This morning’s Times has an interesting article (Side Deals in a Gray Area) about a new trend among the financial criminal class:
While regulators have focused on the buying of options or stocks on leaks about deals before they become public, there is another, more subtle way that big investors can trade while possessing information that the market does not have.
And it is â€” for now at least â€” all perfectly legal.
This little-known leeway comes in the form of â€œbig-boy lettersâ€ â€” letters between buyers and sellers that say, in essence, â€œWe are all big boys here, so letâ€™s not sue each other.â€
In the instance covered in detail by the Times, it worked like this. Criminal A, in possession of information to the effect that securities it owned were about to tank, sold them to Criminal B. A and B signed a big boy letter, thereby supposedly and magically insulating A from civil liabiilty for its criminal behavior. Criminal B immediately flipped the tainted securities to Sucker Z (not mentioning the existence of the big-boy letter), which is now suing both A and B, now that the securities in question are worthless.
Now, according to some experts in the field these “big boy” letters are perfectly fine. To the unlettered among us, including this small town lawyer, the very fact that the big boy letter exists is an indication that at least one side to the transaction is acting on the basis of insider information. Who can doubt that Criminal B was aware that Criminal A knew that the value of its securities would soon go down. Who can doubt that there was a meeting of the minds between them that they could both benefit financially if Criminal A laundered its insider information through the allegedly ignorant B? Who can doubt that B would likely not have purchased the securities without the additional information telegraphed by A’s desire to have a big-boy letter in the first place.
It will be interesting to see if our regulatory system and judiciary have been brought so low that they would give their imprimatur to this sort of thing. That’s a close call of course-the Bush administration has a reflexive inclination to favor the cause of corruption, even when the dispute is between two members of its financial base, as is the case here, Sucker Z being a Texas hedge fund.