Tuesday, February 7, 2012

Don't be an Insider

"The real voyage of discovery consists not in seeking new landscapes but in having new eyes." -Marcel Proust

This French novelist was on to something with this quote.  One thing business school has taught me is that learning and problem solving aren't always necessarily about learning new things or seeing new problems.  Sometimes, it's about framing.  Or the content and delivery channel.  By this, I mean that alot of the learning in the past two years has come from cases (real experiences) and lively discussions.

One of the more interesting learning opportunities came about a week or so ago when convicted insider trader Garrett Bauer shared his story with students at London Business School and candidly took Q&A.   This event came from left field when Garrett contacted our PE & VC club and offered to do this.  I heard second-hand that the PE & VC club agreed to host this event because Garrett had similar other speaking engagements at US business schools and wanted to include us in the mix.

Essentially, Garrett was a day trader who used inside tips from a lawyer (his best friend) to make buy / sell decisions.  He did this for several years, and while it didn't always pay off, it doesn't change the fact that he acted on privileged and confidential information.

Garrett went into great detail on the information he got, the logistics of the scheme, how he got caught, and what it was like to be in prison.  He was tried in federal court, and it was there that he learned that his best friend ratted him out.  In a strategic move, Garrett plead guilty and was convicted.  He is now awaiting sentencing.  That is largely the decision of the federal judge who will give a sentence ranging from ~8-12 years based on the points accumulated from all the charges (insider trading, obstruction of justice from destroying a cell phone, and money laundering from using cash from an ATM to pay for insider tips).   Factors such as volunteer work, marital status and children, sickness, and amount of money recouped can influence the sentence given within the sentence guideline.   I don't believe Garrett is evil, and he's found an interesting way to use his time to teach others based on his experience and to also potentially lower his sentence.  He's also found the right audience with MBA students, and I believe he is sincere in his message of "it's just not worth it".   Not only for insider trading but also other "victimless crimes."

The Q&A lasted at least an hour.  The softball questions at first became a bit more candid and interesting as time passed.  I asked Garrett whether he had had a chance to talk to his best friend / insider trading accomplice since he was arrested.  He said that he had not and that his lawyer advised against it (because it would then lead to another type of charge added to his docket).  From what I could tell, he didn't show overt anger towards his friend for betraying him (surprising).  I certainly wouldn't be that forgiving.

The message of "it's not worth it" really came through.  (Not that I ever have or will user insider info).   From the way Garrett explained, I would never want to be the target of the federal prosecutors.  They make sure that they can win most cases they take to trial.  And many of the rules, precedents, and calculations are assymetric in favor of the feds.   He also did this for a decade, and didn't make that much (or any) money for many years at the beginning.   Plus, he made good money anyways.  Definitely not worth it.

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