‘Most Americans today believe the stock market is rigged.  And they're right'
Bloomberg Businessweek|October 04, 2021
Insider trading allows the well-connected to profit from privileged information. Technically it’s illegal—but only technically
Liam Vaughan

JIMMY FILLER MADE HIS CONSIDERABLE WEALTH BUYING and selling scrap metal in Birmingham, Ala. Now approaching 80 and mostly retired from business, he has dabbled as a collector of antique cars and casino memorabilia, acquired a 20,000-square-foot mansion in the hills outside the city, and donated $1 million to help build a practice facility for the University of Alabama at Birmingham football team. This largesse has made Filler a big name in his hometown —but he’s an even bigger deal among a certain class of stock trader.

That’s because Filler has an incredible track record buying shares in the companies he advises and invests in. Of the 496 trades he’s made since 2014 in Alabama’s ServisFirst Bancshares Inc., where he sits on the board of directors, and Century Bancorp Inc. of Massachusetts, where he’s the largest shareholder, 372 of them, or 75%, have shown a profit three months later. That’s the kind of run the world’s best stockpickers dream of, the financial equivalent of making the final table of the World Series of Poker main event in consecutive years.

Filler is the most successful corporate insider in the U.S., according to TipRanks, a data company that rates executives by how good they are at timing trades. As a result of this status, every time Filler buys a share in ServisFirst or Century, 2,699 TipRanks subscribers get an alert. Some of them, assuming Filler’s past performance will continue, follow suit and buy some stock for themselves.

In the U.S., an insider is defined as a senior executive, board member, or any shareholder who owns 10% or more of a company. There are about 82,000 of them, and every time they trade they’re required by law to file a disclosure, known as a Form 4, within two days. These filings can be viewed on the U.S. Securities and Exchange Commission’s website, but scores are added each day, and most don’t offer much insight. “You have to know where to look,” says TipRanks Chief Executive Officer Uri Gruenbaum. Directors typically receive a proportion of their compensation in stock options, giving them the right to buy shares at a set price before a certain date, so if an executive is simply exercising an expiring option, it probably doesn’t reveal a great deal about how he views the company’s prospects. Selling may not tell you much either, because there are all sorts of reasons an insider might want to cash out—to buy a boat, for instance. It’s when insiders use their own funds to buy stock on the open market that it’s almost worth paying attention.

TipRanks uses an algorithm to sort through the torrent of SEC filings, filter out what it calls “uninformed” transactions— that is, those that don’t seem to have predictive value—and come up with a rolling list of the top 25 insiders. As well as looking at win rate, the service factors in how much, as a percentage, insiders are making per trade. Those with long track records, such as Filler, also score better. “Someone might pick heads five times in a row, but to do it 20 times or 50 times is really hard,” Gruenbaum says.

Besides Filler, other TipRanks stars include Steve Mihaylo, the CEO of telephone services company Crexendo Inc., where he owns a $60 million stake. Mihaylo has turned a three-month profit on 83% of his trades over the past five years even as Crexendo’s shares have seesawed. His 1,985 followers understand that when the CEO is buying, there’s a decent chance the stock is about to go up. Then there’s Snehal Patel, CEO of pharmaceutical company Greenwich LifeSciences Inc., who’s made only five purchases but has earned an average 488% return on them because four of the trades preceded the announcement of promising results from a cancer drug trial. Filler says he’s a long-term investor in Century and has never been affiliated with the company; he also says he’s never sold a share in either Century or ServisFirst. Patel points out that the success of the Greenwich LifeSciences trial was referenced on the company’s website and IPO prospectus before he traded. Mihaylo declined to comment.

It’s not just those at the top of the rankings who constantly beat the market. Purchases made by U.S. executives outperformed the S&P 500 over the ensuing 12 months by an average of five percentage points between 2015 and 2020, according to a TipRanks analysis. The gap might seem scandalous to those with only a passing acquaintance with U.S. insider trading rules, which make it illegal for insiders to trade using the material— or financially significant—nonpublic information. And yet on Wall Street, it’s long been an open secret that insiders trade on what they know. In 1962, Perry Wysong, a bow-tie-sporting investor from Florida, started a newsletter identifying opportunities based on insider trades. Years later, a young stockbroker in Florida, George Muzea, set up a consulting firm to advise George Soros, Stanley Druckenmiller, and other hedge fund managers, often over games of tennis. “We used to call the best prospects studs,” he recalls. In 2008 a group of quants from Citigroup Inc. published a paper that found a portfolio mirroring insiders’ trades could yield an astonishing 23.5% a year, more than all but the most profitable hedge funds.

No one is claiming to know if Filler or any of the other TipRanks stars are taking advantage of nonpublic information. Poker legend Doyle “Texas Dolly” Brunson made five final tables in his career, after all, and it’s possible to get lucky enough to flip a coin and hit heads a bunch of times in a row. Plus, insiders will always have a better general sense than others about how their company is doing. But a growing body of research suggests that many insiders are trading well thanks to something more than luck or judgment. It indicates that insider trading by executives is pervasive and that nobody—not the regulators, not the Department of Justice, not the companies themselves—is doing anything to stop it. “There is a lack of appreciation for the amount of opportunistic abuse that exists under the current system, the amount of egregiousness,” says Daniel Taylor, a professor at the Wharton School and the head of the Wharton Forensic Analytics Lab. “Most Americans today believe the stock market is rigged, and they’re right.”

IN MANY WAYS, INSIDER TRADING IS THE EXEMPLARY WHITEcollar transgression. It’s what drives Bobby Axelrod’s nefarious profits in the Showtime series Billions and what Wall Street’s Gordon Gekko was engaged in when he said, “Greed is good.” In the real world, too, the crime captures, almost perfectly, the sense that the market is biased in favor of a corporate elite—a sentiment that undergirds both the recent meme-stock explosion and the rise of cryptocurrencies. When an executive learns his company is about to lose its well-regarded CEO and offloads shares to an unwitting pension fund, or a board member hears about a potential takeover on the distant horizon and sets up a plan to start buying, they’re profiting at the expense of regular people. Prosecuting insider trading is “a manifestation of America’s basic bargain,” wrote Preet Bharara, the former U.S. attorney for the Southern District of New York, in a 2018 op-ed article for the New York Times. “The well-connected should not have unfair advantages over the everyday citizen,” he wrote.

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