The Mychal Kendricks case shows that the illegal stock practice is still out there — and regulators take it very seriously.
Maybe the Seahawks could sign Martha Stewart? At least she’s done her time for insider trading.
Everyone knows sports is big business. And American football is the only place we can watch multimillionaires beat each other up on any given Sunday. But the Kendricks case is unusual for an athlete, as well as a throwback for veteran business journalists.
Insider trading was once a big deal. It has since been eclipsed by a shower of business hustles, corruption, and walking right up to the line of legality. One recent example was Elon Musk’s attempt to pump Tesla stock on Twitter. That gambit led to a $40 million settlement with the Securities and Exchange Commission and Iron Man’s removal as chairman.
Most Read Business Stories
- How a tax loophole is helping tech company workers save millions
- Protesters in Seattle petition Amazon to stop selling technology to ICE
- Boeing jet trouble leads to cuts at Europe's busiest airline
- We've just lived through the greatest period of restaurant growth in U.S. history. Here's why it's ending.
- 6 minutes: Man haunted by family's final moments on 737 Max
But as Kendricks shows, insider trading is still out there. And even in the anti-regulatory age of Trump, regulators still take it seriously.
At its most basic, the tactic involves trading stocks or other securities based on inside information. It’s unfair to other stockholders — sometimes ruinous — and illegal.
Kendricks was accused of receiving non-public information from a financial industry analyst on potential bank mergers while he was playing for the Philadelphia Eagles. The Seahawks signed Kendricks, 28, this fall. He played in three games before the NFL announced this week that he is suspended indefinitely as punishment for insider trading.
Analyst Damilare Sonoiki conspired with Kendricks. For example, the indictment states, “On July 18, 2014, Kendricks paid $850 for a luxury car service to drive Sonoiki approximately 150 miles from New York City to York, Pennsylvania so Sonoiki could attend a nightclub event hosted by Kendricks. After the event, Kendricks and Sonoiki went to Kendricks’ apartment in Philadelphia,” where Sonoiki set up a special brokerage account in Kendricks’ name.
Kendricks made $1.2 million from the tips. Now he might go to prison.
According to Sports Illustrated, the assistant special agent in charge of the FBI’s Philadelphia division described Kendricks’ moves as “not merely gaming the system.” Such insider trading is “a threat to U.S. financial markets, because it compromises the public’s trust that our markets operate fairly.”
Indeed, insider trading is not a victimless crime. Those who do it gain a first-mover advantage over other investors. For example, if insider traders get a private tip that a merger is imminent, they can buy up shares of the target company and then pocket the profit when the stock rises after the deal is announced. Or they might learn that a firm is facing a serious danger — they can sell early, avoiding losses when the news causes the stock to tank.
The public’s trust in a fair market — already tried by such “innovations” as computerized flash trading, which gives legal advantages to certain investors — is further eroded.
People of a certain age remember the notorious Ivan Boesky, who became a prominent and very wealthy arbitrageur in the 1980s. “Arbs” profit from buying something in one market and selling it in another, with no risk to themselves.
It’s a complicated undertaking, but those who played the game were among the Masters of the Universe in the mega-merger decade. They helped remake American business and, along with corporate raiders, cost many cities their local economic treasures.
Time magazine put Boesky on its cover in 1986.
But a year later, Boesky was investigated by the SEC for investing in stocks based on non-public information from corporate officers about upcoming deals. In some cases, Boesky invested only days before a merger.
He was sentenced to three-and-a-half years in a federal prison, fined $100 million and permanently barred from the securities industry. The scandal also hastened the undoing of junk-bond financier Michael Milken, on whom Boesky informed.
It took the Boesky scandal to bring insider trading to the public’s attention. Oliver Stone used Boesky as one of the inspirations for his evil “greed is good” character Gordon Gekko in the movie “Wall Street.”
For one thing, pre-1980s Wall Street operated with much more prudence and caution. This was partly a legacy of the Great Depression: One of its triggers was rampant stock fraud. It took years for The Street to earn the trust of average Americans again.
And it was a result of the SEC, established under President Franklin Roosevelt, to police the securities industry. As its head, FDR picked the famed/notorious speculator Joseph Kennedy, father of the future president.
To critics of the appointment, Roosevelt famously responded, “Set a thief to catch a thief.”
Indeed, Kennedy did such a good job cleaning up Wall Street, he is said to have complained (probably tongue-in-cheek) that even he couldn’t make money there any longer.
But the enforcement of insider trading was long nebulous.
It definitely applied to corporate directors and officers, as well as holders of more than 10 percent of a company’s shares. But it could apply to others who trade on inside tips. The SEC wanted it that way, the better to deter potential lawbreakers.
The agency has since become more specific on those at risk of breaking the law.
Boesky’s example, however, didn’t deter Martha Stewart. She was found guilty in 2004 on charges related to insider trading. She sold shares in a bio-pharma company after her broker warned that a critical drug had failed its trial.
The information was non-public and material (meaning significant), putting this in the insider trading target zone.
Stewart avoided a loss on the stock. Once caught, she pleaded ignorance — which was highly unconvincing considering she had been a stockbroker herself. Brokers must pass the grueling Series 7 exam to become licensed, which includes a deep immersion in securities law including insider trading.
She got off more lightly than Boesky: Five months in the pen and two years of supervised release.
Now, Kendricks didn’t learn the lesson of Stewart — even though the SEC and stock exchanges are vigilant about insider trading and the regulator has a strong record of enforcement.
Greed, like hubris, springs eternal.
I will leave it to you, dear reader, to apply the appropriate sports metaphor.