Let the Insiders Hand You an “Unfair Advantage”

by Insider Alert Research Team

 Everyone in the stock market is looking for the ‘magic signal.’ That single factor that indicates an unequivocal BUY with guaranteed profits ahead.

The honest truth is there is no magic signal. You won’t find one by drawing lines on a chart. You won’t find one with a mathematical formula. And you certainly won’t find one by using the ratings of the big brokerage houses.

The financial markets are probably the most-competitive field of endeavor on the planet. There is a lot of brainpower and financial muscle trying to “win.”

You need to look at the market differently to beat it.

One of the best predictors of wealth creation is ownership by the people in charge. Hardly anyone focuses on ownership.

It’s a simple thing, yet nearly all the financial world’s eyes focus on everything but this. By following the signals of the ‘people in the know,’ you dramatically increase your chances of making a profit.

That’s why we follow insider buying.

The Inside Track

The fact of the matter is there are always people who know more about a company than you can glean from months of reading financial statements and industry reports. People with more knowledge than the most highly paid and qualified professional analysts. Individuals who are privy to a treasure trove of information that is not even available to the public.

So, who are these guys?

As you may have already guessed, these “enlightened ones” are the corporate officers and board members that head up every single company. And if you like, you can make the exact same moves that they do.

Admittedly, there are all kinds of investment strategies. People put their faith and funds into strategies like “Dogs of the Dow,” seasonal investing, index investing, or simply, buy and hold.

But we have found that insider buying (when properly interpreted) is the most powerful predictor of investment success.

Research shows that sound companies with widespread insider buying tend to outperform the market by a substantial margin. In fact, a comprehensive study at the University of Michigan revealed that stocks with insider buying generally triple the performance of the market over the next six months.

Follow The Leader

Some of the most successful investors of our era attribute part of their success to following this signal.

Legendary fund manager Peter Lynch believes there is no better tipoff to the probable success of a stock. George Soros, one of the most successful hedge fund managers ever, has used the strategy to help earn returns of 36% annually… (at that rate, money doubles every two years).

Warren Buffett, too, is a big believer in what he calls “the biblical standard” (quoting Matthew 6:21: “For where your treasure is, there will your heart be also”).

Buffett’s own Berkshire Hathaway is stacked with insiders who own significant amounts of stock. (At one point, several years ago, Buffett wrote in his annual shareholder letter that every director of Berkshire Hathaway was a member of a family owning at least $4 million in stock. None of them acquired shares with options or grants). By the way… Berkshire Hathaway shares have delivered a compound annual growth rate of 15% since 1990.

And our own Alexander Green, the Investment Director of The Oxford Club, has used this technique with great success in his Insider Alert.

You can do the same in the stock market by limiting yourself only to companies that exhibit one of the chief characteristics of wealth creation: significant ownership by the people in charge.

Following insider buying is one of the investment world’s crown jewels – certainly the purest and simplest way to make money in the stock market. When insiders are piling their money into their own companies it’s because they believe the company is poised for a huge gain in profits.

And usually… they’re dead on.

Profile of an Illegal Insider Trader: Garrett Bauer

by Insider Alert Research Team

Whether done the right way (a.k.a. the legal way) or the wrong way (i.e. the illegal way), insider trading can be quite lucrative.

When done the wrong way, it can also be quite detrimental, ending in embarrassing investigations, steep fines and significant jail time. Hardly the way a well-educated, hard-working corporate man or woman wants to go.

Take it from Garrett Bauer, a former independent day trader on Wall Street, who worked for RBC, JAG Trading and Lighthouse Financial in the past. He also made at least $32 million of personal profit off of insider trading. The illegal kind.

That money paid for a piece of real estate in Boca Raton worth $875,000 and another $6.65 million, 6,700 square foot penthouse in Manhattan’s Upper East Side. Business Insider reported last year:

“The penthouse is beyond luxurious. There are ten rooms, including a living room with 35-foot floor-to-ceiling windows, a kitchen with state of the art appliances, and a gigantic master suite. And don’t forget about the 1,320 square foot private roof deck.”

Judging by those posh results, his insider knowledge served him well. As evidenced by his pending March sentencing, however, it didn’t serve him well enough.

While the trades were extremely lucrative, they were also performed based on specialized knowledge. That in and of itself isn’t illegal, but it becomes so when investors don’t fill out the proper forms in the proper process. And Bauer deliberately did not follow the legislated procedure, knowing full well that his actions were illegal.

In his own words, on March 21, 2011, Bauer was recorded saying: “I mean, the fact is we did something wrong. So it is not like we are being convicted of doing nothing. We did something wrong here.”

And he admitted as much in a court of law nine months later, when he entered a guilty plea to the charges of insider trading, money laundering and obstruction of justice.

At the time, the prosecution recommended a prison sentence of nine to 11 years, in addition to the money and property federal authorities permanently seized. And historically speaking, Bauer doesn’t have very good chances of the judge knocking that down to something less severe.

Invited to speak at Yale by the school’s College Investment Group as a deterrent to future white collar crime, he duly warned the gathered students that judges have a tendency to rule harshly on such cases. Their purpose: to discourage further bad behavior on the part of other well-connected businessmen and women.

Though insider trading cases perhaps get the most coverage, according to the FBI database, “White-collar crimes are categorized by deceit, concealment, or violation of trust and are not dependent on the application or threat of physical force or violence. Such acts are committed by individuals and organizations to obtain money, property, or services; to avoid the payment or loss of money or services; or to secure a personal or business advantage.”

The database also states that “The number of agents investigating corporate and other securities, commodities, and investment fraud cases has increased 47 percent, from 177 in 2001 to more than 250 today. Since 2007, there have been more than 1,700 pending corporate, securities, commodities, and investment fraud cases, an increase of 37 percent since 2001.”

So apparently judicial attempts at stemming the tide by implementing harsh sentences doesn’t work nearly as well as they’d like it to. Not that it’s their fault.

While Garrett Bauer now fully recognizes that “there are catastrophic consequences” to insider trading, he also points out how “practically everybody thinks it’s not going to happen to them.”

Doubtlessly, many people do get away with their white collar schemes. And Bauer could have been one of them, considering how he started illegal insider trading back in 1994 and continued his criminal career until 2011.

That’s a sizable stretch of time to fly under the radar. Though admittedly, it probably would have gone a lot easier for him if he hadn’t been quite so good at hiding his activities…

It All Started with Matthew Kluger

When authorities arrested Garrett Bauer, they also took 50-year-old Matthew Kluger into custody, charging him with insider trading as well.

At the time, Kluger was a senior associate for Wilson Sonsini Goodrich & Rosati, where he worked on mergers and acquisitions (M&A). But before that, he had a varied career, filled with different educational pursuits and occupational focuses. In an April 6, 2011 piece, the Business Insider detailed:

“Kluger didn’t become an M&A lawyer until later in his career. The first school Kluger went to was the Kent, Connecticut-based Kent School, a private boarding school. He then went to Cornell, where he studied at the school of Hotel Administration… Later, Kluger worked as the General Manager of a Toyota dealership in California. He graduated NYU law school in 2005.”

From there, he eventually made his way to Wilson, et al, where he represented businesses in tricky cross-border transactions. Since those deals would have involved different languages and cultural traditions, they would have been complicated enough without adding in illegal aspects to the mix.

Nor was he playing around with small-time companies. His clients included well-known businesses such as CBS, Ducati, IBM, Johnson & Johnson, RiteAid and Unilever.

Not that the big names seemed to bother him at all. If anything, they probably enticed him all the more with their enormous potential for significant profits.

On April 7,2011, as the public was still finding out about the decade-plus-long dealings, Bloomberg divulged that “The scheme laid out by prosecutors began with Kluger’s passing tips about deals he worked on as an associate for major deal law firms.”

According to informed speculation over at Business Insider the day before, he already had a history of unethically passing along information from back when he was still in law school. But it seems that he had the correct connections well before then as well, considering how he initiated the fateful scheme in 1994. That was when he asked middleman Kenneth Robinson to locate people who could and would knowingly act on insider information he relayed to them.

Robinson, a mortgage broker, went on to contact Bauer, his longtime friend. And as history now blatantly shows – and Bauer now blatantly admits – Bauer jumped right on that bandwagon. In many ways, Bauer even took charge of the operations to everybody’s benefit.

Everything seemed to go smoothly for a while. From 1994 to 1997, Kluger passed along tips he garnered from Cravath Swaine & Moore LLP, the firm he was working for at the time. It all happened again from 1998 to 2001, after Kluger switched jobs and began working for Skadden Arps Slate Meagher & Flom LLP.

During those times, Kluger acted like the pro he was, making sure to never divulge information pertaining to cases he was personally working on. He didn’t even open any suspicious-seeming documents on his computer. Yet, even so, he was able to access enough information to make lots of money.

Insider Trap Laid, Set and Sprung

 Kluger might have been quite good at what he was doing, but Bauer was apparently even better.

For some unknown reason, the two men and their partner, Robinson, took a hiatus from their illicit activities for a while. Maybe it was because Kluger was so good at keeping his white collar crimes under the radar. Maybe one or more of the men had personal reasons that kept them away from it all.

Regardless, according to now-public records, the three put the brakes on the operation in 2001 and didn’t start back up again until 2005.

They should have just stopped while they were ahead, however, since that third and final round of illegal insider trading was what did them in.

At that point, Kluger was working at Wilson Sonsini Goodrich & Rosati PC in Washington. And Bauer had long since taken over the roles of paymaster and benefactor. Or so said the prosecutors in the case. They don’t appear wrong, however, considering that, of the $32 million the men made together between 2005 and 2011, Bauer held onto all but $2 million of it.

Admittedly, that’s small change compared to the money he was working with overall. Before his arrest, Bauer said he typically traded a minimum of $50 million per day. Considering that his daily maximum was usually in the $100 million range, it shouldn’t be surprising that his 2010 total was in the billions: $8 billion, to be precise.

Of that, he told Yale students, “well under” one percent was on illegally obtained information.

Following his speech, Yale Daily News summarized his story, writing that “The scheme was discovered after Bauer became more selective about which tips he used. Robinson – who had previously not generated large profits in his own personal trading account – then began acting on Kluger’s tips… and the Securities and Exchange Commission (SEC) became suspicious of the spike in profits and investigated Robinson, who subsequently turned in himself, Bauer and Kluger.”

Technically, it could be argued that Kluger and Bauer could have kept up their schemes indefinitely without ever tipping off the SEC. Either of them could have possibly messed up significantly enough to warrant government attention even if Robinson hadn’t been caught red-handed. But their previous history and even their behavior during the official investigations seriously suggest otherwise.

With the FBI breathing down his neck, Robinson not only divulged his own discretions and those of his partners, he also went so far as to wear a wire while making numerous phone calls with the two other men.

Bloomberg notes:

“Bauer, 43, told his friend [Robinson] he believed they’d sufficiently hidden their crimes by talking on disposable cell or pay phones and by using cash from small bank accounts to dole out profits of the alleged scheme.”

They even discussed literally burning money or putting it through a washing machine cycle to clear it from any incriminating fingerprints.

That’s why Kluger was confident in their ability to escape unscathed in the end. In one recorded conversation, he told Robinson, “As long as Mr. G [Bauer] keeps his mouth shut and I keep mine and you keep yours, I don’t think they’re gonna find enough of anything.”

Again, that might very well have been true. But Robinson already had talked and was still talking, which makes the question altogether moot.

Bauer told Yale students that his entire body “turned numb” when he finally recognized that his friend had ratted him out. While he has since come to terms with that betrayal, he still acknowledges the obvious: that the next several years will be difficult, also noting that the waiting period between his guilty plea and sentencing is the proverbial eye of the storm.

He’s using that window of opportunity to give talks addressing the consequences of what he did, volunteering at a soup kitchen, teaching English and math to the underprivileged and making balloon animals for children with disabilities.

Whether all of those good works will serve him well in March when the judge determines his punishment, however, is still left to be seen.

Everything You Need to Know about Insider Trading

by Insider Alert Research Team

Insider trading.

You might have heard the term back in 2011 when Peter Schweizer’s book, “Throw Them All Out,” first caught the attention of 60 Minutes and quickly ignited a firestorm of controversy.

In “Throw Them All Out,” Schweizer detailed numerous examples of congressional corruption, including our lawmakers’ habit of legislating themselves exclusive loopholes to profit off of the rules and regulations they shackle the rest of us with. That includes insider trading.

Let me explain…

Insider trading, at its very basic, is when somebody with special knowledge about a company decides to either buy or sell shares or security of said company. Usually this is somebody high up on the corporate ladder but, as Briefing Investor explains it, it can also include “officers and directors of companies, owners of restricted stock, and owners of more than 10% of a company’s stock.”

What’s wrong with that, you might ask?

Well, that’s where things start to get a bit more complicated.

You see, when the stock market crashed in 1929, setting off the Great Depression, a lot of blame started flying around pretty quickly as blame usually does. And while the government was in part responsible for the mess and definitely for the ensuing chaos, it didn’t want to acknowledge that blatant fact.

So, for better or worse, it began meddling in the private sector more than it already had been.

In 1934, Congress passed the Securities Exchange Act, which was promptly signed by President Franklin Delanor Roosevelt. Arguably the first of its kind – at least on the federal level – it placed strict controls on publicly traded companies with the stated intention of evening the playing field against the “fat cats” on Wall Street and in favor of main street.

Among the long list of regulations the Securities Exchange Act outlawed were:

• Using any “device, scheme, or artifice to defraud,” investors, essentially requiring companies to list all relevant information about their businesses, profits, etc. or, as Cornell University Law School explains it, anything “that investors would think was important to their decision to buy or sell the stock”
• Manipulating the market to suggest that stocks are worth more than they actually are
• Employee purchases or sales of ownership in a company without first making the public aware of the transaction, also known as insider trading

Altogether, the Act was supposed to force companies to behave more ethically and investors to act more intelligently, with the combined result of keeping the markets from crashing again. The same was true for the Sarbanes-Oxley Act of 2002, which demanded even more transparency from businesses, adding additional paperwork for them to fill out and information they had to release.

Obviously, neither have prevented very much, as evidenced by the multiple stock market crashes and recessions 1934, corporate scandals such as Enron, WorldCom and Satyam, as well as the government-connected Fannie Mae and Freddie Mac, corporate crooks such as Bernie Madoff and Jon Corzine, and Raj Rajaratnam and the other 55 people who have been charged with insider trading since 2009.

And those are just the ones who get caught!

That also isn’t to mention that company’s are really quite clever about following the letter of the law rather than the spirit much of the time. (Though it’s hard to blame them sometimes when they have to follow so many of said laws.)

As Cornell University explains:

Section 9 of the 1934 Securities Exchange Act “addresses manipulation of the stock market by traders… However, modern market manipulation is accomplished through methods that are more subtle and harder to detect… [partially because] investors must prove that the price was actually affected by the manipulation, and that the defendant acted willfully. Proving damages also involves proving the actual value, since successful claimants may recover the difference between the actual value and the price they paid.”

And the same can be said of many other aspects of insider trading law, as discussed further on.

Their Insider Pain Can Be Your Outsider Gain

Regardless of whether either the Securities Exchange Act of 1934 or the Sarbanes Oxley Act of 2002 were right or wrong, helpful or harmful, effective or ineffective, or even selfishly or selflessly motivated, they are the reality that the publicly-traded business world has to operate under in the United States.

As the aforementioned “Throw Them All Out” by Peter Schweizer pointed out, Congress doesn’t have to abide by any such rules since they loopholed themselves right out of any such responsibility or accountability, but that’s another topic for another article.

In the meantime, average investors can get ahead of the game if they only have the know-how and commitment to utilize their resources properly. (For anybody who doesn’t have the time or inclination to not only look into the following resources but follow them up and research the company as well, consider Alex Green’s Insider Alert, which does all of that work for you. For more information about the Oxford Club service, click here.)

Unless you want to get into the world of shorting stocks, forget paying that much attention to when insiders are selling. Partially that’s because there are at least a dozen good reasons for company employers or head honchos to sell what they have. And most of them are personal, having nothing to do with the company’s short-term, mid-term or long-term growth.

The chief financial officer might have a daughter going off to college, the CEO might be buying a new house, or the vice president’s young son might require a costly medical treatment. And an easy way for any of them to get the finances necessary for any of those purchases is by selling off some of their shares.

Now, if the CFO, CEO and VP are all selling at the same time, that’s reason to think twice about investing in the company. But if it’s just one or even two corporate insiders offloading some shares, more than likely, it isn’t in any danger of becoming the next Lehman Brothers.

On the other hand, there is only one reason that insiders buy, and that is that they expect their company to do well in the near future. And, let’s face it: Out of all of the analysts, investors and industry experts who like to spout their opinions at every opportunity, it’s the insiders who should know the best how their company is really doing and what it is really capable of accomplishing.

Back in 2009, Alexander Green, who edits the Insider Alert, wrote how, in 2008, he discovered that:

“David Abrams, a Director of Crown Castle International made the single-largest insider purchase in the nation. He bought 4.5 million shares at a cost of more than $60 million.

“Based in Houston, Crown Castle leases cell towers and antenna space to wireless communications companies. Most of these are in the United States, although more than 1,400 are in Australia.

• The company has more than 24,000 towers in prime markets and is actively building more to lease.
• Recent earnings, released earlier in the month, contained a few surprises.
• While earnings were in the red, revenue was still growing at 9%. And I noticed that site rental revenue, gross margins and recurring cash flow all exceeded expectations.
• Moreover, the company had lost three-quarters of its market value and was selling below book value.”

Triggered by the SEC filings that Abrams legally had to file within two days of his purchase, Alex was able to identify it as a potential growth stock worth targeting. But he didn’t stop there, taking the additional necessary step of researching the company from what it did to how and how well it did it.

Then he recommended Crown Castle International to his Insider Alert subscribers and he watched it.

Of course, the markets weren’t behaving well in 2008. At all. Yet two months later, the stock had shot up 58%. And Alex was able to lead subscribers to that significant short-term gain all because he was paying attention to what the insiders were doing.

Insider Activity Isn’t So Easy to Find

As previously mentioned, while insider trading can prove extremely lucrative, it isn’t always the easiest task to interpret or even find.

For starters, the SEC – in typical governmental fashion – doesn’t just have one generic form for insiders to fill out whenever they’re making a transaction. They have multiple ones, including:

• Form 3 filings, which officially record how much an insider owns
• Form 4 filings, which officially record any changes to what an insider owns
• Form 5 filings, which basically sum up everything recorded in Form 4 filings for the year
• Form 13D filings, which have to be filled out as soon as a shareholder owns 5% or more of a company’s shares or securities
• Form 144 filings, which officially record the POSSIBLE sale of what an insider owns (No sale actually has to be made, so someone like a CEO can just keep filing Form 144s every 90 days just in case he does want to someday sell something.)

Starting to get the picture?

And it gets even more complicated than that…

As Briefing Investor says: “Unfortunately, even if you could access all insider filings electronically as an Internet investor [which you can’t, considering that much of the data doesn’t ever have to make it onto the internet or any traditional news source either], the time requirements on these forms does not always prove helpful. Form 144s must be filed in advance of the actual sale, but it may be done as early as the morning of the sale.”

In other words: not helpful at all. The same goes for Form 4 filings, which are submitted to the SEC after any changes are made, not before or even during.

Any savvy businessperson or anybody with access to a decent legal advisor can easily get around the rules and regulations – though not the paperwork – to profit just about as nicely as he or she would if the government didn’t meddle as much as it does.

Clearly, researching insider trading with the intent of capitalizing on it can easily become a complicated and unhelpful mess for anybody who doesn’t know exactly what they’re doing or at least knows somebody who does.

But for those who can successfully navigate the complicated, convoluted world of insider trading, there’s major money to be had.