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Finding the Needle in a Haystack That's on Fire

April 13, 2006

Dear Fellow Options Trader,

It is said that when Hollywood does it, it's called a formula picture. When Wall Street does it, it's called business as usual. And when it comes to insider-trading schemes, even the best screenwriter couldn't come up with the crazy stories that are unfortunately altogether too true!

This week, four young men -- people in their 20s -- were charged with insider trading. Some cheered. Some jeered. Some were surprised, but not me. Why? Because I see multiple examples of this type of activity practically every business day. In fact, it's what our systems, Heat Seeker and Distant Thunder, were built to find -- and find it they do!

I am confident that despite the "perp walks" and tough talk, our option-tracking technology will go right on ferreting out such unusual trading patterns. I am also pretty sure I could write the story about the folks who are unlucky enough to get caught before they actually do get caught! Here's an advance copy of what the next insider scheme will look like:

1. It will involve only the underlings -- no top-level bigwigs.
2. The firm the accused work for will say, "We are cooperating fully with the investigation."
3. The same firm will feign dismay and shock over the actions of those accused.

LIGHTS! CAMERA! ACTION!

This week's arrests went right down this exact storyline. Three of the accused worked for either Merrill Lynch or Goldman Sachs. They were indeed all junior execs and -- you got it -- both firms said they were either "gravely disappointed" to hear of the charges or that they were "cooperating fully with the government."

At the heart of the insider trades were two that our Heat Seeker and Distant Thunder programs picked up last year -- Procter & Gamble's $58 billion purchase of Gillette, and Adidas' takeover of Reebok. (Click here to read our coverage of the Reebok story.) If you do a Google search for my name and Reebok, you will find upward of 140 stories ranging from USA Today to Reuters to the BBC that cite our systems and what they found and foretold.

Tobin Smith and I have jokingly referred to this as having tomorrow's newspaper today, sort of like that "Twilight Zone" episode. Imagine what riches you could amass if indeed you had tomorrow's newspaper during today's trading session. The mind reels, but as most of us would also like to enjoy the fruits of our labors, I suspect the loss of our freedom would be a cost too heavy to justify the potential gains.

If you could get away with it, you couldn't even list it as a bragging rite because eventually, the law would find you. And that's exactly what happened this week, nearly nine months after the Adidas/Reebok insider-trading activity took place.

In an opinion piece, Bloomberg revealed that apparently one of the men had produced an independent film about -- get this -- a junior executive at a finance company who gets framed for stealing several million dollars from his clients. So, clearly these kids knew the risks but they were hoping for a Hollywood ending. Even if that film ever makes it to the silver screen, I have a funny feeling its writer and his friends won't be able to get out of jail to see it for a long, long time.

It's sad but true -- for some young hotshots who have expensive taste and access to confidential information, the temptation to pull off a scheme like this is all-too-frequently too strong for them to resist.

TRADE, BUY LIST UPDATE

Folks, even though SBC has wreaked havoc on our Internet access this week, we're still moving and shaking. And, as always, we're keeping an eye on our open positions. However, with Passover and Good Friday limiting trading volume and volatility, we're not seeing much unusual trading activity in the options world. And you know my theory on that -- I would rather hold off on making any new recommendations than give you one that I don't expect is positioned to skyrocket. I'll try to make it up to you in the near future, but in the meantime, I hope you have a fantastic and special holiday weekend with those you love.

CATCH ME ON 'CAVUTO' THIS WEEKEND

If you get a chance to watch a little television this weekend, please tune me in on Neil Cavuto's show on Saturday morning, April 15. As always, I am delighted to be on the king's show (the King of Financial TV -- not the King of Pop!) and flattered that I will do two hits (spots) on "Cavuto on Business"!

The show airs on the Fox News Channel on Saturdays at 10:30 a.m. Eastern. Please tune in and if you enjoy the show, drop by their Web site and let them know!

Good luck trading and remember -- pigs get fat, but hogs get slaughtered, so don't be a hog!


Jon "Dr. J." Najarian
Editor
ChangeWave Options Trader

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