Dan Solin

A Sane Explanation for Insane Behavior

It seems like no week goes by without another action by the SEC alleging insider trading or other misconduct by members of the securities industry. This week was no exception.

According to a litigation release issued Feb. 17, 2012 ,the SEC has charged John Kinnucan and his Portland, Oregon-based expert consulting firm, Broadband Research Corporation, with insider trading.The SEC complaint (the allegations of which have to be proven in Court) alleges that Kinnucan and Broadboard tipped off clients with material, nonpublic information they obtained from "prohibited sources" inside publicly traded technology companies. The clients were allegedly portfolio managers and analysts at prominent hedge funds. In addition to the civil case, Mr. Kinnucan was arrested and charged with one count of conspiracy to commit securities fraud, one count of conspiracy to commit wire fraud, and two counts of securities fraud.

Insider trading appears to be an epidemic on Wall Street. According to the Wall Street Journal, 36 hedge fund managers have been convicted or pleaded guilty to insider trader charges. The most prominent case involved Raj Rajaratnam, the founder of Galleon Group, a hugely successful hedge fund,who was convicted in May 2011 on all 14 counts securities fraud and conspiracy, based on insider trading allegations. The government alleged that this scheme generated over $63 million in illegal profits and avoided losses for Galleon.

I find it intriguing that well-educated, successful people would engage in this conduct. It raises these questions: If hedge fund managers have the secret mojo that permits them to obtain outsized returns without taking commensurate risks, why do they have to resort to illegal conduct? Does greed alone explain a willingness to engage in criminal conduct and risk a lengthy term in prison?

A study at a Swiss University reported in Der Spiegel may provide a sane explanation for insane behavior. The study found that stockbrokers behaved more egotistically, and were more willing to take risks, than a group of psychopaths who took the same test. The brokers appeared to be motivated not just by greed, but by a desire to achieve a competitive advantage. One of the researchers likened the conduct displayed by brokers to seeing their neighbor had the same car so "... they took after it with a baseball bat so they could look better themselves." Scary stuff.

Previously, I was of the view brokers were just emperors with no clothes, pretending to have a "market beating" skill that doesn't exist, in an effort to justify what they do for a living.

Whatever the reason for this conduct, you don't want to be a part of it -- or them.