Friday, April 25, 2008

Ex-Trader Charged With Spreading False Rumors

Ripples of terror reverberated around Wall Street trading desks yesterday when the SEC accused a former Schottenfeld Group trader with spreading false rumors about Blackstone's proposed takeover of ADS. The SEC demonstrated firmly that it is not messing around with rumor-mongering by going after this pea-shooter whose total profits on the offending trades were $25,000. It is certainly true that Mr. Pea-Shooter (aka Paul Berliner) did make up rumors about a supposed meeting that never took place between Blackstone and ADS. He then forwarded those rumors to 31 of his closest friends ( who are all brokers) through instant messenger. He also shorted the stock at around $77 and watched it fall in response to the spreading of his rumors. However, those who listened to Mr. Pea-Shooter and sold their stock in a panic, or even shorted it, should send this guy a thank you note. The Blackstone/ADS deal never happened and ADS is now a $57 stock.
There are many who believe that Wall Street is built on a firm foundation of rumor-mongering. If traders didn't spend all day making up rumors to support their trading positions, their productivity levels would drop markedly. Within many of these rumors, however, lies a kernel of truth. Finding that kernel is considered part of the game. Were traders spreading rumors about Bear Steans going bankrupt? Absolutely. But Bear Stearns was eventually forced to find a white knight to rescue it. Will the SEC go after those rumor-mongers? Or is it not illegal if the rumors become a self-fulfilling prophecy? Every investment bank relies to varying extent on borrowing in the money markets to finance its trading positions. Theoretically, any investment bank can go bust over a crisis of confidence. Lehman, who was also apparently the target of viscous rumors during the height of the panic in the credit markets, emphatically put its foot down and raised capital to avoid winding up like Bear. Does the SEC go after those who spread rumors about Lehman but not Bear just because Lehman's management did a much better job of dispelling the rumors of its "potential" insolvency? The answer is obviously not straight-forward. But whatever it is, you didn't hear it from me.

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