Albert H. Wiggin did what very few people did – he made millions of dollars during the 1929 stock market crash and subsequent Great Depression. Mr. Wiggin, then head of Chase National Bank, shorted 40,000 shares of his own company stock and made $4 million in the process for the transaction which was a huge number back then. By shorting stock, Mr. Wiggin bet on Chase Bank to lose but won lots of dough while much of the world lost their life savings, and in some cases their lives.
This sort of insider trading was legal in 1929 but made illegal in 1934 when Congress revised the Securities Act, the revision famously referred to as the “Wiggin Act.” The Securities Act slowed down but did not eliminate insider trading, which made stock traders Ivan Boesky, Michael Milken, Dennis Levine, and Martin Siegel infamous. The first celebrity to get caught with their hand in the stock market cookie jar was Martha Stewart, who sold shares in a pharmaceutical company based on insider knowledge just before the stock price dropped. Ms. Stewart baked cookies in a federal prison for five months, and her reputation was never fully repaired.
We are currently in the midst of probably the most bizarre insider trading case in our nation’s history. This individual is neither a banker, stock trader, politician, nor TV celebrity. He does have a number – 56 – his uniform number with the Seattle Seahawks NFL football team. Mychal Kendricks, a linebacker by trade, has admitted to receiving non-public information regarding certain technology stocks from a Goldman Sachs employee in exchange for cash and game tickets when he played for the Philadelphia Eagles in 2014-15. Mr. Kendricks purchased call options contracts hoping the stock prices would rise and sold them at a $1.2 million gain which translates to returns ranging from 79% to 393%, not a bad day’s work but also not a realistic return for an amateur investor unless they knew something.
Mr. Kendricks and the Goldman Sachs employee even used football terminology to code text messages between them. Based on the civil complaint filed by the Securities and Exchange Commission, Mr. Kendricks seemed preoccupied with getting capital gains tax breaks. At this point, Mr. Kendricks is claiming he was duped by his friend, who represented himself to be a Harvard graduate, who gave “a false sense of confidence.”
Mr. Kendricks has pleaded guilty and is awaiting sentencing, which is due coincidentally after the football season. According to several sources, he is looking at a prison sentence of up to 25 years and a fine of $5.3 million, which dwarfs his 2018 salary of $790,000. Whether he has a 2019 salary will depend on the U.S. Department of Justice attorney prosecuting the case, the federal judge, and of course the NFL which must address this no-win situation. They appear to have policies dealing with domestic violence and drug use, but probably nobody inside 345 Park Avenue in Midtown Manhattan ever thought they would be dealing with a player convicted of insider trading. The only previous experience they had in white collar crime was suspending Paul Hornung and Alex Karras for the 1963 season for betting on football games and associating with gamblers.
Insider trading poses a threat to financial markets because it compromises the public’s trust in those markets. If investors cannot trade on a level playing field, everyone loses – the buyers, sellers, and customers and employees of publicly-held companies. The strange financial saga of Seattle Seahawk Mychal Kendricks highlights one of life’s truism: If it sounds too good to be true, it probably is.