Insider trading buddies nailed by ... Metrocards?

Here's a delightful piece of regulatory police work. The Securities and Exchange Commission brought a case today against Lawrence Robbins, a former accountant and current independent film producer who seems to have funded his films by insider trading ahead of corporate takeovers.

It alleges that Scott Allen, who worked at a human resources consultancy, found out about some pending takeovers, and he told his friend John Michael Bennett, and then Bennett told his friend and business partner (in film production), Robbins. Bennett and Allen pleaded guilty to criminal insider trading a while back, while Robbins -- who was one further step removed from the source of the inside information -- settled a civil SEC case today by agreeing to pay back about a million dollars without admitting or denying the accusations.

Like a lot of SEC insider trading complaints, you can read this one as a how-to guide for insider trading though, I mean, you could also just not do that. You are free to be a law-abiding citizen. I will do the former but purely for entertainment purposes, this is not legal advice, or illegal advice I guess, don't actually do any of these things.

Obviously Rule No. 1 of insider trading is that if you're an insider -- like an HR consultant on a merger -- you shouldn't trade. You'll get caught. So you tell your friend, and your friend trades, and then he hands you a bag of cash. Division of labor! These guys got that part down: Allen never traded a share, says the SEC, and Bennett paid him with bags of cash.*

Also, you don't tell your friend stuff on a recorded phone line. These guys managed that, though they did occasionally communicate on un-recorded phone calls, which is also sub-optimal, since the SEC can cite phone records showing that Allen called Bennett on days that he learned new information.**

Most important, you keep your hand-offs of bags of cash secret. Really, though, this seems like it should have worked:

For example, on July 1, 2008, Bennett withdrew $5,200 from a Citibank branch located near his office at 10:52 am. Allen swiped his Metrocard at the 47-50 Rockefeller Center subway stop (the subway stop closest to Allen's office) at 12:36 pm and then again at the 59 Street Columbus Circle subway stop (the subway stop closest to Bennett's office) at 1:54pm. Also on July 1, 2008, Allen had an appointment on his Outlook Calendar for 1 pm entitled "BR @ 1," and Bennett had a $106.80 credit card charge at Blue Ribbon Sushi, a restaurant located in the Time Warner Center at Columbus Circle.

I like it! The temptation to write "Secret Insider Trading Tip-Off Meeting & Bag of Cash Handoff" on your Outlook calendar is no doubt strong, but Allen successfully resisted it. And one does think of the subway as being pretty anonymous. Next time I guess buy a $10 Metrocard with cash?***

Of course, nobody thinks the SEC will be reconstructing his mass transit trips, and generally the SEC won't be. The problem here is that these guys violated one of the most important insider trading rules, which is, don't trade in a way that makes it obvious you are insider trading. What that means is: Don't buy out-of-the-money short-dated call options.**** You know Company X is getting bought for $25 next week? Great, buy some Company X stock. Don't put on a giant bet that only pays off if Company X is getting bought for $25 next week:

In an account at Merrill Lynch, Robbins purchased a total of 2,351 out-of-the-money call options between Friday, February 29, 2008 and Thursday, March 6, 2008. Specifically, Robbins purchased: (i) 125 May $17.50 call options and 75 May $15 call options on Friday, February 29; (ii) 1,100 May $20 call options on Monday, March 3; (iii) 751 May $20 call options on Wednesday, March 5, 2008; and (iv) 300 May $20 call options on Thursday, March 6, 2008.

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