ROOMY KHAN: The US government is creating a culture of distrust and fear on Wall Street

Roomy KhanRoomy KhanRoomy Khan.

On June 21, 2016, Sanjay Valvani, a hedge fund manager at Visium Asset Management, who was charged with insider trading last week, was found dead in his home Monday evening, an apparent suicide.

Sanjay Valvani grew up in Michigan and graduated with an M.B.A. from Duke University’s Fuqua School of Business in 2001 before going to Wall Street. He endowed two scholarships and was a member of the board of visitors at his alma mater business school. But ultimately, a successful career and a life built with hard work and education, fell victim to a governmental probe and charges.

Sadly, Sanja Valvani’s suicide is not unique. In June 2011, in a Manhattan courtroom, federal prosecutors played for a jury a secretly recorded phone conversation between two Wall Street traders exchanging stock tips. Two days later, Ephraim G. Karpel, one of those traders, hanged himself in his office. While working for a New York commodities firm, Mr. Karpel had been cooperating with the federal authorities for about a year and he had been taping conversations with fellow traders.

As Deal Book reported, “the government’s investigation changed his life forever and was his unravelling,” Fran Karpel, his wife, said in a telephone interview. “He sank deeper and deeper into a hole and couldn’t see a way out.” Ms. Karpel added, “we were terrified,” and “we had no one to turn to.”

Government’s increasingly aggressive and public stance in pursuing insider trading has not only led to headliner convictions, but it is also creating a culture of distrust and fear on Wall Street. Government’s hardball investigative tactics, pressuring witnesses and raiding offices, mostly result in a complete destruction of professional lives, but sometimes result in an irreversible human tragedy.

For many professionals on Wall Street, the focus is on the upside from insider trading. In a cutthroat competitive industry, bonus, and some times even job security depends upon successful trades. You are as good as your last trade! However, this focus on alpha can lead to being blind sighted to the severity of downside.

My heart goes to the family of Sanjay Valvani and Ephraim G. Karpel. The futility of life in such times is staring at you. My own mother said to me “If I was in your shoes, I would have committed suicide.” Many people working in the industry in an intensely results driven environment engage in insider trading without fully comprehending the consequences of these choices, while perpetuating and feeding the narrative that it is “victimless.”

Of course, insider trading is not really victimless. An insider trader is giving himself or herself an undue asymmetrical advantage. My analogy for this is an exam where one has the answers before one sits for the exam. The argument that one should make insider trading legal is equivalent to saying we should post the upcoming test on line before we take the test. Then all one has to do is to memorise these questions and answers and, every one can get an “A.” Defeating the purpose of taking the exam!

Congress designed section 10(b) of the Exchange Act as a “catchall” clause, but the Supreme Court has held that “what it catches must be a fraud.” Thereupon, the violation of insider trading has been interpreted into the section 10(b) and SEC Rule 10b-5 as a form of common law fraud or deception. Although, Insider trading does not fit into the paradigm of the common law fraud, nevertheless it is a form of “Market Abuse.”

An analyst who has done a ton of research is unfairly disadvantaged compared to an insider trader with this “secret information.” For every trader who reaps benefits with the inside Information, some investor on the other side does loose. However, the losing trader is distant and anonymous. Hence, very bright and educated people, leading to these very poor choices, justify the action.

But above all, many professionals, if you are caught, do not comprehend the severity of the steep downside. There is not enough preparation for the consequences for these choices. The upside of millions of dollars needs to be offset by the possibility of losing “everything.” I certainly did not do this, and it resulted in a cataclysmic decimation of my professional and even most of personal life.

As I would say, it is an equaliser. It leads to destruction of not only one’s past, but also the future!

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