Monday, July 30, 2012

Will "Medley Global Advisors" become the next "Expert Networks" scandal for global macro hedge fund insider trading?

As a participant in the capital markets, along with many of my peers, I often wonder how the markets (stocks, bonds, futures, Forex) can move with such large volumes in such short spans of time, shortly before public government officials make public statements.  This statement i just made was facetious...because I know exactly how these market movements occur, and I've grown fed up.  Allow me to explain.

Statements by public government officials regarding economic policy are classified as "material non-public information" before they are made public.  For this reason, wouldn't prior knowledge of these statements not only preclude persons from trading on the information, but also preclude persons from disseminating the information to others?  Wouldn't the government officials who "leak" this "material non-public information" be accountable to some legal ramifications for their actions?  Would selling this information to 3rd parties who then trade on this information be considered "insider trading?"

In 2001, Goldman Sachs got caught participating in just this type of scandal.  The short of the story was that a Goldman employee gained "material non-public information" that the US Treasury was about to stop issuing new 30 year US Treasury bonds, shortly before the information was made public.  The Goldman US Govt Bond trading desk proceeded to buy 30 year US Treasury bonds in the open market, before this information was made public.  Then, after the announcement was made public, the value of this trading position skyrocketed, Goldman sold the position for a quick profit, and then proceeded to business as usual.  For any doubters out there, this activity is illegal.  Possession of the "material non-public information" precludes any person from acting on the information "in any way."  This causes us to beg the question, "does the same standard hold up to general statements to be made by government officials with decision making power over their domain?"

So last week, the head of the ECB, Mario Draghi, made some very aggressive but vague comments about how the ECB will do anything to save the EUR and the EU.

from Bloomberg July 26 headlines
*EU SAYS BARROSO, DRAGHI DISCUSSED BANKING UNION YESTERDAY
*DRAGHI SAYS EURO-AREA MUCH STRONGER THAN PEOPLE ACKNOWLEDGE
*DRAGHI SAYS EURO-AREA PROGRESS IN PAST SIX MONTHS EXTRAORDINARY
*DRAGHI SAYS LAST SUMMIT WAS `REAL SUCCESS'
*DRAGHI SAYS DON'T UNDERESTIMATE POLITICAL CAPITAL IN THE EURO
*DRAGHI SAYS THE EURO IS IRREVERSIBLE
*DRAGHI SAYS THE ECB IS READY TO DO WHATEVER IT TAKES FOR EURO
*DRAGHI SAYS ECB WILL DO WHATEVER NEEDED TO PRESERVE THE EURO
*DRAGHI SAYS `BELIEVE ME, IT WILL BE ENOUGH'

Interestingly, just before these official comments came out, a Medley report was published to a small but expensive subscriber list, indicating the political climate in the Euro area had changed regarding central bank purchases of peripheral government debt.   For those who are unaware of how this system works, the firm "Medley Global Advisors" has unparalleled access via their "relationships" to central bankers and their staff, along with a plethora of other government employees.  Many of the employees and analysts at Medley Advisors are former employees of these central banks, and thus have an inside track on the thinking, and just perhaps, on the public speeches that central bank officials will make, before they are made available to the general public.  Now, i'm not a lawyer or a specialist on the definition of insider trading, but something about this smells fishy to me. This is a firm with 2 main products.  One product is an economic analysis of varying countries and economic sectors.  Fair enough, they have a great deal of experience in analyzing and predicting trends on these topics.  The other service is an "insiders view" into the thinking, thought process, and content of future statements to be made public, by government officials, ranging from FED and ECB central bankers to Treasury officials and other government employees.  This "other service" is the real service. Hedge funds and investment banks pay big money (hundreds of thousands of dollars) for this inside information.  I'm just wondering, what makes this "inside information" different from "SEC classified inside information" about a company before it too is made public knowledge.  I may not be a legal scholar, but something just feels illegal here, with a similar feel to the "Expert Networks" that Raj Gupta has been convicted of using to obtain inside information about companies before trading in their securities, and very similar to the incident where Goldman Sachs got caught up in back to 2001.

From my prior experience on a sell side US Treasury trading desk, I know that a number of large Global Macro hedge funds trade in large size almost immediately after a Medley report is issued, when the said report indicates a change of attitude or warns of future speech forthcoming from central bank and other governmental figures.  My question dear readers is thus:  Is this service from Medley Global Advisers legal?  Should the government officials who "leak" this "material non-public information" go to jail?  Should Medley Global Advisors be prosecuted for disseminating information they know to be "material non-public information?"  I don't know the legal answers to these questions, but I somehow doubt that the well connected owners and employees of Medley Global Advisors would appreciate even the appearance of impropriety.  Isn't that the standard government officials are supposed to be held to?  I personally do not have the financial or legal ability to pursue this line of questioning.  However, perhaps some interested journalist might take the torch and pursue this apparent case of insider trading in the global capital markets?  If this behavior is not illegal, well shouldn't it be?  Could this be the next hedge fund scandal?

No comments:

Post a Comment