Insider Information is AWESOME!

by JT McGee

Someone should probably go to jail for this.

Adams Golf was said to be exploring strategic alternatives to boost shareholder value. I said then that I would value at anywhere from $10-15 in a buyout.

That’s starting to look like a real possibility, given this action in the last month with a 10% pop on Friday:

insider trading, buyout

Short story: this company never trades much more than 15,000 shares on any given day. A typical Friday would close with fewer than 10,000 shares traded. Last Friday, nearly 75,000 shares were traded. A majority of volume came late in the trading day. It was fun to watch, really.

Complaining for No Reason?

I shouldn’t be complaining. This company is going to provide me a very good return should a buyout be announced this week. I’ll be living it up like a champ, having invested heavily into it, and using it for my stock market selections this year as well as last year. (Bring on the bragging rights!)

But this annoys me to no end. Someone knew what was going on – someone knows at what price this company will sell. And someone – or several people – used that inside information to make a quick buck.

I never had plans to add any more to my position. I add funds to my portfolio irregularly, usually in large chunks that appear every few months. I can’t say that I would have piled a ton of cash to it on Friday if the insiders had not made a big move. It’s not like I lose directly from their games.

But what I can say is this is the kind of nonsense that makes people hate finance. This is the kind of garbage that allows people to use “Wall Street” in the same category as the dirt bags on “K street.” It is actions such as these that gives finance a bad rap; the kind of stuff that makes it all too easy to hate investment bankers, portfolio managers, and corporate insiders at otherwise perfectly legitimate companies.

Insider information and distrust of Wall Street is likely partly to blame for a lack of participation from my generation. Forbes reports that 40% of Generation-Yers agree with the statement “I’ll never feel comfortable investing in the stock market.”

This kind of stuff drives me up the wall. There’s so much money to be made legitimately in the financial markets, without insider knowledge and an edge on the rest of the marketplace.

Wall Street needs a swift kick in the balls. Decisions like these, especially the decision to trade on insider information, gives the populists a reason to regulate almost every process from buying stock to wild derivatives.

{ 6 comments… read them below or add one }

Darwin's Money February 26, 2012 at 17:25

Oh, how I do enjoy going back into the charts and volume the day a merger or takeoever is announced and checking out the action. It is almost ALWAYS showing some sort of runup and insider trading. Taking it a step further is the Options Action since greedy bastards like to amplify their insider knowledge. There are thresholds of course and the SEC won’t bother looking into an account that bought 100 shares in the days leading up to an announcement. But heavy trades in both stock or option often bring an investigation. You only hear of a few prosecutions a year. I guess with the ratio of insider trades to prosecutions so low, it’s tempting to continue to do it!

Reply

JT McGee February 27, 2012 at 11:11

This one (unfortunately) isn’t options eligible. I hear you on the greed. Happens every time, usually a day or two before announcement. Someone called in an order of 20,000 shares (more than the average daily volume) on Friday.

20,000 shares should be reason for investigation, but this company is about as far off the radar as one can get.

Expecting an announcement after close today, or on Tuesday. If not, it doesn’t really matter, as one activist shareholder has identified 3 people to put on the board. No doubt he’s looking for a sale.

Reply

Dave @ Gen Y Finances February 27, 2012 at 06:37

You hit the nail on the head with this post, JT. NOTHING drives me more crazy than clearly seeing insider trading and nothing getting done about it.

It’s also amazing to me that hedge funds started a whole new business by paying “consultants” to get insider information from Washington insiders. It drives me crazy that these things have gone on for so long!

Reply

JT McGee February 27, 2012 at 11:12

Yeah and it’ll go on well into the future. Wall Street eats itself from the inside with each passing day.

Reply

Evan February 27, 2012 at 14:42

What angers me is how EASILY this could be curtailed. All you need to do is fine the living hell out of a few firms…like the one who put in a 20K order on this little stock and it would slow down at least the obviousness of it all.

Reply

cashflowmantra February 28, 2012 at 09:28

It is simply the golden rule: He who has the gold, makes the rules. It won’t change; it will only vary.

Reply

Leave a Comment

*

Previous post:

Next post: