I've been reading the news about Anthony Elgindy today. Quite a story of relevance to everyone in trading.
For the record: I am no apologist of Anthony Elgindy - or anyone else - any individual or company, and there are a great many - here at SI who may or may not be in the business of manipulating stocks and trading in a deceitful manner. Quite to the contrary: I am the last person they would ever count as an ally. I have spent the past two years collecting evidence against a number of them, and legal action is forthcoming:
Please see:
siliconinvestor.com
As concerns A., I don't have the facts, though yes it does look damning, the indictment handed down today. Still, in this country, he is to be regarded as innocent until proven guilty. I hope and expect that he will be given a fair hearing, both in court and also in public.
Dow Jones just published the following (below). In my opinion, the most serious charge is that of obstructing justice. The question is this: is it illegal for someone to be given information by an FBI official? I would think the FBI officials would be in legal jeopardy here, but not A. His paying for the information, if proven, might present a problem, however, as that might constitute aiding and abetting.
Here is where I have a problem. The government says A. traded on "secret" FBI information. Was all of that truly "secret"? If it was available publicly, then it is not "inside information." Had he hired private investigators to ferret out information on these companies, would that be illegal? What is the difference between Wall Street analysts trading on non-public information such as (in the times preceding Regulation FD) private (i.e. the public was explicitly excluded) conference calls with CEO's? If A. paid FBI officials for background information on executives of these companies, then turned around and warned those companies they should pay him fees so that he would not issue a downgrade, how is this any different from Wall Street investment banks selling their analyst upgrades to companies paying them the highest fees? Remember Eliot Spitzer pointed out that some of our most prominent investment banks actually threatened companies with downgrades if they did not pay them banking fees. That sounds to me strikingly similar to what A. is alleged to have done. They both seem to rise to the level of outright extortion, wielding research reports as a sledgehammer against companies in this way.
Now the question here is this: All of this, if proven, is highly unethical, immoral and illegal behavior. But if A. is to be indicted for his actions, if he is accused of racketeering and insider trading, if proceedings are in place to seize his assets, then how is it possible that there are no criminal indictments facing Merrill Lynch, a firm which engaged in practices quite similar to those A. is accused of? Merrill Lynch's analyst abuse cost American investors amounts of capital many orders of magnitude higher than A. and his company could have done.
If Anthony Elgindy is going to jail for manipulating, abusing and extorting the market through his analyst recommendations, then there are hundreds, if not thousands, of investment bankers in downtown Manhattan who should share exactly the same fate.
I am not here to downplay the accusations. I have come to learn of organized fraud on the part of industry professionals to such an extent that is scarcely imaginable, how pervasive and rampant is the culture of greed, profits at any price, any hint of conscience absolutely absent, criminal scoundrels destroying the financial aspirations of legions of day traders and investors across the country. Those who are responsible should face justice for these activities - all of them. Therefore, if Anthony Elgindy abused the system, if he broke laws in the process, then he should face the consequences. However, so, too, should Wall Street investment banks. Unless we are to surrender to cynicism and selectively prosecute based on societal rank, then every last violator must be called to book.
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How The Govt Says Elgindy's Scheme Worked
By Michael Rapoport
NEW YORK (Dow Jones)--It was an audacious scheme, in prosecutors' telling: Use moles within the Federal Bureau of Investigation to get secret government information that could be damaging to a company, and then use that information to profit by short-selling the company's stock or by extorting the company outright.
That's what the government alleges Anthony Elgindy did, in an indictment released Wednesday. And while prosecutors are holding back on some of the details, the indictment does lay out a series of facts that can be pieced together into one detailed example of how the alleged scheme worked.
The information involves Nuclear Solutions Inc. (NSOL), a radioactive-waste treatment company which the government says Elgindy shorted last December - borrowing the company's shares and selling them in the hopes that the stock price would go down so that Elgindy could repurchase the shares at a lower price to return them to their owner, thereby making him a profit.
From the government's indictment, here's a chronology of what prosecutors say Elgindy did on Nuclear Solutions, matched with what was going on with the stock at the time:
Dec. 19: Jeffrey A. Royer, an FBI agent working with Elgindy and who was indicted along with him, searches the FBI's National Crime Information Center database and finds "criminal history information" about Paul Maurice Brown, the founder of Nuclear Solutions. (The government doesn't detail the nature of the information Royer found regarding Brown, who died in April. A Nuclear Solutions spokesman couldn't be reached for comment; Elgindy's attorneys also have not been available.)
Same day, about two hours later: Elgindy sends an e-mail to subscribers who follow his stock picks. The e-mail states: "NSOL - CEO, Dr. Paul Maurice Brown, is a convicted felon..."
That day, Nuclear Solutions stock tumbles from $3.20 a share to $2.45, on heavier-than-usual volume - a drop of about 23%.
Dec. 20: Elgindy and others begin posting information about Brown's alleged criminal record on Internet bulletin board and in chat rooms. In the indictment, the government alleges that Elgindy and his associates "sought to accomplish their manipulation by coordinating the release of negative information with short-selling in a manner designed to exaggerate the negative market sentiment for the stock."
Dec. 22 and 26: More negative e-mails from Elgindy about Nuclear Solutions. In one, he says that "Convicted Felon Brown ... has history of lying & fraud..." In aother, he says, "NSOL - info on (a Nuclear Solutions executive) the scumbag (attorney) ... has been disbarred..."
Dec. 24 on: Elgindy or his associates short Nuclear Solutions stock on seven separate occasions, lasting through most of January.
Dec. 27: Elgindy sends another e-mail to subscribers asking for details about their positions if they're short. Another e-mail, on Jan. 3, says "NSOL - short 20% @ 2.05 (add)." The "2.05" corresponds approximately to Nuclear Solutions' stock price at the time - a price which dwindles lower throughout most of January.
Jan. 30: In a chat-room discussion with his subscribers, Elgindy says that "We are pulling out of NSOL" and "NSOL <-- coverage (terminated) for good."
Jan. 31 and Feb. 1: Trading volume once again surges on Nuclear Solutions - consistent with the idea that any investors who had shorted the stock on the basis of Elgindy's e-mails were now repurchasing the stock to cover their positions. The price is volatile, plunging as low as $1 and going as high as $1.80.
The stock closes on Feb. 1 at $1.55. That's less than half the $3.20 a share it traded at before Elgindy's initial e-mail - a difference that represents profit to anyone who shorted the stock. |
