By John Lawrence
Some guys just can’t resist the temptation to score an extra couple of hundred thousand bucks by using their position inside a company such as Qualcomm and the information they are privileged to know in order to buy and sell stock before the public has access to that information. Such a guy was Derek Montague Cohen, who knew about Qualcomm’s plans to buy Atheros Communications in 2011.
He knew that Atheros’ stock value would go up after it was publicly announced that Qualcomm would buy them. So he bought Atheros stock before it was announced publicly and before the stock price went up. After the announcement and the resultant surge in Atheros’ stock value, he sold the stock making a tidy $200,000 profit. But he was not the only one. Several other Qualcomm employees did the same thing.
Now Cohen faces jail time, something that rarely happens in white collar crimes.
Cohen’s lawyer argued that he shouldn’t have to serve jail time because of his age, health problems and the lifestyle he’s become accustomed to. He said, “It’s a terrifying prospect for him to face prison at this point in his life.”
As Jay Leno would say, “Ahut. Ahut. Ahut.” Poor baby. If you don’t want to serve the time, don’t commit the crime.
But Cohen, age 52, should thank his lucky stars that he lives in the good old US where white collar criminals are usually just given a slap on the wrist.
In China they are routinely executed for less. Take the case of Zhou Yongkang, age 72, who was found guilty of accepting $118,000 in bribes. He was sentenced June 11 to life in prison. And Cohen’s lawyer will still probably get him off after appeals and other legal machinations.
Let’s face it – America does not like to jail its white collar criminals. Look at all the bankers who have been found guilty of fraud, bid rigging and everything else; yet not a one of them has spent any time in jail.
In most of these cases the insider(s) get away with it. Who’s tracking this kind of thing anyway? Cohen and the other blokes were just unlucky, that’s all. Of course if they didn’t think they were going to get away with it, they never would have done it which is the rationale for most crimes. On May 29, U.S. district Judge Janis Sammartino sentenced Cohen to six months in prison and 1000 hours of community service.
Cohen spent about $430,000 on stock and call options. U.S. Attorney Eric Beste took a dim view of Cohen’s dealings. “This is a crime of opportunity being committed by people of education and experience, and there’s a significant amount of discretion. These people choose to cheat, and they can be deterred.”
As it turns out, Cohen was ratted out by another Qualcomm exec who also had his hand in the cookie jar. Robert Herman, who worked as a regional sales director in San Diego, pled guilty to insider trading in July and was sentenced to a $50,000 fine, 1,500 hours of community service and three years probation. He got out of jail time by cooperating with authorities, i.e. he ratted out Cohen.
After getting a call from Cohen, Herman bought about $148,600 of stock in Atheros. Later that day, after the news went public, Herman sold the stock and made a $29,000 profit. Cohen, who had earlier pled not guilty, was the fifth person to admit guilt in connection with the deal, according to court records. Among the other members of this motley crew was Michael Fleischli who pled guilty to netting about $3,000, prosecutors said.
Insider Trading, Front Running – Stock-In-Trade for Corporate Low Lifes
Insider trading is similar to front running in which a trader has knowledge that a stock will probably go up or down. Then he can buy or short the stock depending on circumstances before the surge or drop happens making a quick profit once the stock pops or dips.
In this business advance knowledge of any trend can be used to make a profit. And that’s how most hedge funds make their money. If you don’t have access to special knowledge in this business, chances are you’ll be left behind or left out.
But wait! there’s more. Two San Diego stockbrokers, Chad E Wiegand and Akis Eracleous, pled guilty to insider trading on June 9. The guy supplying the info was Michael J Fefferman, who was a high ranking executive with Ardea Biosciences, a San Diego biotech company. He tipped off the other two that Ardea was going to be purchased by AstraZeneca in 2012.
With that information in hand the two stockbrokers bought a ton of Ardea stock. When the public announcement of the merger was made, shares of Ardea stock shot up 51% in one day. They then made a tidy profit selling the stock they had just purchased at a much higher price. These guys also make money by knowing in advance of public announcement that certain clinical trials went off rather well or were a total dud.
In any event it’s information in advance of what the average Joe Schlub has access to that makes these guys their money, and only a few ever get caught.
The Yin and Yang of Insider Trading
In Chinese philosophy, yin and yang describes how apparently opposite or contrary forces are actually complementary. Theses forces seem to be at work at Qualcomm Corporation where criminal activity and a stellar reputation as San Diego’s largest employer seemingly go hand in hand. From a philosophical perspective these seem to be the contrary forces that are actually complementary.
Jing Wang, a former executive vice president and president of Qualcomm’s global operations, pled guilty to insider trading and money laundering in July, admitting that he made $240,000 from trading Atheros stock through a secret brokerage account. His stockbroker, former Merrill Lynch vice president Gary Yin, pled guilty to money laundering.
Wang’s brother, Bing Wang, is also charged but believed to be at large in China. Good thing they didn’t pull this stuff in China or they would be looking at life imprisonment at the very least along with their countryman, Zhou Yongkang, but more probably they would be executed. Unlike the good ole US, China has no qualms at all about executing white collar criminals. Bet Qualcomm rues the day when it hired the Bing and Jing show.
So San Diego, America’s Finest City, with America’s Finest Corporations, turns out to have America’s Finest White Collar Criminals. It’s the Yin and Yang of business – the grimy underbelly complements the gee whiz image. What else is new?
John Lawrence
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Great job of reporting. We live in Scam Diego, where MBAs lose their virginity as quickly as necessary. Don’t you wish the newspapers of the last century were still using their resources to do this work?
Yes, the most famous inside trader of them all – Martha Stewart. She was sentenced on July 16, 2004 to five months in prison, five months of home confinement, and two years probation for lying about a stock sale, conspiracy, and obstruction of justice. She was ratted out by Doug Faneuil, assistant to her broker, Peter Bacanovic, who tipped her off that ImClone was about to drop.
The sad thing is, her being a convicted felon is probably just not on her concern radar with all the money she has. Most people don’t even care and the one’s who do are not staying awake at night. All one can do us just have a sense of humor.
Thanks John. All these examples merely point out how regulation does not really solve the problem of greed. Cheaters will try to get away with something whenever they think the regulators aren’t looking. This cat-and-mouse game that goes on constantly in a regulated capitalist economy is not the answer. The answer is to shift to a more equitable economic model.