Chinese Stocks and Insider Trading Trouble

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
Read More.
( Updated
)
a | A

A China delay.

Here is index provider MSCI's news release on its decision not to include Chinese A-shares in its global indexes, which is sort of phrased the opposite way: MSCI announced "that it expects to include China A‐shares in its global benchmarks after a few important remaining issues related to market accessibility have been resolved." That happy language seems genuine: MSCI will work with Chinese securities regulators to try to get A-shares into the index as soon as possible, after clearing up little problems like how daily quotas for foreign investment can run out before the end of the day, making it hard for indexers to buy at the close. Initially if the A-shares are included it would be "a 5% partial inclusion of China A‐shares into the MSCI Emerging Markets Index," due to restrictions on foreign ownership; as those restrictions eased over time, the weighting of China would presumably go up. "On full inclusion A-shares would account for a fifth of the MSCI emerging markets index, while all Chinese stocks combined would take up 44 percent of its value."

We've talked before about the many Chinese stocks whose prices went up by the daily limit every day for weeks after their initial public offerings. That is not ... that is not natural. But stocks, in addition to being ownership shares of companies with their own economic fundamentals, are also tokens whose trading price is determined by supply and demand. If you know that there is a ton of demand -- particularly price-insensitive index demand -- for stocks, and you very carefully control supply, and slowly provide more supply to meet the massive demand, then you can manage a steady upward price trend. "Wary of the danger in exposing its markets to unchecked global capital flows, China has chosen to take a slow, deliberate course to opening them up," which is good for prices, mostly. On the other hand, William Pesek here at Bloomberg View points out that China's stock-market surge has not been great for its bond market

Insider trading, etc.

Here is a civil insider-trading case (with a parallel criminal action) about an employee at Ardea Biosciences who allegedly tipped his stockbroker brother-in-law about pharmaceutical trial results and eventually the acquisition of Ardea by AstraZeneca. Here is the complaint. Here is how it describes the relationship between the Ardea employee (Michael Fefferman) and the broker (Chad Wiegand):

Fefferman has been friends with Wiegand since approximately the mid-1990s when they worked together at a brokerage firm. Fefferman married Wiegand's step-sister in 2002. Fefferman and Wiegand considered each other to be a close personal friend, and they and their families socialized together frequently. Fefferman knew that Wiegand had financial difficulties and occasionally gave or loaned money to Wiegand to help him financially.

Okay but. The allegations are basically, there was news, and Fefferman gave it to Wiegand, and Wiegand traded on it (and also tipped a buddy of his). There's no suggestion that Wiegand gave Fefferman anything in exchange for the tips: Fefferman just gave him free inside information out of the goodness of his heart. (Fefferman gave Wiegand money, but not the reverse.) After Newman, is that illegal? This is not legal advice or anything but the SEC's complaint here does not seem to describe illegal insider trading, since it's missing the "personal benefit" requirement in Newman. Which makes it a weird test case: If you think insider trading should be illegal, then surely this sort of insider trading -- tipping your brother-in-law about pending material announcements at the company where you work -- should be illegal. But ... I'm not sure it is?

Elsewhere, here's a guy who "has agreed to pay more than $1 million to settle charges that he shorted U.S. stocks in companies planning follow-on offerings and then illegally bought shares in the follow-on offerings to lock in significant profits with little to no market risk." That's bad, you're not supposed to do that, there's a rule (Rule 105) that says you can't sell short after an offering is announced and then cover your short sale in the offering. You can sell short after the offering is announced and then cover your short in the market after the offering is priced; you can also sell long (if you previously owned shares) after the announcement and then re-establish your long position in the offering. Rule 105 is one part general distrust of short sellers, one part general distrust of risk-free profits, and one part, like, shorting and then covering in the offering is sort of a rude thing to do to issuers and our securities laws disfavor rude things. Still this conduct should be carefully distinguished from last week's alleged insider traders, who allegedly shorted before the offerings were announced (and then covered in the offerings) because they managed to seduce investment bankers into giving them inside information. That is much ruder, offers bigger and more risk-free profits, and is doubly illegal.

And Igor Oystacher settled spoofing charges with ICE for $125,000, which, as Paul Murphy points out, makes it seem a bit unfair that Nav Sarao is still in prison on similar (but unproven) spoofing charges. One bizarre oddity of the American criminal justice system is that if prosecutors want to lock you up all they have to do is utter the magic words "wire fraud." Everything is wire fraud. Spoofing? Wire fraud. Building cars that kill people? Also wire fraud. My slightly exaggerating the extent of wire fraud laws right here on the Internet? Probably also wire fraud. If you're not in prison for wire fraud it's just because they haven't gotten around to you yet.

A Target data breach.

Yesterday Target posted an announcement that it was increasing its dividend and share repurchase authorization, then took it down, then put it back up again. Probably don't do that? The release went up at 3:11 p.m. and was gone "fewer than 25 minutes later"; Target also "told CNBC that it didn’t issue a press release about a dividend increase," which is maybe just ever so slightly not true? In that it did? But by accident

The company was working through different scenarios for the outcome of the board meeting, said the person, who asked not to be identified because the matter was private. One of those contingencies was posted on the site mistakenly, according to the person.

When the release disappeared one thought of the Avon hoax:  It looked for a moment there like the SEC had locked up Nedko Nedev, only to see the real killer strike again. But it wasn't, it was just that "a number of Web links were being tested." The stock was up on the announcement and then down on (or maybe before) the de-announcement -- the re-announcement didn't come until after the close -- so I guess if you sold after Target's denial you have a very boring securities fraud lawsuit? Anyway the lesson here is probably (1) don't test your Web links, come on, how hard is it to put things on the Web, I do it every day, and (2) if you must, wait until after the close. 

People are worried about bond market liquidity.

Or I mean whatever this is:

“All the money is going to the same place, and when something adversely impacts one, chances are the same factor adversely impacts everyone else, and there’s nobody there to take the other side,” Antczak said in a telephone interview. “We used to have 23 types of investors in the market. Now we have three. In my mind, that’s the key driver.”

The three types of investors in corporate bonds, according to Citigroup strategist Stephen Antczak, are "mutual funds, foreign investors and insurance companies"; the 20 other types -- which hold less and haven't been growing as much -- include "hedge funds, government pension funds and securities brokers." On the other hand:

“A couple of investors have been acting like brokers, thinking about being a source of liquidity to the Street,” Antczak said. “They are big and able to hold less-liquid positions because they don’t have to mark it against the market and can hold until maturity.”

That's what you probably want: value investors are the ultimate source of liquidity. Elsewhere in bonds, Swiss bonds at positive yields! Buy defaulted Argentine bonds! Treasury collusion!? Will an increase in mergers and acquisitions cause corporate credit spreads to widen? And banks are shifting more bonds into the held-to-maturity category so they don't have to mark them down when rates rise. And in equity markets, "the Standard & Poor’s 500 Index this year is trading in the smallest range since at least 1995."

Things happen.

BlackRock is getting more into smart beta. Jack Ma regrets taking Alibaba public. An oral history of Uber. Tech startups sometimes use non-GAAP accounting. More blockchains. These Are Global Banking’s Winners and Losers Since the Crisis. Banks and living wills. Third Point Re CEO Says Not Any Dummy Can Start a Reinsurer. Hedge Funds Add $950 Million in April after Shedding $750 Million in March. Student loans and moral outrage. "Generation Xers are the forgotten middle child generation." Yuccies. Debate commercial. How Sir Walter Raleigh Calculated the Value of Streaming Music. Pizza Hut Couldn’t Make ‘Artisan’ Work, So Now It’s Stuffing Hot Dogs Into Crust.

If you'd like to get Money Stuff in handy e-mail form, right in your inbox, please subscribe at this link. Thanks! 

(Corrects entity with which Igor Oystacher settled in second item.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net