INSIDER TRADING IN STOCKS AND HORSE RACES

A partner at the prestigious accounting firm KPMG was busted this week for passing along confidential financial information about client firms to a jeweler friend, who then bought and sold stock in the companies, including Herbalife, Skechers, Pacific Capital Bancorp, and Decker Outdoor Corporation. The jeweler reportedly made more than $1 million in illegal earnings and provided his tipster friend with over $100,000 in money and gifts.

This incident is the latest in a long and sordid line of insider trading cases. As a result, numerous high- and low-profile securities traders have been convicted and are doing time for their crimes. Currently, charges have been brought against nine executives of one of the leading hedge funds, and four have admitted guilt. The hedge firm has agreed to pay over $600 in civil damages but a judge has refused to approve the settlement because the hedge firm would admit no wrongdoing.

In addition to illegal insider trading, there is also the legal genre. Corporate board members and employees routinely buy and sell shares of stock in their companies, and these transactions are reported to the Securities and Exchange Commission and made available to the public.

Horse racing bettors have contended with insider trading of sorts since the first wager was made. In particular, people who work on the backside of racetracks are privy to how various horses are training coming up to a race, and they often trade on the private information by betting accordingly.

About the only legal protection a bettor without inside information has is that an owner or trainer is prohibited by regulatory authorities from wagering against their own horse.

But the everyday bettor has even a better safeguard. That is, the scuttlebutt emanating from owners, trainers, grooms, and others close to a horse is frequently dead wrong. These folks tend to be unrealistically optimistic about their horse’s chances in an upcoming race. Moreover, many of them are poor handicappers. We sometimes read about a jockey who had the choice of riding two horses, and picked the wrong one. It will be interesting to watch, for example, whether John Velazquez made the correct decision in opting to ride Verrazano in the Kentucky Derby rather than Orb.

Trading stocks based on private information is a much more exact form of insider trading than betting horses on the perceptions of backside types. Whereas the impending report of an earnings shortfall is a fact, the quality of a horse’s last workout is a subjective interpretation.

For every anecdote of where a bettor has been correctly touted onto a horse by an insider, an opposite anecdote can easily be found. If you rely on inside information to bet horses, you had better perform plenty of due diligence on the objectivity and motives of your tipster.

If betting to win, based on private information, were a crime in horse racing and the equivalent of the SEC vigorously enforced the law, there would be a lot of racetrack insiders under investigation. But failure to show that the ill-gotten information led to profitable betting would keep most of them from being convicted.

Copyright © 2013 Horse Racing Business

Comments

  1. It is generally true that following the ‘market mover’ that carries the weight of late money is hit and miss but if you look at the total market it certainly appears to be more accurate than in the past as guide to which horses will perform well. i.e. horses which are not tipped readily by tipsters end up as one of the top 4 favourites and win – this is probably because there may be 3 or 4 trainers advising their owner to back their horses not knowing about each of other trainers confidence. One of them is often right, but not necessarily the one that invests the most.

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