Are You Being Screwed?

Insider Deals From Baseball and Beyond

Written by Jimmy Mengel
Posted May 18, 2017 at 8:14PM

The latest financial scandal hit in a very unlikely place — somewhere that you may least expect it — Major League Baseball...

A revered Baltimore Oriole — my hometown team — was just busted for insider trading. Doug DeCinces made over a million bucks by acting on a stock tip from his neighbor, who happened to be the CEO of a small medical supply company.

DeCinces was a capable third-baseman, but he had the ignoble pleasure of replacing Hall of Famer Brooks Robinson and then being traded to make room for future Hall of Famer Cal Ripken Jr. Despite being an All-Star, you can see why he isn’t exactly a household name compared to the sandwich of greatness he found himself in the center of.

He eventually played out his final days in Japan before starting a new career as a stock hustler. That career hasn’t worked out quite like he planned.

Now he has made a new name for himself: a criminal who could possibly die in prison for his financial crimes...

Here’s what happened, and what it means to you as an individual investor...

DeCinces began loading up on shares of Advanced Medical Optics, acting on a stock tip from his neighbor — James V. Mazzo, the CEO of the company he was investing in. Now, normally it’s not too strange for a company CEO to talk a big game about their stock and potential company success.

However in this example, it was far more insidious. The CEO told DeCinces that a huge merger with Abbott Labs was about to take place.

That’s where things took a dark turn…

DeCinces eventually bought over 90,000 shares of the company just before it was sold to Abbott Laboratories. (Full disclosure: Abbott Laboratories (NYSE: ABT) is one of my favorite dividend aristocrats, and I still have it as a buy in my Crow’s Nest newsletter.)

Not only did he did he act on insider information, which is clearly illegal, he bought the stock in the names of his grandchildren. Now, perhaps he was really, really interested in his grandchildren’s well-being — but I have my doubts. That is a classic trick these guys use to shield themselves from prosecution. There is nothing more cowardly than hiding illegal stock picks in your wife, child, or grandchild’s name to save your own ass.

And apparently, based on DeCinces' experience, it doesn’t work all that well...

In a mad panic of greed, he liquidated the rest of his stock holdings and dumped them into Advanced Medical Optics. After the official news of the merger took place, shares of Advanced Medical Optics jumped 143%.

He sold and made a fortune. But now he's facing decades in prison.

This type of behavior isn’t limited to rich baseball players. It happens in the stock market all of the time. In fact, the U.S. Congress has been hit with the same exact accusations…

Politico just reported that many members of congress have been actively — ahem, wildly — trading in the same stocks that they regulate as part of their job.

Here’s what it reported this week:

  • Sen. Sheldon Whitehouse, the Rhode Island Democrat who sits on the Senate HELP Committee, which oversees health care, is a heavy investor in pharmaceutical stocks. Last November, as lawmakers closed in on a bipartisan deal over a significant medical research bill called the 21st Century Cures Act, Whitehouse bought shares in the pharmaceutical firms McKesson, Gilead, and Abbott Labs 10 days before the bill was made public. Whitehouse and his wife bought additional stock in Gilead and Amgen on Nov. 28, two days before the House voted on the bill. The day President Barack Obama signed the bill into law, Whitehouse started a series of three sales of shares in those companies.
  • Rep. Adam Kinzinger, Republican of Illinois, was a guest speaker at Prescient Edge, a small research and technology firm with Defense Department contracts, in January of 2016. When the company raised private capital later that year, Kinzinger bought in to the tune of $20,002. Kinzinger is now a member of the House Foreign Affairs Committee, which oversees issues affecting Prescient Edge.
  • Rep. Chuck Fleischmann, Republican of Tennessee, sits on the health care appropriations panel. As Vice President Joe Biden was pressing lawmakers to approve funding for his “Cancer Moonshot” proposal in the summer of 2016, a Fleischmann family account invested in two companies, Juno Therapeutics and Celgene, which were developing new cancer drugs. One of the investments was made a week before the Obama administration announced new measures that would speed up approval for cancer therapies.

I could go on and on…

The point is, before you start making huge investments in microcap companies, always remember that there are more connected players that have already staked their claim.

It doesn’t take a government prosecutor to see what is going on here.

Many of these politicians gave limp and unbelievable answers for why they had done so well with their stocks. Some said that they did not communicate with their stock brokers — like these guys made wildly convenient picks of their own, perfectly timed to the legislations their bosses were overseeing. Some said that they hadn’t even looked at their portfolios in years. Right...

I’m not buying any of it.

The point is, before you start making huge investments in any company — especially small microcaps, always remember that there are more connected players that have already beaten you to the punch...

There are sharks lurking in every ocean and snakes nesting in all of the tall grasses. It can be very hard to spot them before it's too late.

You need to do your due diligence to make sure that you know exactly who is running the companies that you are investing your hard-earned money in.

Here are a few ways to make sure you’ve made a good decision… and how to identify dirty tricks. 

1) Make sure you know who is running the company. A great team with a long track record of successful businesses in a given sector is far more likely to know what they are doing, and far too reputable to stake their reputation on a big pump and dump.

2) Know who is invested and at how much. Many companies will have early investors with shares at pennies to the dollar. Make sure you know who owns what and how much. You can use these resources to check out your stocks

The System for Electronic Disclosure by Insiders (SEDI) - Canada's online service for the filing and viewing of insider reports as required by various provincial securities rules and regulations.

Canadian Insider - Insider filings and news and reports about the Canadian stock market

3) Know the lock-up periods. Most investments in new companies require the shareholders to “lock up” shares for a certainly amount of time after the company goes public. That means that they cannot sell before a certain date. This attempts to prevent huge sell offs and scams. Make sure you know the dates and anticipate the selling before it happens.

4) Invest in companies that can stand the test of time. There is a reason that most of my portfolio is wrapped up in dividend aristocrats. These are companies that have been successful enough to reward investors with dividends for at least 25 years in a row. I have no worries about insider selling in companies like this.

As they say, caveat emptor — let the buyer beware.

That’s what we do here at Outsider Club — we talk to the management, we vet companies, and we do the boots-on-the-ground research so you don’t get hosed by the likes of baseball millionaires playing with a corked bat or dirty congressmen with a direct line to inside business deals.

Godspeed,
jimmy-mengel-signature-fixed

Jimmy Mengel

follow basic @mengeled on Twitter

Jimmy is a managing editor for Outsider Club and the investment director of the personal finance advisory, The Crow's Nest, and cannabis stocks advisory, The Marijuana Manifesto. You may also know him as the architect behind the wildly popular finance and investing website Wealth Wire, where he's brought readers the stories behind the mainstream financial news each and every day. For more on Jimmy, check out his editor's page.

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