Anyone who has seen HBO’s The Wire (or read this) knows that it’s best not to discuss your illegal activities over the phone.Allegedly, Spencer Mindlin wasn’t one of those people.
Now thanks to his alleged activities, we know how to front-run Goldman Sachs. (But of course, we’d have to be employees or otherwise know of Goldman’s upcoming trades to actually do it.)
Background: the SEC recently filed insider trading charges against Mindlin for trades he made while he was an employee at Goldman Sachs. According to the allegations, Mindlin and his father made $57,000 by taking positions in securities underlying the SPDR S&P Retail ETF (XRT) with knowledge that Goldman Sachs would later make market moving trades on those same securities.
12/17/07 1:30pm - Spencer emails Goldman employee at the NYSE to figure out how Goldman will play the rebalance.
12/17/07 5:21pm - Mindlin emails Goldman's ETF desk again, and finds out that Goldman will short 225,000 shares of Sport Supply
Mindlin tells the ETF Desk that they would need to rebalance their hedges on the XRT by 12/21/07, the date that XRT will start tracking Sport Supply.
He is later emailed a spreadsheet that indicates Goldman would have to short 225,000 shares of Sport Supply, which at the time was over seven times the average daily trading volume for the stock.
Spencer emails instructions to his father to give to his Citigroup advisor.
He wants him to trade Sport Supply before Goldman shorts it. He tells his father, 'ask him to do it with a $.35 limit. Be sure to get that limit on the trade.'
Using his Citigroup brokerage account, Alfred buys 60 $10 put options on Sport Supply set to expire on December 21. This gives him exposure to 6,000 shares.
Alfred makes another trade in Sport Supply ahead of Goldman's short.
According to the SEC, 'Because Alfred Mindlin's call with TD Ameritrade was recorded, Spencer and Alfred Mindlin's conversation was also captured on tape.' Here's what they said:
- Alfred: It's done.
- Spencer: It's done?
- Alfred: Yep.
- Spencer: OK. What price?
- Alfred: Three-Five.
- Spencer: OK. Great.
- Alfred: OK.
- Spencer: Actually, did I tell you what happened? I mean why I started freaking out?
- Alfred: No. No, you didn't tell me anything.
- Spencer: But, I did. I was talking to you before. I told you, right?
At 12:51pm, Alfred buys 30 $10 puts on Sport Supply with his TD Ameritrade account.
12/21/07 10:56am - Goldman's ETF desk emails Spencer. He is reassured that Goldman will short Sport Supply.
On the big day, the day that XRT beings tracking Sport Supply, Spencer is further reassured by Goldman that they would be executing the rebalancing trades, which would likely move Sport Supply shares lower.
12/21/07 2:19pm - Spencer calles TDAmeritrade to boost his trades in Sport Supply before Goldman executes their short.
Impersonating his father, Spencer calls TD Ameritrade multiple times in an effort to boost his short positions on Sport Supply. However, due to margin requirements, he only purchases 7 put option contracts. He also places an order to buy 3,700 shares of Sport Supply at the close of the market. This would cover the exercise of 37 put options.
The 60 puts in the Citigroup account and the 37 puts in the TD Ameritrade account are exercised well in-the-money.
The Mindlins have also purchased 9,700 shares of Sport Supply, which cover the 97 puts.
Total profit: $24,608.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.