Mark Cuban Charged With Insider Trading By SEC

Mark Cuban, HDnet founder and owner of the Dallas Mavericks was just charged with insider trading by the SEC. The commission alleges that Cuban received a call from tje Mamma.com CEO about a pending PIPE offering of Mamma's stock. The call was supposedly prefaced by a disclaimer from the CEO that the information was confidential. The SEC complaint alleges that Cuban then used this insider information to sell all his Mamma.com shares in after-hours trading, thereby avoiding a loss of about $750,000. In case you're interested, here's a link to the complaint.

It should make for an interesting case. Cuban has the resources to fight this thing pretty much as far as he wants (even potentially all the way to the Supreme Court), and is definitely stubborn enough to do exactly that. He's already posted a response to the complaint on his blog:

Mr. Cuban stated, “I am disappointed that the Commission chose to bring this case based upon its Enforcement staff’s win-at-any-cost ambitions. The staff’s process was result-oriented, facts be damned. The government’s claims are false and they will be proven to be so.”

Not surprisingly, Stephen Bainbridge has a very thorough legal analysis of the issue. After all, it's in his wheelhouse.

In the meanwhile, I have SAS programs to run and papers to write.

Finance Professors Accused of Insider Trading

Here's another installment of "Finance Professors Behaving Badly":

John Marshall (retired finance professor at St. Johns University) and Alan Tucker (currently on faculty at Pace University) were recently accused by the Securities and Exchange Commission in March of passing along and trading on inside information about the takeover of The International Securities Exchange by Eurex. According to the S.E.C.'s allegations, Tucker, made more than $1 million trading on the tips he received from Marshall in 2007.

Read the whole thing here.

What's surprising is not that this happened, but that it doesn't happen even more often. Although the inside info didn't come from either of their finance classes (it came as a result of Marshall sitting on the board of a takeover candidate), finance professors (and particularly those in schools in the NYC area) get a lot of info.

Either we're smart (or ethical) enough to trade on that information, or smart enough not to get caught.

HT: Financeprofessor.com

Do Insider Trading and Short Selling Provide Useful Information?

The answer (according to University of Michigan professors Najat Seyhun and Amiyatosh Purnananadam) seems to be "yes".

In a new study that just hit the SSRN, they find that combining "standardized" short selling and insider trading provides better information about future returns than either does separately. They create their standardized measures by first calculating average historical levels of insider trading (purchases scaled by total shares outstanding) and then dividing differences from the average by historical standard deviations in insider trading and short interest. They find a number of interesting patterns with these measures:

• The two measures (standardized insider purchasing and standardized short interest) are only very weakly correlated. This means that the two measures aren't capturing the same information. So, there are potential gains to suing both in combination.
  
• They argue that using patterns in insider purchasing, they can identify "informed" short selling. In other words, when insider trades are in the same direction as short sales, short selling is most likely to be driven by informed traders. In other words, when standardized insider purchases are low (i.e. insiders have bad news) and standardized short interest is high (i.e. short sellers have bad news), subsequent stock returns are likely to be low (and the opposite for high insider purchases and low short interest).
• When they form hedge portfolios that are long the "good" firms (high insider purchases and low short interest) and short the "bad" firms (low insider purchases and high short interest), they get obtain risk adjusted returns (based on 4-factor model) of 0.88% to 1.22% per month.

So in short (no pun intended), their study finds pretty credible evidence that short selling and insider trading could potentially be combined into a profitable trading strategy.

Read the whole thing (on SSRN in pdf format) here.

Connections, Networks, and Investment Managers' Performance

One argument for going to a top school is that you get to tap into the alumni network and make connections with classmates that will help you in future years. Here's some interesting evidence that it's true in the investment world. Cohen, Frazzini, and Malloy examined how school ties affected the investment patterns of mutual fund managers in a paper, titled "The Small World of Investing: Board Connections and Mutual Fund Returns." They examined whether mutual fund managers invested differently in a company when someone from their school sat on the board. They found that:

• When the manager and the board member went to the same school, the manager took a significantly bigger stake in the company
• These "connected" investments gave significantly higher returns (a portfolio of connected investments outperformed non-connected ones by over 8% per year)
  
• The abnormal returns on connected investments were concentrated around corporate events such as earnings announcements.

Here's a copy of the paper.

It's a pretty interesting piece - it appears that they superior returns weren't merely a reflection of the managers knowing more about the ability of the board member. The most telling finding was that the returns were concentrated around specific news events. Hence, they were more likely to be driven by "inside" information.

All in all a paper worth reading (or at least, discussing in class).

Friday Link Dump

It's been an interesting day at Unknown University. We had a huge storm blow through, and there was flooding in many buildings around campus. Unfortunately, one of the buildings housed the university servers, and they had to shut down before there were short circuits that could really mess things up. As a result, they cancelled afternoon classes, and I've had no internet access all day. In any event, there have been a few interesting things that came across my bloglines account, so I thought I'd post a Link Dump before I turned in for the night.

At the Super Returns PE conference, someone asked a number of PE bigwigs what keeps you up at night worrying. Dealbook reports their answers.

Barry Ritholtz at The Big Picture put up some very nice analysis of of issues surrounding Tuesday's big stock market decline. And in a related piece, he presents the Top Ten Myths of Tuesday's Correction.

Greg Mankiw's top-selling economics principles text is centered around Ten Principles of Economics. Yoram Bauman (the world's only "stand-up economist") gives the unofficial, humorous version in this video.

The Wall Street Journal (online subscription required) reports on a large insider-trading scheme involving over a dozen individuals at investment banking firm UBS AG and several hedge funds.

That's all for now, folks.