaller company. The zaitech losses were sufficient to, if not bankrupt then threaten the company's independence, and certainly its honor. S.O.P. at the time, all across Japan, was to defer losses and pray. The entire system was designed to support them in such efforts - Japanese brokers had special departments dedicated to helping clean up similar problems - as did foreign banks and brokerage firms including our most venerable. Olympus' FIRST repair-bonds, if my information is correct (overlooked by the Jan 12th 2012 Report and Mr Woodford), were structured by foreigners, lest we in the west be become too moralistically hypocritical, as the recent ex-smoker chides the one unable to find the fortitude to quit just yet. For it was, and probably still is, the Americans, British and French bankers who possess the most questionable morality, most devious know-how in circumventing global audit firms, along with the wherewithal to conjure appropriate supporting opinions from well-known law firms, such as those supplied to Lehman's Repo 105, or dubiously-disclosed Synthetic CDO structures, and off-balance sheet SIVs with far less socially-minded intention. Again, despite what is laid out above, I am not condoning their actions. But as history is written by the victors, those wanting a more complete picture must take care not to succumb to righteous revisionism from which crucial context is lost.

Some will vilify the Olympus old guard on grounds of violating the primacy of shareholders' interests. Despite the dramatic drop in the share price as a result of the revelations, such critics might evaluate outcomes under alternative scenarios. Original losses were equivalent to the prevailing market cap Olympus. At the time, this would have resulted in either bankruptcy (less likely given the underlying business), a huge dilution to raise sufficient capital to continue independently; or a forced merger, likely on poor terms with another Sumitomo-group firm. All would likely have compromised shareholder value for shareholders at that time. Jobs - both in Japan and abroad would have been at risk; growth of the crown jewel (med tech) might even have been jeopardized or never evolved the way it did had Olympus lost independence. Management, quite literally, cheated death, and legacy core shareholders were likely better served.  Subsequent investors acquiring shares regretfully won't be as thankful. Deferring recognition for a decade, the company grew large enough to absorb losses without threatening the existence of the firm.

It was 2001 when Kikukawa took the helm, and if we are to believe him (according to testimony at his autumn trial), this is when he found out. At that time, he claimed that HE suggested 'fessing-up, but, was allegedly told by by the CFO (who was very culpable) that this would "be crazy". Apparently disagreement exists in Japan too, though in this case, he acquiesced.  Sadly, for most involved, he didn't confess when he could have.  They missed the chance when Yakult and a dozen others DID were forced to come forward, caught up in the SECs case against PEI's Martin Armstrong and Cresvale for their loss-hiding and repair-bond transgressions. THIS may prove the most fatal error in management judgement. For after Enron, and uproar resulting from the sheer number of companies that had done exactly the same thing - zaitech spec, resulting losses, and subsequent loss concealment - laws changed. Now, culpability involved more than a deep bow and a pay-cut. Now, continuing loss deferral was no longer just organizational loyalty, and shame avoidance, but self-interested prison avoidance. Ultimate disposal took on new and urgent meaning. This was still a different motive than the American Gang of Four, but over time became no less parochial in nature.

Deferral is not disposal. Disposal meant figuring a way to move a billion through the income statement so it could match the needed write-down in the balance sheet. Disposing of a billion-plus dollars in extraordinary losses without transgressing laws that would result in prison was always going to be tricky. Now, I would have thought IF you were going to try to do it, then the Camera division might have been plausibly large enough to provide cover. But this would have required much wider spread complicity. The "kitchen sink method" used by western companies for decades whereby one searches high and low for any write-down to get it all out might have been an option during this time for an enterprise with 8, 9, $10 billion in revenue.

Those are the limits of my contrapreneurship. It is likely that disposal was impossible. It is just harder to keep a secret in modernity with the internet, globalization, and increasingly electronic slime trails. Having said that, whoever hatched Olympus'  hare-brained scheme to use elephantine advisory fees tied to flea-sized acquisitions deserves whatever fate they receive. What were they thinking? No one would notice? It was so weird and obviously wrong it challenged deeply-held feelings of loyalty resulting in  a leaked revelation. This is where the previous analogy with the Kurosawa's Seven Samurai stops. Olympus' guilty should have figuratively fallen on their ritual swords for the sake of the company - even if it meant jail. Here, by this time, given the absurdity and preposterousness of the dispoal efforts, Mr Woodford, by being earnest and diligent and staying the course was always going to win. He makes it sound like a dead heat, and it probably felt like that to him and his family, under siege as they were. But since the stakes, for the system were high, authorities and old Japan had to give the appearance of being concerned with international norms and foreign shareholders - especially the good long-term ones like Southeastern and Harris Associates - (as opposed to carpetbagging activists). With enough attention, this was always going to be greater than the inclination to rally behind Olympus. He really needn't have worried (unless Yakuza's pension funds were heavily long Olympus and...). And in a small way, this is progress, if not for honest business practice, then for Truth.

Insider Trading Secrets Revealed: It's All In The Haiku

US Attorney for the Southern District Court of New York, Preet Bharara, may have his work cut out for him in trying to land the big fish atop what many believe to be the largest and most profitable insider trader endeavor ever.

Bharara is rumoured to have secretly questioned former employees of the target, none of whom are under investigation nor under threat of being charged, but nonetheless were believed to have given the US Attorney important insights into how it worked. After the revelations, the mood of his legal team was reported to be decidely sombre.

Here is what he has learned: Analysts, portfolio managers, brokers with juicy tips, have long been under strict instructions never to reveal material non-public information to the big fish since as everyone knows, that's illegal under current laws and their interpretation by the higher courts. But that doesn't mean the big fish doesn't want to know. Or trade accordingly should it become known. But, in order to not transgress the law, he needs to figure "it" out himself, whatever "it" is. To be free to act and trade in such situations, he needs to have the equivalent of an epiphany, or miraculous revelation, one that no court could prove, nor jury unanimously find, was the result of receiving inside information.

Enter the obscure and enigmatic Japanese art of Kōans and Haikus. The Kōan is an ancient form of teaching representing an allusive metaphor, conveyed by a perplexing story, parable, dialogue or series of impenetratable questions that confront the seeker with a riddle of sorts. The purpose is to provoke sudden awakening in the unenlightened or in western parlance, cause an epiphany, of precisely the type the big fish needs to insure no jury would ever be able to make the connection between something that superficially makes no sense, and that which requires years of rigorous zen-buddhist training to tease out.

To demonstrate, examine this Kōan:

Blind Man: Ha, ha, never assume because a man has no eyes he cannot see. Close your eyes. What do you hear?
Boy: I hear the water, I hear the birds.
Blind Man: Do you hear your own heartbeat?
Boy: No.
Blind Man: Do you hear the grasshopper that is at your feet?
Boy: [looks down and sees the insect] Old man, how is it that you hear these things?
Blind Man: Young man, how is it that you do not?

or this...

The pupils of the Tendai school used to study meditation before Zen entered Japan. Four of them who were intimate friends promised one another to observe seven days of silence.

On the first day all were silent. Their meditation had begun auspiciously, but when night came and the oil lamps were growing dim one of the pupils could not help exclaiming to a servant: "Fix those lamps."

The second pupil was surprised to hear the first one talk. "We are not supposed to say a word," he remarked.

"You two are stupid. Why did you talk?" asked the third.

"I am the only one who has not talked," concluded the fourth pupil.

To the ordinary person, this just reminds them of Master Po of Kung-Fu, who was the Blind Guy with the white eyes and Fu-Manchu talking riddles to the flash-backed young David Carradine. To the trained Master, however, he KNOWS this has a deeper more important meaning. The first one, properly interpretated should be read as "ZOLL 2-be bot by Japs - Back up the Truck". The second is bit more complicated but can be deciphered as: "CSCO's quarter will be light by a dime - Drop 4 million shares!" Less wise interpretors might just understand it as "CSCO - Get outta' Dodge now". Yet, when a Federal investigator goes through email communications with a fine-tooth comb, he will not be able to see anything unusual in the enigmatic riddle or the 900 year-old humorous parable - certainly not its embedded meaning.

Haikus are stylized verse, of seventeen syllables typically in 5-7-5 pattern across three respective lines, juxtaposing imagery of two seemingly unrelated ideas, to the unitiated even random ideas, obscured within a hidden thread or connection. The big fish, unknown to even close friends, is a Master in these arts, rapidly and accurately able to decrypt the seeming artistic riddle and extract the hidden meaning which would result in an actionable trade, with no discernible connection between the original material non-public information and the subsequent trade.

For example, take the following haiku:

old pond . . .
a frog leaps in
water’s sound

To the trained Master, of which it must be pointed out there are incredibly few, so few that prosecutors will find it difficult to find an expert to explain it to a jury, let alone convince the jury this is like a secret code with embedded messages, this can only mean "Trials Going Well! - Buy ELAN large"

To the layman, it would like two grown men innocently sharing an appreciation for poetry. What could be wrong with that? It seems absolutely preposterous to even suggest that there is a secret message inside, let alone material non-public information about an Irish Pharmaceutical company that caused an epiphany which was transformed into a $750 million dollar long position quicker than you can say "Captain Jack Sparrow". You can see the reason for Mr Bharara's sombre mood.

Even more cryptic is the next example:

the first cold shower
even the monkey seems to want
a little coat of straw

The uninitiated, looks at this looks and see the gibberish of some art-school type trying to impress his EMO girlfriend. However, to the highly trained Master this screams out: "ELNs new Drug Sucks!!!! Sell ALL - Borrow against the Entire Kingdom and Short a billion more!!". THAT is how powerful these Haiku's can be in calling up the powerful embedded imagery necessary to translate the inner message into a bold epiphany and action.

For Mr Bharara, regretfully, no one will believe it. It is too far-fetched. Too perfect. Too beautiful. THAT is why the Big Fish is a Master and .. ummm ... errr...the Big Fish, and Mr Bharara ...well...works for government.


(NB: Haikus courtesy of Bashō, via wikipedia, and yes, I know Master Po and Kung-Fu were Chinese/Shaolin creations but they were convenient for illustrative purposes and in any event most important ideas had their origins on the mainland anyway... )