The recent news about the FBI's current crackdown on insider trading brought to mind what happened to a friend several years ago.
My friend was a very aggressive stock trader, and was always margined to the hilt. In the late 1990's and early 2000's he had done extremely well for himself by staying as leveraged as he could. But eventually he got caught in a short squeeze, and lost most of his money. (Though he still remained quite rich by most standards.)
I'm convinced that he got big enough to attract the attention of a hedge fund, which found out that he was leveraged to the hilt and decided to squeeze him. How would they have obtained this information? They would have bribed a back office employee at one of the brokerages where my friend kept his accounts. If they knew that a large investor was 100% leveraged -- and thus would be forced to buy in if a short position went against him -- they would buy the stock, drive it up, and sell it back to him at the higher prices he would be forced to buy in at.
Put yourself in the position of the person providing the information. Let's say you're a back office employee at Goldman Sachs. Your job is to process the traders' transactions, make sure the (mostly electronic) paperwork gets done the right way, the money gets transferred to the right places, margin calls are met, and all the accounts are in order. Your earn $170,000 a year, a good living by most standards, but you keep reading about how many millions the investment bankers and traders at Goldman are making. You can't help but feel like a second class citizen, and also a little resentful.
You're barely making your mortgage payments as it is, your wife is agitating for a nicer car, and you know your income category will make it hard for your three children to get scholarships to college. But you also know that without those scholarships, you'll be working the rest of your life in order to have a decent retirement.
Along comes a hedge fund guy who phones you at your home and tells you he wants to meet you, and that it could be very profitable for you. You get the feeling that this may not be completely legit, but the thought of extra money is appealing. You meet the guy, and he tells you that all you have to do is give him a little information: which accounts are 100% margined, and which stocks they are short. He says he'll meet you at a bar in Queens, near where you live, that no phone calls will be involved, and that if the information you give him is worthwhile, he'll pay you a percentage of the profits he makes. In cash. And that it could well run into the hundreds of thousands of dollars. He points out that there will be only two people who know about this arrangement -- you and him -- and that he has as much incentive to keep your arrangement secret as you do.
You think about it. Then you do what most people in your situation would do. You succumb.
I'm quite sure this is what happened to my friend, though I would never be able to prove it. I would also be surprised if this kind of thing does not go on all the time. It's a fairly obvious scam, and I'm sure I'm not the only one who has thought of it.
And employees at non-financial firms who are privy to information about takeovers, or new products, or FDA test results, must be sorely tempted to cash in on that information.
People will do all sorts of things for money, especially if they perceive the risk to be negligible. And hedge funds will do anything for money. Anything at all.
I'm not trying to sound morally superior here. If I were that back office guy, I'd probably do the same.
(Though maybe I'm slightly superior to those hedge fund guys.)
So I'm glad to see them brought in.