A comparison I hear a lot is that investing in the stock market is a lot like playing poker. It’s a pretty apt comparison. There are many similarities between investing and poker. They involve the revolving relationship between skill and luck, risk management, knowing when to fold and trusting yourself not to play all your cards at once, or reveal too much of your hand to another player.

Evaluating your cards (stock options). The first thing you can do in any poker game, be it onlinepokerlowdown.com or a ‘friendly’ game among your pals, is to see what you’re working with. Look at your cards: what’s the raw material you have on hand. Do you have anything worth betting on, or investing? Obviously, you don’t want to pay to see a flop when you’re sporting a 2 and a 9 unsuited. Similarly, you don’t want to invest in a stock that doesn’t have reasonable assets.

How much to bet (invest). If you’ve got a hand worth playing, or a stock worth pursuing, your next question is how much to put in. If you under-bet, you risk a heavier hand swooping up all the low-hanging fruit—that is, making the pot too valuable and too risky too early in the game. If you over-bet you’ll scare off other players (investors) and reduce the value of the pot. You want to make a bet (investment) that carries value while encouraging other investments that will add value.

Knowing when to fold (sell). One of the most common mistakes a poker player makes is falling in love with his cards and not knowing when to fold them. At some point you just have to know that in a game with many players at the table a pair will probably not take the pot. Similarly, with a stock you have to know when it has a run its course and begin a slump. Selling
before a downward turn is one of the trickiest moves in stock market investing. Imagine the people who sold right before the crash of 2007. There weren’t many of them, but the ones who did had money leftover to play the next hand.

Ultimately, skill and luck alternate in importance. A skilled investor, just like a skilled poker player, can still fall victim to a sudden economic downturn or a decline in a certain industry. Conversely, an amateur can waltz in and blindly make a fortune. It’s this dance between knowledge and guts, skill and luck, that makes poker and investing so similar.

Publicly traded investment firms look out for shareholders first.

You expect the companies you’ve invested money into to look out for your best interests, correct? The same goes for the shareholders of the corporate investment consultancy you work with. Always keep this in mind when working with a broker at such a firm.

Brokers are under no legal obligation to monitor investments after sale.

Investment advisers are obligated by law to monitor the quality of a sold investment so long as the owner is still a client of their firm. Brokers, on the other hand, only have to make sure the investment is good at the moment of sale. While laws have been enacted to incentive brokers into avoiding giving haphazard advice, nothing keeps them from doing so.

He or she earns commission from companies you buy stock from.

It sounds too dastardly to be true, but it is. Corporations make a habit of offering perks to brokers who can sell their stocks. Depending on what the company does or makes, your broker could be sent a brand new executive office chair or offered an all-inclusive cruise.

Brokers can be forced to sell certain stocks.

Either through aforementioned pressure from shareholders or from the fact that many brokers often get doled out a disorganized array of investment products, you may not always be given good recommendations simply because the higher-ups have forced your broker to push junk.

Not ever broker is an expert on every investment product.

The idea that one individual can master the art of stocks, bonds, commodities, and mutual funds and not be working out of Goldman Sachs HQ is a bit far fetched in today’s complex global market. Take any claims of such broad authority with a grain of salt.

While brokers and investment advisers have their uses, don’t get swept up in the misconceived notion that they are there solely to ferry you to investment success. Grill them in order to get the right answers, and learn how to smell a stinky suggestion. If it’s a recurring problem, then perhaps its time to get a new broker, or learn to invest without one.

The charges, which of course took center stage during the collapse of the housing and financial markets, were widely seen as bellwether tests as to the strength of future federal prosecutions against Wall Street executives who are involved in defrauding investors. We don’t yet know whether or not the settlement will mandate that the former Bear Sterns managers admit guilt, but many law analyst agree that a second acquittal, this time in a civil court, would have “undermined the S.E.C.’s ability to achieve settlements in other cases.” That said, it also ostensibly sends the message that the federal government is unable, or unwilling, to regulate and control financial fraud in corporate America.

At a time when many Americans are struggling with the costs of healthcare insurance, school tuition, gas prices, and the cost of living, some civil liberty activities bemoan the seeming immunity granted to financial mavericks. While your average working class citizen struggles to acquire Discover student loan interest rates, hedge fund managers play musical chairs with investor money and reap enormous bonuses, even while entire industries collapse. Investors lost $1.8 billion when Bear Sterns hedge funds collapsed.

Meanwhile, President Obama says he will be creating a multiagency task force whose sole purpose will be to take on cases that involve mortgage-related fraud. The S.E.C. has already launched into several investigations and issued subpoenas, helping to bolster the recent case against three former Credit Suisse traders, who are charged with inflating their financial portfolios in exchange for bonuses. But the prosecution of hedge fund managers is still a very controversial issue in the Wall Street world, where some analysts say it is difficult to draw the line between intentional fraud and poor business decisions.  

In a conference call with investors, Einhorn steadfastly denied that any impropriety had occurred. He said that all conversations with Punch Taverns were made under the explicit understanding that the company would not disclose to Greenlight any confidential information. Therefore, he did not appreciate that any information gained from one such meeting may have contained insider knowledge. Einhorn went on to rebuke the regulator for broad and misguided policies. The agreement to pay the fine, he stressed, stemmed out of a desire to avoid a protracted court battle.

The case stems from a June 2009 conference call between Einhorn and the managers of Punch Taverns, the latter in which Greenlight Capital owned a significant stake. During the call, Einhorn was told that Punch Taverns was planning to issue new shares of its stock, a move that would likely reduce its stock price. Greenlight then sold a considerable percentage of its shares in Punch after the call, a move that regulators stress was clearly based upon insider information.
Greenlight Capital is based in New York and manages around $8 billion worth of assets. The company generated news and a large following when it short-sold on Lehman Brothers stock in 2008, just months before the bank collapsed. Since then, Greenlight and Einhorn have amassed considerable money and influence by betting on equities and corporate debt.

While the $11 million fine is certainly not an insignificant one for Einhorn and Greenlight, the fund has years of grow and high-profile gains to carry it through. The real question is whether the fine will take a hit to Einhorn’s reputation. By paying and avoiding a court date, he certainly hopes to insure that it does not.

The news of the indictment against CEO Charles Stiefel and Stiefel Laborities comes as the SEC continues to up its effort to crack down on insider trading and other corporate crimes. Earlier this year, hedge fund manager and Galleon Group founder Raj Rajaratnam was accused of an insider trading scheme worth $63 million. This was just one of many in the past few years. Investigators have been aided by new software that is able to calibrate patterns from a vast database of financial information. The SEC uses such technology to see if any suspicious trading activity transpires before major mergers, company announcements, or huge share purchases.

In the case of Stiefel, FEDs allege the crime reared on deliberately mis-valued stock and deceitful business practices. When GlaxoSmithKline bought Stiefel Labs in 2009, the family-owned company was the largest private dermatology manufacturer in the world. Mr. Stiefel had recently bought 800 shares valued at $16,494 a piece. After it was acquired by GSK, these same shares were honored at $68,000 a share, gaining 300% profitability. This was just the first in a series of similar transactions during that time frame. In other words, between 2006 and 2009 CEO Charles Stiefel bought back shares at prices that undervalued the stock and failed to alert shareholders of the higher potential value. He also directly lied to shareholders by telling them that the company would remain family-owned while actively leveraging the company for sale to GSK

The SEC plans to retrieve the money that was defrauded, a process known as disgorgement, and prevent Charles Stiefel from ever serving as a corporate officer. According to a brief statement, Stiefel will contest the charges. The SEC seems poised to prosecute to the full extent of the law, saying “Private companies and their officers must understand that they are not immune from the federal securities laws…” With the recent stigma attached to corporate corruption and the public outrage over high-finance malfeasance, it’s likely this case will not be taken lightly.

If news of major internal banking scandals based on risky behavior could come at the least optimum time for big banks, now would be it. United States lawmakers are expected to start introducing legislation over the course of the next several months written to impose strict regulations on banks that built their wealth and equally lost most of it due to the practice of proprietary lending. The behavior, which basically entails a bank making massive bets for the benefit of themselves rather than customers, was a leading cause of the corrosion that led to the financial collapse of 2008. There’s big government incentive to rid the banking system of the risks involved in this practice through stiff no-nonsense regulations.

The voices of big banks claim that such regulations would be detrimental to their ability to take the necessary steps to recover the losses sustained over the last several years. Essentially, their argument is that such laws are impossible to write to include everyone, and only lead to further centralization of risk due to the inability of more institutions to engage in the practice. The main target of their offensive, the Volcker Rule named after former Federal Reserve chairman Paul A. Volcker, was written specifically to prevent banks from speculative betting with their own money. It’s obvious then why they aren’t interested in this becoming law.

But none of these proposed regulations and new laws are written to stop the kind of criminal behavior Mr. Adoboli is currently sitting in a London cell for possibly perpetrating. They’re simply compliance measures, meant to curtail the sorts of risk-taking that contributed to the 2008 financial collapse. In order for regulations and penalties to be put in place to keep people like Mr. Adoboli from continuing to individually put the future of banks and businesses at risk, someone will have to cause a financial crisis by committing it.

Mr. Adoboli got shockingly close.

This is just another example and the inquiry was set in motion as a result of correspondence sent to the Senator this past April. On the 26th, the Financial Industry Regulator Authority sent a letter about, what they called the, “potential scope of suspicious trading activity.” This is a huge slam against the SAC hedge fund that’s currently run by billionaire investor Steven A. Cohen.

The firm, led by Mr. Cohen, is one of the largest hedge funds in the world. To date no official charges have been made against Mr. Cohen or the group that he heads but a spokesman for the group said that they were “outraged” by the conduct of their portfolio managers. Many officials believe that charges will be filed shortly. Similar allegations have been made against Raj Rajaratnam, the head of the Galleon Group, that did result in conviction and similar accusations have been made against Noah Freeman and Donald Longueuil. These hedge fund giants have been industry leaders and it begs the question how epidemic the issue of insider trading is inside the financial community.

Wile specific hedge funds, such as SAC Capital itself, aren’t being charged; similar allegations have raised serious questions about the corporate culture that seems to possess a huge current running through our financial system. The government has been playing catch-up for years in their attempts to create a fair and balanced playing field. Senator Grassley has taken an aggressive approach towards this issue and it’s the hope that the legal system will start taking a more vigilant approach in its pursuit of Wall Street perpetrators. Though insider trading remains a huge issue, it is still unclear as to the efficacy of government regulation and indictment on this pervasive issue.

Jiau has pleaded not guilty to insider trading and is scheduled for trial on June 1st. As more “expert network firms” tumble, it’s becoming clearer and clearer that these insider trading networks are rampant. “The government has criminally charged 13 people connected to these firms, including Ms. Jiau, who is accused of knowingly facilitating the passing of inside information. Of the 13 charged, eight have pleaded guilty.”

A Tangle of Details Emerge in an Insider Trading Case [NY Dealbook]

After the end of the First World War and the resulting optimism of the post-war U.S. economy, hundreds of thousands of investors were lured into questionable securities and unbelievable promises offered in margin financing. Nearly half of the securities created during the 1920′s – about 25 billion dollars worth – ended up becoming useless overnight after the market crashed. The truth was unavoidable: the government had to intervene on the behalf of future investors and ensure that a regulatory and investigative commission has to be created that oversaw the swaps of enormous funds and risky assets. Not only to prevent another financial collapse, but to safeguard individual investors against the sweeping destruction entities with bigger stakes in the stock market could lie upon them.

In the aftermath of our recent Great Recession, it might seem that the SEC has failed enormously in the duties it was given when it was created almost 80 years ago. This was in part due to elected officials in congress and the executive branch loosening the regulatory power that the SEC had possessed over securities and exchanges. It was not that the SEC was ignorant; it was that it became inhibited. But now that we’ve been given a double dose of proof as to why government should always be keeping a vigilant eye out for fraud and false hype on the stock exchange, the SEC is going to carry on the legacy of keeping the fairness of securities and exchange to a maximum and the ways for powerful investors to milk the system kept to a minimum.

The SEC as it exists today focuses most of its investigative and protective efforts into going after instances of insider trading, price manipulation, the selling of unregistered securities, and glaring omissions about the facets of securities being offered. These are services that are essential for a world class economic engine like the U.S. to run, and are services that can only be provided by the power of government. The SEC is who you trust to make sure your securities are secure.