Chapter 6 - Everybody Wants Some

In February 2017, things went downhill again. The SEC had wrapped up their investigation into my trading and concluded that I made around $144,000 in profits from illegally trading in biopharma stocks during my tenure at Zacks. I was baffled. They had clearly made a mistake in their analysis, I thought. My lawyer contacted the SEC and asked for them to send us the list of trades. When we got the list, I remember thinking, "WTF are they doing?!?"

It turns out, the SEC does math in a funny way. When you buy a stock - illegally - the SEC applies strange logic to calculate your gains. They look at the price you purchased the stock and then they look at the closing price the day the (inside) information came out. That's the implied illicit gain. It doesn't matter if you held the stock another day, week, or even year; unless of course, you made more. Then they use the larger of the two figures. It also doesn't matter what else happened during your holding period. It's all your fault.

The vast majority of the time, my research report had absolutely nothing to do with the move in the stock. My trades were reactionary and my reports were consistent with my trading views. Sometimes I made money and sometimes I lost money. Sometimes I'd sell the stock and other times I'd hold it for weeks or even months. But, none of that matters when you are calculating the gain for insider trading. In the 80 instances where I bought a stock and later issued a report or article, the SEC calculated that 58 of those instances resulted in an implied again of $144,000. The other 22 instances, where I lost money, didn't count. The SEC ignores losses, even if you actually lost money on a name they calculated an implied gain!

Yep, there were a few of those 58 "wins" where I actually lost money. There were dozens where I didn't make nearly as much money as they implied. In real life, my brokerage account records show around 80 trades where I made $65,000 in net profits. In the eyes of the SEC, it was 58 trades where I made $144,000 in paper profits. There's no arguing with them either. If you argue, you are obstructing. Their idea of cooperation is 100% acceptance of their findings.

This meant the SEC fine was likely going to be 3X what I expected. At first, my lawyer guessed around $100,000. As it turns out, they fined me $305,000. That's 5X what I made in real life. But that wasn't the bad news. The bad news was that the SEC turned my case over to the U.S. Department of Justice. The U.S. Attorney's office in the Northern District of Illinois opened a criminal investigation into my trading. They wanted a shot at me too.

Prison time was back on the table.

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