‘Government Has Our Best Interests At Heart!’ Oh, Shut Up

This is simply unbelievable.

For a long time, a very wealthy friend of mine who is an extremely good money manager had been sharing his IRA portfolio, and every buy or sell action he took, with anyone who asked to be added to his email list. He is the kind of guy the EMH (efficient markets hypothesis) assures us cannot exist, who pretty consistently and very impressively beat the market. His lifetime return on the account is in excess of 40% annually, and that includes the years of the recent financial crisis.

So if you wanted to invest exactly the same way he was, you could easily do so.

Not anymore. Now the government has chosen to protect us from people like him. From his email to friends:

This list began many years ago and grew out of my desire to help others who are friends but are not professional investors. The list started as a small group of friends and family but over time I added names as people asked for assistance. My thought process was that I would be doing a good deed. I figured from a “karma” point of view that I would be rewarded for sharing my best thinking. I did not guarantee success, but I guaranteed honesty in what I am doing . That is, I would report every single trade. Then each person could make their own decision whether to follow me or not. Those who have read Clausen’s The Richest Man In Babylon know that the simple key to growing wealth is to save 10% of what you make and invest it the way rich people invest. I never contributed more than $40,000 per year to the account and it is now over $6.0 million. My compound annual return from inception in 2003 is 42.76% and my return for the last five years (including 2011 down) is 52.96%. So it has performed well.

I never imagined that sending out this list hurt anybody, or in any way conflicted with my role as a the manager of an investment fund. I was not charging for advice and I was not selling anything. To use an analogy, it was as if I knew how to cook and I was sending out good recipes to friends. I made no implied or other commitment. I often advised people to seek their own counsel. Everyone who was on the list was an adult. In fact, many of the people on the list had expressed an interest in investing in our fund but they did not qualify under the oppressive government rules which prevent average savers from investing $10,000 or $30,000 with me. By law (a law that the big brokers and mutual funds love by the way) you can only invest in my fund if you are a “qualified investor” meaning you have assets of $1.5 million or earn $200,000 or both. Theoretically this is to protect small investors, but in reality what it does is restrict them from doing what they want and forces them to either invest on their own (think sheep sitting down with wolves to discuss dinner) or to hand their money over to the mutual fund industry (think sheep giving themselves to wolves). The LAW will not let you invest your money as you see fit. All for your protection of course. Personally, I think this is wrong. You should have the freedom to make your own choices.

So, since people expressed an interest in investing with me but could not, I added them to my IRA list. I tell you what I am doing, you make your own decisions, and no harm, no foul. I have always been very careful to only disclose my trades after [our] Fund had taken its own positions. In other words I have a fiduciary responsibility to put my investors first and I have always done so. This has been clearly disclosed to the IRA list several times. Unfortunately, with the passage of the Dodd Frank Bill and with the increasing size and success of [our firm] it now looks nearly certain that we are going to be subject to much stricter government regulation from the State of Massachusetts and the US Federal Government. Ironically, these organizations could not catch Bernie Madoff when they had a concerned citizen (Markopolous) pointing out the fraud. They have refused to prosecute the people at MF Global who stole customer money. Yet, they find it important that they monitor all of my emails and instant messages to make sure I am not doing anything illegal. The level of filings and registrations that we will have to go through are extremely burdensome. Frankly, I find it outrageous and disgusting that I cannot tell my friends what stocks I buy. I would think it would be protected under freedom of speech, yet in the securities industry nothing is so simple. I have been informed by my partner and multiple lawyers that I can no longer disclose what stocks I am buying and run an investment fund. Personally, I would like to fight this in court, but I have a responsibility to my partner and to my investors to focus on investing well. Therefore, I have to stop disclosing what we are doing. For that I apologize.

JimInABQ

That is just sad. I’m not in the least surprised but it breaks my heart to see the government acting this way in an attempt to “protect small investors”. As is typical, the law has the opposite effect. We need someone like Ron Paul now more than ever to end this kind of abuse of power. We need to be grateful to commentators and authors like you who point it out.
Anonymous

This is frustrating for me as my career is just beginning. My 401k has been stagnant, barely worth half a year’s salary after 4 years of investing, and now I am forced to further rely on others to grow my wealth. Why is free advice illegal? It shouldn’t matter if it is good advice, or bad advice.
willb

Don’t forget that technically, your 401k belongs to the federal government, not you. So it follows that they have a justiciable interest in telling you how to invest it. People who “save” through a 410k have already swallowed the bait. Don’t get pissed when they reel you in.
http://twitter.com/jestodwrotnie Piotr Fedorowski

So not only does the government tell you what you may invest into, they now limit who can talk to whom about what?

Thankfully, there’s hope on the horizon. Thanks to advancements in personal cryptography, there are now several technologies in development that may in the near future allow free individuals to trade securely and anonymously, without the state having any power to stop it, control it, or even know what’s being traded between whom.
If you’re interested in the subject, look into Bitcoin, Ripple, and especially Open Transactions – these are some seriously disruptive projects that aim at decentralizing economic power, just like the Internet itself decentralized flow of information and knowledge.
http://www.facebook.com/ryan.griggs Ryan Griggs

Come on now, this is bullshit. I’ve never heard of such a thing. How much more blatantly anti-wealth can the government get? It doesn’t even make sense from the establishment viewpoint. Think of the nonsense! Theoretically, the government criminals ought to want the people to have more money in order to then have a larger amount of money to steal from through taxation! And for some reason they’re against that? How confusing.
David Bardallis

Just one more “service” from your loving, omnipotent state!
Martin Brock

Unbelievable.

But who needs transparent, efficient markets anyway? Let’s just do away with all of these disruptive disclosures and let a few central planners make all of the investment decisions free of the prying eyes of email readers. They’ll take good care of us.
bill

The sheep continue to embrace their enslavement. Joe Salerno has pointed out that we can create defense for ourselves, and pain for the large corporate-state banks by pulling our money for deposit into a smaller bank. This is certainly not a cure, but a step forward. We must peacefully resist on as many fronts as we can. Let’s stop dividing and conquering ourselves and bring our peaceful, thoughtful resistance to divide them.
Joe

I work in compliance for a large broker/dealer and I empathize with you. The regulatory burden is downright ridiculous and getting worse every year.
http://opcnup.wordpress.com/ Emerson White

A clever trader can buy a stock, make a big recommendation, see the stock price jump a tiny bit as the recommendation is taken, then sell the stock. It’s called market manipulation. It’s a way to capture value from anyone stupid enough to take your recommendations. It allows you to make fantastic returns, like 40% a year, which lures in more followers, which also lose value to you.
bill

I wanted to add that when their are too many angry hornets to smack, a large beast can be defeated.
http://www.facebook.com/kingofthehokies Jim Land

That sounds awful. Before I got to the part about how he couldn’t do this anymore I was hoping I could have been added to the list, and would have paid to do so. The state against everyone…..
http://www.TomWoods.com Tom Woods

So without knowing any of the details, you assume the person I’m talking about is just a market manipulator, even though his email list probably had about 200 people on it, maybe 45% of whom actually took the advice — much too small to have any effect on the market. But nice try, though.
Holmgren

There’s an easy workaround on this one. Set up a website where you just say “”I wonder if it would be a good idea if I bought IBM here, and “I often think about other people who are selling Microsoft here”. You’re not telling them you ARE doing anything. You’re just idling musing……
Brian

This is too bad. More victimless acts being punished and threatened. The free exchange of knowledge and ideas will continue, though, in the underground economy.
Martial_Artist

And as another alternative, don’t put the money in a bank at all. Deposit it in a credit union.

Keith Töpfer
willb

This is typical “administrative” law designed to protect the professionals already in the field; much like lawyers requiring prospective wannabes to pass the bar review. A favorite law of attorneys is that it is illegal to give free legal advice. Pretty soon we will have a bar review for every profession in America.
DVReznicek

Droppin that knowledge! That’s why I love Tom.
http://opcnup.wordpress.com/ Emerson White

Who says I was talking about this specific guy? Certainly not me. I was explaining the rational for the law against what he was doing.

Way to rip that straw man to shreds!
http://opcnup.wordpress.com/ Emerson White

Also the strategy works on smaller scales, have you ever heard of front loading? That’s where you buy up some stock, then sell the same stock to an audience of 1, then dump your stock, thousands of brokers boost their income doing this.
http://www.TomWoods.com Tom Woods

Now where would I ever have gotten an idea like that? I guess you pulled the 40% figure out at random.

The point is not relevant to this case in any event; I rather doubt John Hathaway’s gold fund has done well because of the 90 people who bought into it over the years at my friend’s recommendation.
bill

Tom, does your friend keep a considerable portion of his capital outside the banks? Gold and silver? Just curious as to how he protects himself from the possible banking calamity.
Anonymous

Or possibly a helpful friend, not associated with the financial industry, could report his transactions.
Scotty

The government isn’t interested in distributing the ‘wealth’ but only concentrating it among their elites of which they benefit immensely. They distribute the control and regulation…..and poverty. The poor and financially oppressed make better paeans for ever more government in hope of getting some personal advantage. Real prosperity and increase in standard of living comes from falling prices and stable markets. Not through artificial creation of credit and inflationary fueling of asset prices. If the government allowed more easier ‘distribution’ (and not through social programs) of the ‘fake’ wealth the lid on inflation would not be able to be held together by the banking system.
Scotty

You said: “I was explaining the rational for the law against what he was doing.”

You have just explicitly implied that he was manipulating. If he was as open with his buy and sell trades as he infers, it should be fairly soon for one of his followers to figure out the manipulation game, if there was one. And it wouldn’t take over 8 years to do it.

Your front loading example appears to be only feasible if you had a very wide network of influence….but no doubt has frequently occurred. However, who is this, or these, dupes who comprise the ‘audience of 1′? The personality would be typical gregarious hype but with far less transparency with trading.
Mousepd

An ex girlfriend ( Attorney ) once taught me that there really is no such thing as ” Swim At Your Own Risk.”
You have free speech to talk an give advice on everything under the sun. But if you develope a following of fans via a web site, email lists, magazine, etc. And people seek out your advice on medicine, insurance,finance, etc. Regardless of the “Swim at Your Own Risk” banner, you could still show up on the Government’s radar. I’m not defending big brother. In fact I’m fed up with the Fed. But you have be careful when giving advice.
http://www.facebook.com/profile.php?id=665555277 Harold Ray Crews

The bar review is something that select law students do to build a resume by working on the their law school’s journal. I think you’re speaking of the Bar Exam which every state in the US except perhaps one or two require you to take unless you’re seeking admission through reciprocity from being admitted in another state. I assure you I end up giving free advice all the time provided it is a simple matter that I’m conversant with and the recipient understands that the advice is contingent on the absence of complications. Once people find out you’re an attorney many have no problem asking for legal advice. It is the same with MD’s and financial advisors.
Mark

I’ve know people who have made a lot of money front running stocks by just telling a few golf buddies at the country club. It sounds like the small gold stocks he deals in are perfect fodder for this type of activity and as an investment professional he should be well aware of the possible suspicions even if he is completely legit.

Plenty of investment newsletter publishers recommend stocks and also manage money, it is not against the law by any means the SEC just wants to make sure there is full disclosure and no manipulative intent. He doesn’t have a problem with that does he?
Greg

this really makes me angry. the worst thing is that no one cares!!! this pisses me off!!!
John James

What in the world did you think the post was about the whole time you were reading it?
John James

Thank you for sharing this, Tom.
willb

Actually it’s Law Review, not Bar Review. But you are right about the exam. You can give “free” legal advice but as you suggest, you are liable. This huge potential for liability removes any vestige of “free.” I guess you could give “free” taxi rides but the taxi is still liable to the full extent, thus, there is no true sense of “free” since the taxi is paying all the expense of covering the liabilities involved. Much the same as a “free” lunch. When you give “free” legal advice you are creating reliance and thus it is not free. But technically you are right that there is no law against it, but there is a law holding you accountable.
Anonymous

Ugh that just bummed me out.
Anonymous

Huh? You probably think that laws against insider trading actually stops insider trading… The problem with this kind of law is that it hurts honest people and only helps the sleaze balls. It’s like taking away people’s firearms… the criminals are the only ones left with guns (and I’m including the ones with badges).
http://twitter.com/Conservative_76 Bob

This post is a prime example of how far we’ve fallen since 1776.
Laura

WOW, that is so terrible. And, he made such good points about Madoff & MF Global and the ineptitude of our government agency, the SEC!
Laura

What is his firm’s name??
http://pulse.yahoo.com/_3YU52EINCBVVCOFOD5A5IHOJWA Bruce C

The guy did use the word “CAN” in the first sentence.   Does that not count for anything?

He didn’t seem to claim your friend did this, but was giving an example of the rationale for the regulation, agree with it or not (I don’t).   There are a LOT of shady characters in the business.

Ever hear the term “affinity fraud” ?

Interestingly, Just tonight I was watching a TV show about a pastor who fleeced his flock for about $500,000 with an “investment”. Yes, this is not the same exact thing, but you should know that criminals are more creative than you can imagine. And many “respectable” money managers have gone rouge after many years of legitimate operations. It’s when they suddenly can’t get that 42% return that some feel the need to play games. So while unlikely in this situation, it isn’t impossible. I think he was just pointing that out.

There are also very small publicly traded stocks where a man of reasonable means could indeed affect share price enough to make a tidy profit and nobody would ever know. Example: I owned stock in a small publicly traded chemical company whose total market cap was less than your buddy’s net worth!

Peter Schiff has pointed out some of these characters himself. They just do it on a much bigger scale, that’s all.

While it shouldnt’ be illegal, I do think it’s possibly unethical for someone who gets paid to manage a fund to give out the holdings for free unless he owns 100% of the concern and his paying fund members are made aware of his freebies to friends.

Bernie Madoff was probably considered a great honest guy…until he wasn’t.   I’m sure his friends would have been indignant too if he’d have been suspected before the SHTF.

(btw, 42% annualized return claims over long periods are to be regarded with healthy suspicion, and would certainly involve holdings with more risk than someone who gets their investment advice via an email would be prepared for). That’s a return you might have expected if you had bought gold on margin in 2001.   Nearly every other asset class has failed to yield Gold’s return since then. )

You might want to consider taking down this entry, as if he is an investment fund manager he might be violating some other regulation they could give him heat over.
http://pulse.yahoo.com/_3YU52EINCBVVCOFOD5A5IHOJWA Bruce C

Not the best analogy ever. I see your point, but people DO go to prison for insider trading and my wife’s boss has to be very careful about what he says to outsiders because of these laws. She’s had a few co-workers over the years go to jail or lose their jobs at least for some of these white-collar violations, so it does have an inhibiting effect to some degree. Just ask Martha Stewart.
http://www.facebook.com/profile.php?id=665555277 Harold Ray Crews

Which is why you have to give so many caveats and disclaimers that it is about worthless. But essentially you are correct. It is free only to the recipient. The attorney providing the advice is paying the cost through liability and malpractice coverage.