What's up guys and welcome to Wall Street Millennial. On this channel, we cover everything related to stocks and investing. In this video, we're taking a look at the dark side of Wall Street. There are a few legendary investors on Wall Street who can consistently make superior returns by identifying undervalued stocks that the market is mispricing. People who have this ability are few and far between.
Wall Street is full of hungry young investors who dream of becoming the next Warren Buffett. Some of them are willing to do just about anything to achieve this goal. One way that people have tried to do this is insider trading.
Insider trading involves trading in a public company's stock by someone who has material non-public information about the stock. This practice is illegal because it allows a trader to unfairly extract trading profits at the expense of other market participants. Today we'll look at some of the most shocking cases over insider trading of the past couple decades. First we have Raj Rajaratnam, a Sri Lankan-American former hedge fund manager.
who founded the Galleon Group hedge fund. He came from a wealthy family and grew up in Sri Lanka and England before earning an MBA at Wharton in 1983. After a successful stint in banking, he started his own hedge fund, which he named the Galleon Group. His hedge fund was very successful before it was found out that it engaged in insider trading.
It was valued at up to $7 billion in 2008. In a 2009 investor letter, one of his funds had a net annualized return of 22.3%, which is very good for a hedge fund. Up until this point, Raj had been considered one of Wall Street's rising stars in asset management. He specialized in tech and healthcare companies, claiming that he got his best investing insights and ideas from frequent visits with companies and conversations with executives. In 2009, the FBI arrested Raj for insider trading.
The profits from his insider trading reached $60 million, which was the biggest insider trading profit in US history at the time, although SAC Capital would soon outdo this by many times. Raj had received proprietary information from high-level executives at IBM, McKinsey, Intel, and others. Many of these executives and Raj knew each other from Wharton. He also had conspired to procure proprietary information on an upcoming $5 billion stock purchase by Berkshire Hathaway.
A former Goldman Sachs board member and McKinsey chief executive tipped him off to a planned purchase of Goldman Sachs preferred shares by Berkshire. His name was also Raj, but last named Gupta and was close friends with the original Raj. Gupta was arrested in 2011. Also in 2011, Raj from Galleon was found guilty on 14 counts of conspiracy and securities fraud and sentenced to 11 years in prison.
In addition, 13 other people connected to the case also got prison sentences. All in all, Raj engaged in insider trading from 2003 through 2009 in stocks including eBay, Goldman Sachs, and Google. In addition to insider trading, Raj has also caught flack for donating millions of dollars to organizations with terrorist connections. He donated $3.5 million to a group called the TRO. This group was raided by the FBI in 2006 for connections with the terrorist group Tamil Tigers.
The Tamil Tigers were prescribed by the U.S. as a terrorist group based on allegations of attacks made on civilians, use of child soldiers, ethnic cleansing, torture, and mass murder. Its aim was to secure an independent state for the minority Sri Lankan Tamils. Raj himself is an ethnic Tamil. Under the terms of his incarceration, Raj still has about a year left on his sentence.
In a turn of events, in 2019, Kim Kardashian's First Step Act went into effect, which aimed to allow inmates who have terminal illnesses to serve the remainder of their sentences at home. This applied to Raj because of certain health conditions including diabetes. Since then, he has been spending the remainder of his sentence in his Upper East Side penthouse with a private garden. Our next insider trader is Martha Stewart.
Martha became famous in the 1980s after publishing a few popular cookbooks. Over the years, she built a media empire that included a magazine called Martha Stewart Living and MarthaStewart.com. Most insider trading happens at hedge funds or investment banks, so it might come as a surprise that Martha Stewart could have any involvement in an insider trading scandal. In the early 2000s, Martha had a personal stock brokerage account at Merrill Lynch.
The broker handling her account was a man by the name of Peter Bekanovich. In 2001, Martha owned shares of a biopharmaceutical company called Imclone Systems with approximately $200,000. At the time, Imclone was conducting trials for a new drug it was developing. The drug trials were not doing well, and the FDA rejected their application for approval.
Imclone would soon have to disclose their failure to investors. Before the results were publicly announced, Imclone's CEO, Sam Waxall, tipped off Martha Stewart's broker, Peter Bekanovich, about the news. Peter in turn passed this on to his client Martha Stewart.
Martha immediately proceeded to sell out of her entire position of the stock. The day after she sold, the unfavorable trial results were released and the stock tamed 16%. This allowed Martha to avoid $45,000 worth of losses she would have otherwise incurred.
After a six-week jury trial in 2004, Martha was convicted on felony charges of conspiracy, obstruction of justice, and making false statements to federal investigators. She was sentenced to five months in federal prison and a two-year period of supervised release. Between her various business ventures, she had a net worth of hundreds of millions of dollars.
The $45,000 of losses that she avoided with the insider trading was the equivalent of chum change for her, and she ended up paying a much higher price as the scandal permanently scarred her brand. Next up we have Robert Foster Winans who was convicted of insider trading in 1985 in a scheme that profited him to the tune of $31,000. Winans was a columnist for the Wall Street Journal. He wrote a column called Heard on the Street where he would recommend individual stocks to readers. His column became very popular and many people would buy the stocks he recommended right after reading his column.
He would often write up small cap stocks in this column. The buying pressure from the people reading his column. would cause the stocks to reliably increase in the days following the column's release. Windens noticed this phenomenon and thought of a way to profit off of it. He contacted a Wall Street stockbroker with a proposition.
He would tell the broker what stocks he plans on mentioning in his article ahead of time. This would allow the broker to buy the stocks before the column was published. After the column was published, the stock would go up and the stockbroker would sell for an almost guaranteed profit. The stockbroker would pay a witness in cash in exchange for this information.
Between 1982 and 1984, Winans made roughly $31,000 from this scheme. In 1984, the authorities were tipped off about what was going on and arrested Winans for securities fraud. However, prosecutors had more trouble than they anticipated in convicting him.
While Winans' lawyers admitted that his actions were highly unethical, they argued that they did not technically constitute a crime. Winans was not a corporate insider and had no inside information about any of the stocks in his columns. The columns were just his opinions.
Under the First Amendment, he should be allowed to divulge his own opinions about the stock to whoever he wants to whenever he wants. To understand this argument, we have to look at the technicalities of US insider trading laws. In the US, there are two conditions that must be satisfied to qualify as insider trading.
Firstly, the trader must be aware of non-public material information. This condition was clearly satisfied. The stockbroker knew ahead of time what stocks Winans would write about and Winans columns clearly had a material impact on the stocks. The second condition is that the person who divulged the information must be violating their duty to maintain confidentiality of such knowledge. Take the example of a corporate insider who has prior knowledge of a takeover bid or anything else that would impact the company's stock price.
Because he is an employee of the corporation, he has a duty to maintain the confidentiality of the corporate information. If he were to leak this information without the company's permission, this would be a violation and he would be guilty of insider trading. But in the case of winnings, his lawyers argued that he had no technical duty to keep the information private.
The columns were just his own opinion and thus protected by the First Amendment. The prosecutors argued that because Winans was an employee of the Wall Street Journal, his columns did not actually belong to him. They belonged instead to the Wall Street Journal. By tipping someone off to the future contents of the Wall Street Journal column, Winans was violating a duty of confidentiality that he had to the newspaper. In 1987, the prosecutors won the case and Winans was convicted of insider trading and mail fraud.
Winans appealed the case to the Supreme Court. The court affirmed his conviction for insider trading in a deadlocked 4-4 vote. However, they unanimously affirmed his convictions for mail and wire fraud.
Winans ended up serving nine months in federal prison. This case is interesting because it exposes the peculiarities of US insider trading laws. He was only able to be charged because he was working for the Wall Street Journal.
If he had been publishing his column independently and doing the same thing, there's a chance that he may have actually gotten away with Okay. Perhaps the most unbelievable insider trading case in the US was the case of SatCapital, run by billionaire Stephen A. Cohen. Steve Cohen is one of the most successful hedge fund managers in history.
He consistently ranks among the top 5 richest hedge fund managers in the world. For example, on the Forbes 2020 list of richest hedge fund managers, Steve Cohen ranks number 4, only trailing Jim Simons from Renaissance Technologies, Ray Dalio from Bridgewater, and Ken Griffin from Citadel. In a show of his wealth, he recently bought the New York Mets for $2.4 billion. But there were times in his career where it seemed like even Steve Cohen had taken it a step too far and risked losing it all.
As it turns out, Rich's hedge fund manager's Forbes lists aren't the only top 10 list that Stephen Cohen makes it on. In 2013, it was revealed publicly that SatCapital, which is named after Steve Cohen's initials, had been under investigation by the SEC for six years. In 2010, they raided SatCapital offices and offices of former employees of SatCapital.
As a result of the raise, they received subpoenas and were able to charge multiple SAC employees with insider trading. In 2012, the portfolio manager of SAC Capital, Michael Steinberg, was fined millions of dollars and sentenced to three years in prison on a conviction of insider trading for SAC Capital. But that wasn't even close to the end for SAC Capital. In 2013, SAC faced charges of conspiracy and securities fraud based on direct actions of eight of their employees.
One of these people was Matthew Martoma. Matthew Martoma's crimes alone were staggering. He made the single biggest insider trading transaction in history in terms of profit made. making more than $276 million for Sack Capital. His insider trading was a classic case of advanced knowledge of a drug trial failure.
He sold shares of Wyeth and Elon Corporation after receiving information from a doctor in charge of an Alzheimer's disease drug trial being run by the FDA. After selling the shares, Sack Capital made its profit of more than a quarter billion dollars. He was sentenced to nine years in prison, where he currently reflects on his crimes.
Matthew Martoma has a history of illegal behavior. He attended Duke University for college and then went on to Harvard Law School. However, in 1999, he was expelled from Harvard after they found out that he was using advanced computer software to create fake transcripts with false grades.
He was using these fake Harvard transcripts to apply to clerkships with federal judges. After he got expelled from Harvard, he changed his legal name and applied to Stanford's business school, where he was accepted for the MBA program. After his insider trading scandal, it was revealed publicly that he had been expelled from Harvard.
Because he had changed his legal name and did not disclose his expulsion from Harvard, Stanford rescinded his MBA due to being admitted under false pretenses. After Matthew Martoma and seven other SAC Capital employees were convicted or pled guilty, the SEC filed a lawsuit against SAC Capital for condoning illegal behavior amongst its traders. They also brought several other charges, after which SAC Capital agreed to plead guilty, shut down its operations managing money for outside investors, and pay close to $2 billion in fines. $900 million of it was in a case of money laundering and forfeiture. Steve Cohen never went to jail for SAC Capital's crimes.
Instead, several of his employees were locked up. After SAC Capital was banned from managing outside money, Steve Cohen turned it into a family office for four years and renamed it Point72, during which time it operated in much the same way as it had been. In 2017, the newly rebranded hedge fund started taking new money.
It now manages $17 billion, is closed to new investors, and is considered one of the 4 or 5 most successful hedge funds in the world. Finally, we have the sad case of Rene Rivkin. Rene was an Australian stockbroker.
Throughout the 80s and 90s, he had a very successful career. He published the Rivkin Report, in which he would advise his readers what stocks to buy and sell. In the 1990s, he had become a household name in Australia.
In 2001, he had a private meeting with the chairman of Impulse Airlines. The chairman told him that they had plans to merge with competitor Contis Airlines. Rene thought that this deal would be good for Conta's stock, so he bought 50,000 shares of Conta's stock before the deal was announced.
Once the deal was announced, the stock price didn't go up as much as Rene had hoped. In total, he only made $346 of profit from the transaction. Despite how small his profit was, he was sentenced to 9 months periodic detention on weekends. He was also banned for life from having a stock broking license.
In 2013, he tragically met an untimely demise by his own hands. Alright guys, that wraps it up for this video. If you want to support this channel, consider becoming a channel member.
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