A Short American History of Insider Trading

Jacob Harper  |

In October billionaire business mogul/basketball owner/referee harasser Mark Cuban got into hot water, and not because of another tussle with NBA officials. He was accused of insider trading - the act of making money off of insider information.

The SEC civil suit alleged that Cuban engaged in insider trading back in 2004 when he dumped his stake in Canadian search engine Mamma just prior to a share dilution. The SEC further alleged Cuban made $750,000 on the deal, and attempted to wrangle three times that amount from him in reparations.

While Cuban was eventually found innocent of those charges, it wasn't the first case of a high-profile person being implicated in insider trading. The practice has a long history in America, dating back all the way to the country’s birth.

William Duer: The Father of America(n Insider Trading)

Duer was a British-born speculator who became the country’s first Assistant Secretary of the Treasury, serving under the star of the $10 bill, Alexander Hamilton. Duer amassed a fortune speculating on Revolutionary War debt, and he didn’t let a little thing like being privy to heaps of insider government economic information stop him from continuing to do so.

Even after retiring from the post in 1791, Duer continued to exploit his contacts at the Treasury to get tips on bank acquisitions made by the government. His duplicitous trades eventually caught up with him, and Duer lost all his money in the Panic of 1792. He died penniless in a debtor’s prison.

Duer’s actions led to the Buttonwood Agreement, known as the first trading rules established on the nascent trading scene on Wall Street.

Jay Gould: History’s Ninth Richest Man and Not a Nice Guy

Gould is one of the most notorious “robber barons” to inhabit mid-stage American capitalism, and he did so with a ruthless fervor that makes modern day corporate raiders look like babies in bunny costumes. Gould was a successful war profiteer who used “private sources of information… to make every success or defeat of the Union Army a profitable account.” He also engaged in stock manipulation schemes to drive up and down railroad company stock prices, making himself wildly rich and ruining scores of investors in the process.

While probably most famous for nearly cornering (and subsequently crashing) the gold market, Gould also had a penchant for good old-fashioned insider trading. While serving on the Board of Directors at Erie Railroad, Gould illegally watered down the stock to stop a hostile takeover bid from Cornelius Vanderbilt. The move cost Vanderbilt $7 billion. Gould later used insider information to short the stock before it went belly up in 1878, and made a fortune in the process.

The 80s: Greed is Good, and Other Life Lessons

Arbitrageur Ivan Boesky had a preternatural ability to invest in companies right before they became the target of unsolicited acquisition bids. Getty Oil, Texaco, Nabisco - if there was a major takeover in the 80s Boesky was there. It was almost like he knew something no one else did.

Of course, he did. Aided by Drexel Burnham “junk bond king” Michael Milken, Boesky had been getting tips on which companies were about to get offers, and invested accordingly. Especially telling was a payment of $5.3 million Boesky made to Drexel in 1986, which investigators alleged was a payoff for insider information.

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Simultaneously, Milken was engaged in a litany of insider trading gigs of his own, including stock manipulation, self-dealing (defrauding investors through complex intra-office trades) and stock parking.

Milken and Boesky both eventually did time for their crimes. Boesky paid the government back $100 million, and Milken was eventually forced to pay $500 million to defrauded Drexel Burnham clients. That firm went belly up in 1990.

Concerning the two’s legacy, they served as the models for Oliver Stone’s famous Wall Street character Gordon Gekko, the archetype of 80s stockbroker amoralism.

Jeffrey Skilling and the Joys of “Creative Accounting”

In 2000 the Houston-based energy giant Enron had hit $90 a share. Funny thing, because they were actually losing tons of money. But through a series of complex shuffling of the losses through dummy corporations and stating expected revenues as realized revenues, the company hid the ticking time bomb from both investors and mega-auditor Arthur Andersen, who would eventually be ruined for their role in the cover-up.

Knowing the house of cards was soon to fall, CEO Jeffrey Skilling and a host of other high-ranking execs began dumping company stock they knew would soon be worthless. Skilling himself dumped $33 million worth of his stake in the company.

As he and the other execs expected, the company did eventually crash, going under in late 2001 and finally ending the complex bankruptcy proceedings in 2004.

Kind of upset that investors lost billions in the fraud, the US government pursued the top brass at Enron. And unlike the light treatment some high-powered insider traders receive, the Enron guys didn’t get off light. Skilling got hit with a 24-year prison sentence - which for a former Fortune 500 Company CEO is like being executed 10 times (although in 2013 he was able to negotiate a deal to get 10 years lopped off his sentence).

Martha Stewart

“America’s Mom” might know how to make soap from scratch, but she didn’t know how to ethically trade in the stock market.

Stewart was close personal friends with the CEO of pharmaceutical company ImClone, Samuel D. Waksal, and had invested several hundred thousand dollars in the company. ImClone had advanced a cancer treatment drug, Erbitrux, to late trials, and it looked to be a blockbuster.

In 2001 Waksal became privy to information that the drug would be rejected by the FDA. As Erbitrux was their only major drug in the pipeline, the rejection would of course crush the company’s stock. Looking out for his friends and family, Waksal did the only insidery-trading thing he could do and told them all to dump all their stock, and dump it fast.

One of those friends was Stewart. She moved out $230,000 worth of stock prior to the bad news from ImClone. The stock, as expected tanked. But securities investors weren’t ignorant of the suspicious insider activity prior to the announcement, and nabbed Waksal, then Stewart.

Stewart was nailed by testimony from ex-Merrill Lynch assistant Douglas Faneuil, who testified that he told Stewart to dump the stock. Stewart got nailed, and became possibly the most well-known celebrity to ever be convicted of insider trading.

She did five months. In an ironic twist, several years later ImClone would be acquired by Eli Lilly and Co. (LLY) , and shoot up in value. If Stewart had held onto her stock, she would have actually made a tidy profit. 

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