Episode 671: An Insider Trader Tells All : Planet Money Today on the show: A man who got caught insider trading explains everything — what he did, how he did it, and why. Though he's still struggling with that last one.

Episode 671: An Insider Trader Tells All

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DAVID KESTENBAUM, HOST:

Just a little note. Today's podcast includes some bad words. Actually, it's the same bad word said over again in rapid succession. There you go; you've been warned.

All right, Jacob, here's the photo. This is a surveillance photo, we're pretty sure taken by the FBI. You want to describe it?

JACOB GOLDSTEIN, HOST:

Yeah, so it's two men in a parking lot. It looks like the picture was taken from across the street. You see the men in profile. The man on the right is wearing sunglasses and a dark jacket. And he's handing an envelope to the man on the left.

KESTENBAUM: What I love about this photo is it captures the exact moment where the guy on the left is actually taking the envelope.

GOLDSTEIN: You can see the thumb just closing right over it.

KESTENBAUM: We can tell you what's in that envelope because this whole thing ended up in court. It is stuffed with money. The envelope's filled with hundred-dollar bills.

GOLDSTEIN: And this is a picture of insider trading. You hear about insider trading in the news. It's this abstract thing. No, here is a photo of it happening.

KESTENBAUM: Insider trading, where one person tips a friend off about some upcoming merger or leaks some confidential information. They buy some stock, and they make a ton of money. This one made for a particularly good story.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED REPORTER #1: In many senses, it's a story made for the movies, an accountant for KPMG, Scott London, who now has insider trading charges brought against him...

KESTENBAUM: Insider trading feels like cheating because - because it is cheating. And it strikes this nerve for people who feel like the markets are rigged. You know, here is your proof - right? - two men in a Starbucks parking lot exchanging an envelope filled with cash.

Hello, and welcome to PLANET MONEY. I'm David Kestenbaum.

GOLDSTEIN: And I'm Jacob Goldstein. Today on the show, we talk to that man in the photo taking the envelope full of cash in the Starbucks parking lot. And he tells us everything. He tells us what he did, how he did it and why he did it. Well, all right, on the why, he's still kind of trying to figure it out.

KESTENBAUM: Also, what is insider trading? The law is not what I thought. Actually, there isn't really a law. And we dig into this brain teaser - the money that insider traders make, where exactly does that come from? Who are they stealing from?

(SOUNDBITE OF MUSIC)

UNIDENTIFIED WOMAN: Support for this podcast and the following message come from Paramount Pictures, with "The Big Short," the true story of the four outsiders who risked it all to uncover the biggest fraud in U.S. history - nominated for four Golden Globe Awards, including best actor Steve Carell, best actor Christian Bale, and best picture of the year. "The Big Short" stars Christian Bale, Steve Carell, Ryan Gosling, Melissa Leo, Brad Pitt and Marisa Tomei. Now playing everywhere.

KESTENBAUM: Usually in these cases, the person who commits the crime, if you call them up, they will just not call you back. Or they'll say, talk to my lawyer. And then the lawyer will not call you back. This case is different.

So you're the guy in the photo.

SCOTT LONDON: I am the guy in the photo, yeah. (Laughter).

KESTENBAUM: This is Scott London.

LONDON: I've been - well, I was a CPA.

GOLDSTEIN: A CPA, a certified public accountant. Scott was an accountant working at one of the biggest accounting firms in the world, KPMG. And he was good at his job. He got promoted over the years to where he was overseeing 500 people spread across a whole region.

KESTENBAUM: And he says it was the kind of job you could feel good about. They were conducting audits of hundreds of publicly traded companies, making sure those companies weren't cooking their books or making something up. Scott says all the big decisions ran through him.

GOLDSTEIN: And in the course of doing that, what do you learn about a company?

LONDON: Everything.

GOLDSTEIN: Everything?

LONDON: Really, everything - what's going on internationally, what's going on liquidity-wise, what's going on with future projections.

GOLDSTEIN: So, like, you would know as much as almost anybody inside the company about the company.

LONDON: Yes.

KESTENBAUM: This was, of course, very valuable information he was being entrusted with. And Scott says it was super clear that it was supposed to remain confidential. The whole point of the audits was to ensure fairness in the marketplace. They would check and approve the company's financial statements. And then that information would be released to the world. Everyone would get it at the same time - level playing field.

GOLDSTEIN: Scott says they had ethics training classes every year or so, reminding people about the importance of keeping the information secretive, keeping it confidential. And as a boss, Scott says he was often the one telling people to be careful, not to even let anything be overheard accidentally.

LONDON: And there were numerous occurrences where, you know, you're on the 30th floor of an office building. You all head down as a group to lunch, go get a bite to eat. And you're in the elevator. And you get on floor 30; someone gets on at floor 20...

KESTENBAUM: Everyone's still talking about work.

LONDON: I had to just kind of put my finger up to my lips or do, like, the stop sign over your neck. You say, you know, hey, stop talking, that type of thing.

GOLDSTEIN: Sometimes, his friends would ask him, hey, you got any stock tips? And his answer was always, no, I can't tell you anything, sorry.

KESTENBAUM: But it is hard not to talk about work at all. And Scott had this one friend named Bryan Shaw. They belonged to the same country club.

LONDON: We went out for dinner, and we played golf. And we occasionally traveled together. We went to concerts together.

KESTENBAUM: Scott says they were pals. It was one of those nice relationships, you know, that exists kind outside of the family part of your life. They weren't hanging out because their kids liked each other. They liked each other.

GOLDSTEIN: And Bryan was in the wholesale jewelry business. But sometimes, he and Scott talked about stocks in a very safe way - until one day, when Bryan, when Scott's friend, makes this proposal.

LONDON: He goes, hey, I know a way that we can both make a little bit of money. You give me information. I'm going to trade on it. We'll split it three ways. I keep a third. You keep a third. And the government gets a third in income tax, capital gains taxes.

GOLDSTEIN: (Laughter). What did you think when he said that?

LONDON: My initial reaction was that, you know, he was joking. I just - you know, I said, you know, we can't do that.

GOLDSTEIN: Scott definitely does not need the money. He's making more than $500,000 a year. But he says his friend Bryan's jewelry business is doing really badly. This is right after the financial crisis. And his friend says he needs some help. So Scott considers it. He thinks, what if I give him just a little bit of information?

What was going through your head at the time?

LONDON: You know, it's a battle. The simple version of the one side is that I knew it was wrong. It was stupid. And then the other side is, all right, well, he's a good friend. I trust him. You know, if you're trading and, you know, you're only going to make 10 or $15,000, who's going to know?

KESTENBAUM: Scott decided, OK. I'll do it. And he stepped across that line that for years he had been telling people not to cross. And here is how the insider trading actually worked. Scott agreed to pass Bryan information. They did this about companies you may have heard of, including Sketchers, the shoe company and Herbalife, the company that makes weight-loss shakes.

GOLDSTEIN: So for example, just before Herbalife was about to release its earnings report to the public saying - whatever, saying, hey, we had a really good quarter, Scott and Bryan would talk on the phone. Scott would tell Bryan what those results were going to be in advance, before the public knew.

KESTENBAUM: Bryan would buy the stock or place a bet that the stock was going to go up in price. Then the official announcement would come out, and the rest of the world would learn about it.

GOLDSTEIN: Yeah, we'll play a little tape from CNBC here. Brace yourself.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED REPORTER #2: Herbalife reported a thing of beauty quarter with earnings coming in at a buck-43 per share, 22-cent beat on revenues that rose 28.5 percent. You have your like - maybe only Amazon had better than that.

GOLDSTEIN: News like this comes out; the stock price goes up. You could make thousands of dollars in a moment - in a minute - just from having that little piece of information before everybody else.

KESTENBAUM: But here's something super-weird to think about. Where exactly did that money come from? Who got robbed here? It's kind of a brain teaser to think about. Jacob, you and I spent a long time trying to work this out with diagrams on a piece of paper.

GOLDSTEIN: Yeah, we were, like, drawing circles on paper and lines like, OK, here's the insider trader. And here's the money. And wait, who is the victim? Who's on the other end?

KESTENBAUM: It's kind of tricky to think about because, like, if Bryan buys stock - right? - he bought that stock from somebody. So you could say the person who sold that stock to him, that's the person who got robbed because the stock went up in price.

GOLDSTEIN: Yeah, but that person wanted to sell that stock at that price. If Bryan hadn't bought it, someone else would have. The seller, that is not the victim.

KESTENBAUM: We are not the only people who have struggled to figure this out. There are a bunch of academic papers about this. And here, I think, is the answer. Somebody was definitely harmed. It's just really hard to know who.

GOLDSTEIN: Think of it this way. For purposes of explanation, imagine that Bryan had bought 10 shares of Herbalife stock. OK, that is 10 shares that someone else doesn't own because Bryan owns it. We don't know who would have owned it if Bryan didn't exist. But somebody would've owned it. That somebody - that unknowable somebody - would have profited when the stock went up. That unknowable somebody, that is the victim. That is the person who got robbed.

KESTENBAUM: You're looking for someone who doesn't own the stock.

(LAUGHTER)

GOLDSTEIN: Yeah.

KESTENBAUM: There are lots of people out there who don't own the stock. I think if Bryan had gone to Scott and said, hey, let's rob someone's house, there's no way Scott would have said yes. But this felt different. Scott says that was part of his thinking at the time. It felt like a victimless crime.

GOLDSTEIN: Scott says he gave Bryan inside information about a dozen times, and he says Bryan paid him for that information in all these different ways. Once he gave him a watch - a Rolex. Another time he bought expensive tickets to a Bruce Springsteen concert. Sometimes he just gave him cash.

KESTENBAUM: Usually they'd do the exchange indoors somewhere. Once, though, Bryan called and asked to meet in a Starbucks parking lot.

LONDON: He was going to be traveling. He was going to be going someplace. He absolutely wanted me to get this money in my hand. Is there any way he could meet me? I'm like, OK, well, I'm at work, you know, just a couple miles away. You know, I could meet you there if you really want to. And he says, yeah, let's do that.

KESTENBAUM: They meet at the parking lot. And nearby, there is a camera, hence that photo that would later be all over the press of Scott taking the envelope stuffed with money.

LONDON: Five-thousand dollars in cash.

KESTENBAUM: In hundreds or what?

LONDON: Yeah, all hundreds - 50 $100 bills.

GOLDSTEIN: What do you do with 50 $100 bills?

LONDON: To be specific, I put it in my underwear drawer in my closet.

KESTENBAUM: I always wondered where you should hide money.

LONDON: (Laughter).

KESTENBAUM: Not long after that - Scott remembers the date because it was his wife's birthday - he was home alone in the morning, getting ready for work, and there's this knock on the door.

LONDON: Well, the door's somewhat beveled glass. All I could see was kind of just two images. The first reaction that I had was it was two guys - two Jehovah's Witnesses.

GOLDSTEIN: He opens the door, and two men show him their FBI badges.

LONDON: And they ask, can we come in? And I said of course, and they come in. It was probably a 30-step walk from the front door to the kitchen table where we sat. Nobody else was home.

KESTENBAUM: They show him that photo in the parking lot, said there were agents at his friend Bryan's house right then. And as Scott is sitting there, he sees all the dominoes that are about to fall.

LONDON: It was like - OK, what's my wife going to say? What are my friends going to say? Oh, [expletive], what is KPMG going to say? Oh, [expletive], I'm going to lose my job. Oh, [expletive], I'm going to owe a lot of money. Oh, [expletive], I'm going to go to prison.

GOLDSTEIN: It got worse. Scott got a lawyer, and one day, they were on their way to court in the lawyer's car. Scott's reading the news on his phone, and he sees this story about his case that has something he says he didn't know. His friend Bryan hadn't been just making small trades for a few thousand dollars. The story says Bryan had been placing much bigger trades - says he made $1.27 million.

LONDON: And I almost threw up right there in the car, and I actually told my attorney, you've got to pull over. He was driving, but I just - you know, I was just fearful that I was just going to lose it right there. So I just couldn't believe it, and once I saw that, I said holy hell, this is - you know, this is obviously going to be a lot worse.

KESTENBAUM: Scott also learned something else. After his friend Bryan had gotten caught, Bryan helped the FBI set up a sting. Some of those last phone calls had been recorded, and that meeting in the Starbucks parking lot with the envelope - that was a set up. It was all spelled out in court documents. >>GOLDSTEIN: And then, of course, there were the TV cameras and the reporter standing up in front of the country club.

(SOUNDBITE OF NEWS BROADCAST)

UNIDENTIFIED REPORTER #1: It all started here, seemingly innocent enough. Back in 2005, two guys joined the North Ranch Country Club, which is gorgeous. They become golfing friends and buddies.

GOLDSTEIN: The whole thing goes before a judge. And here's where we get to another odd thing - a thing, frankly, that I found surprising when I started learning about this whole thing - and that is the way the law treats insider trading.

KESTENBAUM: We talked to Sarah Baumgartel. She's worked as a defense attorney. She's now a fellow at Yale Law School.

SARAH BAUMGARTEL: Something interesting about insider trading law in the United States is that there's actually no law against insider trading.

KESTENBAUM: So there is no law that says, like, the insider trading law passed by Congress or whatever?

BAUMGARTEL: Correct. There is no law like that. And in typical congressional fashion, they have increased the penalties for whatever insider trading is without defining it.

(LAUGHTER)

KESTENBAUM: And she says while everybody gets upset at insider trading because it gives someone an unfair advantage, that is not the legal reason why it gets you into trouble. The argument used these days in court for why it's illegal is that insider trading amounts to stealing information from a company. It's like theft. And so for that reason, proving that someone traded on insider information - that is not enough to convict them. If, say, a financial document from some company blows out the window, and you happen to find it sitting there on the sidewalk, Sarah says it's not insider trading for you to use that to make money in the stock market because you didn't steal it.

GOLDSTEIN: One other box you've got to check - the person providing the information - that person has to benefit somehow.

KESTENBAUM: And in fact, a bunch of high-profile insider trading cases were recently dropped because an appeals court ruled that, among other things, the person providing the tip, providing the information - that person has to benefit in some substantial way.

GOLDSTEIN: So we ran through Scott London's case with Sarah to see if it met all the criteria. One - did he give away information that he had a legal duty to protect?

KESTENBAUM: Yes, absolutely.

GOLDSTEIN: Did someone trade on that information?

KESTENBAUM: One hundred percent - yes.

GOLDSTEIN: Did Scott London benefit?

KESTENBAUM: We told Sarah about that photo of Scott getting cash in a parking lot.

BAUMGARTEL: That sounds bad.

(LAUGHTER)

KESTENBAUM: He agrees with you.

BAUMGARTEL: (Laughter).

GOLDSTEIN: So is he guilty of insider trading?

BAUMGARTEL: Is this a trick? It sounds like he's very obviously guilty of insider trading.

KESTENBAUM: He pled guilty immediately, and he knew he was doing it the whole time.

BAUMGARTEL: OK. (Laughter). All right, good. That's a relief.

GOLDSTEIN: Scott confessed right away when the FBI came to his house. And the sense I got in talking to Scott is that he's one of those people - if you ask him a question, he is just going to answer it.

KESTENBAUM: Here's Scott on the courthouse steps. A TV reporter asked him a question about how much money he made from the insider trading. And he doesn't, you know, dodge the question. He doesn't run to the car. He gives this very complete, accountant-like answer - just listing off each thing he got.

(SOUNDBITE OF NEWS BROADCAST)

LONDON: I received about $50,000 in cash, a watch that I was led to believe was worth about $10,000 - the Rolex - and about three or four items that were destined for my wife - that I gave to my wife - that were appraised recently for just under $10,000. So if you add it all up, about 70 grand.

UNIDENTIFIED REPORTER #2: And is that all going to be given back?

LONDON: Most of it has been given back - the money through the payment of the bond. The watch has been given back, and the jewelry is actually in my car. And we just couldn't give it back today 'cause the agents weren't present, but that's the plan.

KESTENBAUM: The people back in the studio on TV after this - they were talking about it like - who risks their half-a-million-dollar-a-year job for $70,000?

KESTENBAUM: Scott says his friends asked him that, too, and he does not have a great answer. He can't say exactly why he did it. I asked - was it exciting? Was the thrill part of it?

LONDON: No, wasn't exciting at all.

KESTENBAUM: Was he trying to get his friend to like him more? Is that what was going on?

LONDON: No, that didn't ever pass through my mind.

KESTENBAUM: Scott says he was kind of overworked and unhappy with his job, so everything felt a little less important. Maybe that had something to do with it. But he says crossing over that line was somehow just not as hard as it should have been.

GOLDSTEIN: Scott says what he did was just dumb. He says that, but he says, you know, as best as he can figure out, as best as he can reconstruct, he did it to help out his friend. And he said he didn't think they were going to get caught.

KESTENBAUM: Scott was sentenced to 40 months in prison. He was given a window to turn himself in. Because of a mix-up, he ended up spending a month in solitary confinement, but most of the time, he was in a minimum security prison. Spent a lot of time walking around this track they had, listening to a small transistor radio, telling other inmates, no, I can't help you figure out that accounting issue with your marijuana business. Scott was released this summer - a couple months early for good behavior.

LONDON: I think about what I did every day. I think I - you know, that there's downer days. But for the most part, you know, 80 percent of the time, I have good days, but I think about how life would have been different.

GOLDSTEIN: Were you able to go back to your sort of personal life?

LONDON: Yeah, a hundred percent of it. Yes, I committed a felony. There's no doubt. I did something bad. But, you know, I'm 53 years old. And I've - and that - what I did there does not - in my opinion does not define my personality and who I am at a core. My friends understand that. They - they'll say, right to my face, you're an idiot. I can't believe you did that, but I still love you. And I still would, you know, stand right behind you if you ever needed help.

GOLDSTEIN: Do you still belong to that country club?

LONDON: No, they kicked me out.

GOLDSTEIN: Do you ever see Bryan Shaw?

LONDON: (Laughter). I have not seen him or spoken to him since the day he gave me that package in the Starbucks parking lot.

KESTENBAUM: Scott says they do live in the same area, and they go to the same restaurant, so he knows he's going to run into him sometime.

GOLDSTEIN: And, of course, we asked him, what do you think's going to happen when you do see him?

KESTENBAUM: He said, I'm not going to hit him. It's not like I'm going to punch him in the face. I just want to tell him, when the FBI caught you, you should have just come to me. I would have turned myself in. We could have skipped all the drama, and there never would have been that embarrassing photo in the Starbucks parking lot.

(SOUNDBITE OF UNIDENTIFIED SONG)

UNIDENTIFIED SINGER: (Singing) I never told you that I was blind until the day I met your funny Brady smile.

GOLDSTEIN: One last thing - I did call Bryan Shaw when I was working on this story. He entered the phone, I told him who I was, and he said he was not interested in talking.

KESTENBAUM: You can send us e-mail. We are planetmoney@npr.org. You can tweet us at @planetmoney.

GOLDSTEIN: We're also looking for an intern for summer 2016. You can apply on our blog, npr.org/money.

KESTENBAUM: Our show today was produced by Jess Jiang.

GOLDSTEIN: Special thanks to Bill Wang at the Hastings College of Law. He was the one who finally definitively answered our question of who is harmed in insider trading.

KESTENBAUM: And if you're looking for another show to try, NPR has lots of them - politics, comedy, music. You can find them at npr.org/podcasts or on the NPR One app. I'm David Kestenbaum.

GOLDSTEIN: And I'm Jacob Goldstein. Thanks for listening.

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