We’re on record as skeptics of the great backdating scandal of 2006. But just because you think something was unduly scandalized by an over-eager financial press and over-zealous regulators doesn’t mean it didn’t happen. And there is clear evidence that backdating occurred. In fact, in some sectors—we’re looking at you Silicon Alley tech—it seems to have been a quite common practice.

Now one of the finance professors whose 1997 research helped scholars and reporters at the Wall Street Journal uncover the option-backdating scandal may have discovered another form of backdating, Zubin Jelveh reports on Portfolio.com. It seems that some 20% of chief executives who donate stock to family foundations have suspiciously well-timed the gifts. They make the donations prior to declines in their company’s stock, which suggests that they are either front-running bad news by donating based on insider information or are marking their donations to dates before the announcement of bad news. The former looks like something like insider trading and the latter like backdating.

Everyone’s favorite former Goldman Sachs fixed income analyst was sentenced to fifty-seven months in prison today. That’s at the low end of what prosecutors had asked for, and exactly what Plotkin requested in his plea for leniency. Well, maybe not ‘exactly.’ Plotkin had asked the judge to give him credit for the last 10 months, which he has spent under house arrest. Apparently the judge doesn’t give extra credit for homework.

Ex-Goldman analyst gets prison in insider case [Reuters]

Does anyone know exactly what Eugene Plotkin did as a fixed-income analyst at Goldman Sachs? We’ve wondered and probed and asked but have never been able to get to the bottom of this question. How amazing would it be if he produced some amazing report about how the US housing market was headed for trouble and advised shorting mortgage based derivatives?

An important update on Plotkin after the jump.

Former Credit Suisse investment banker Hafiz Naseem pleaded not guilty yesterday to allegations that he was “the mastermind” behind a $7 million insider-trading ring in which he leaked details about nine deals that Credit Suisse was an adviser on, including the $45 billion leveraged buyout of TXU. The prosecution’s foolproof rebuttal? Naseem had a gambling problem, and was up to his toes in $5,000 of debt, which is totally a plausible reason for committing a $7 million felony. Geniuses. (A lawyer for Naseem has denied these accusations as well, saying that while the $5,000 debt part of the story is true, the gambling part is not. It was a heroin thing, and was taken care of in a completely legal fashion.)

Credit Suisse Case Shocker [NYP]

I haven’t worked at a bank for about fifteen years so I don’t know if this is standard and I’m just out of the loop but someone told me recently about Morgan Stanley’s felony prevention program and I sort of love it. Apparently, in light of the number of finance professionals who have openly admitted to being down with insider trading and the proliferation of groups to support this very cause (not like “let us help you with your insider trading problem” but more “so you want to insider trade? here’s how”), Morgan Stanley has created a program where they bring in felons to talk to prospective felons (these being MS employees) about how they once committed felonies AND IT RUINED THEIR LIVES. It’s all very “Oh, you thinking about smoking some crack? Maybe just a little in the men’s room, take the edge off the morning? WELL DON’T BECAUSE I DID IT AND LOOK AT ME NOW! THAT ONE HIT FUCKED EVERYTHING UP. NOW I CAN’T EVEN GET A JOB AT CITIGROUP.”

But the one thing we wonder is: yes, this whole thing seems like it would be hilarious to watch and we definitely wouldn’t turn down an invite to observe the next one taking place, but does it work? Afterwards, are the MS boys and girls all, “Wow, that scared the shit out of me, I will never do anything illegal (again)”? or more, “Yeah, you went to jail but look at this awesome gig you’ve got now. This is the sort of speaking tour Tim Sykes would kill for, and, I have to say, so would I”? That’s an actual question to those of you contemplating insider trading right now. (The other is, to the LEH readers out there, does Lehman have a similar program? Doesn’t it seem like something that would be right up Dick Fuld’s alley? Can’t you see him leaving important meetings early to take part in the sessions just so he can violently get in his employees’ faces and maybe throw one or two up against the wall under the guise of “getting into character”? And if the answer’s no, would you consider suggesting it, and letting me watch?)

When Goldman turned in it’s third-quarter earnings and revealed the the credit-crunch was its friend, several eyebrows were raised by market watchers. How could Goldman have made the kind of money it claimed to have made by shorting subprime mortgages, more than person we spoke with asked.

Apparently, the same question is being asked over at the Securities and Exchange Commission. Writing in today’s New York Post, John Crudele reports that the SEC is “curious” about whether Goldman’s traders were tipped off by the firm’s investment bankers, giving them an edge on the market. Interestingly, there seems to be some debate within the SEC about whether or not such tipping would constitute insider trading. We assume the crux of the matter is the technical legal question of whether the notoriously conflict-ridden Goldman could ever commit insider trading. If your clients already know you are on both sides of every trade, can you really be convicted of misappropriating from them?

We’d like to know a question Crudele doesn’t ask: what kind of non-public information could have led Goldman to take on those winning positions?

SEC Eyes Goldman Sachs’ Good Fortune [New York Post]

Former Morgan Stanley lawyer Randi Collatta and her husband Chris have been sentenced to four and three years of probation, respectively, including six months of home confinement which will likely be spent arguing whose idea it was to get involved in an insider trading ring on Wall Street for which they are being punished. The Collattas were among 13 people charged in March for participating in the $15 million scam, though the Bayport, N.Y. couple only made about $9,000 off of the scheme, prompting Judge Victor Marrero to say that they were at the “bottom of the food chain,” which has got to hurt. Ms. Collatta apparently “wept uncontrollably” after hearing that she “faces” disbarment. One wonders what she’ll do when she finds out that she’s “definitely” going to be disbarred. Depressed enough yet? Randi will also serve 60 days in prison on the weekends and evenings, a special provision she was given because her husband’s cancer and severe heart problems necessitate that she be able to provide medical insurance.

Ex-Morgan Insiders Get Home Time [New York Post]

It used to be that when we wanted to engage in some insider trading and more or less get away with it, we did it in MA. Those days are over. The First Circuit Court of Appeals in Boston has set a dangerous precedent, ruling that 36 months of probation for a hedge fund manger convicted of insider trading was too lenient, saying the crime befits hard time.

GTC Growth Fund manager Michael Tom, sentenced last year to a period of probation for making $750,000 in ill-gotten gains based on information about Citizens Financial Group’s acquisition of Charter One Financial, had his punishment upgraded to 37 months in prison yesterday.

“We agree with the government that the sentence is unreasonable and that it did not give adequate consideration to the seriousness of the offense, the need for general deterrence for white-collar crimes, and the need for some imprisonment,” the court wrote in its ruling. Thank god we still have the Boston Tea-Bagging Party. And the Big Dig, natch, which will survive in perpetuity.

Court Says Hedge Fund Insider Trading Requires Jail Time [FINalternatives]

The second husband and wife team to be accused of insider trading broke down and pleaded guilty yesterday afternoon, conclusively proving that there is no good end to this arcane institution (“You promised me ill-gotten gains and, like so many other instances in this prison sentence of a marriage, you disappointed me!”). Jennifer Wang, a former Morgan Stanley VP and Ruben Chen, a former ING Investment Management analyst each pleaded guilty to one count of conspiracy and three counts of insider trading. The couple were arrested May 10 for trading on information about Town and Country Trust that Wang had learned through her employer, on which she and her spouse had “earned” more than $600,000 from December 2005 to March 2007.

“I feel deeply sorry for my conduct,” Wang said in court. “I understand what I did was wrong.” I should’ve married Josh Weinstein when I had the chance. Instead, I dumped him thinking, “I can do better than this!” and ended up with this guy [motions to Chen], who couldn’t properly execute a scam if his life depended on it, and never takes out the trash. You think married life as depicted by Everybody Loves Raymond looks bad? Step into my life. ELR is child’s play.

Wang and Chen are the second married couple to plead guilty to insider trading this year, following in the footsteps of Mr. and Mrs. Chris (and Randi, also of Morgan Stanley) Collotta. There’s also a third husband and wife team in the mix, but their names escape us at the moment. Adorably, these incidents have been deemed “pillow-talk” cases, although, personally, the illegal, dangerous information shared seems more like stuff you’d use to initiate things, rather than cool off. Unless of course we’re talking about “pillow-talk” as a segue to round two, in which case, we stand corrected.

Couple Plead Guilty in ‘Pillow-talk’ Case [CFO.com]

After years of being relatively peaceful, the Japanese gangsters known as the yakuza are becoming more violent, according to a report from Japan’s national police agency. And what’s driving them to violence?

The stock market.

In the wake of the end of the Japanese building boom, which had been a major source of income for Japanese gangsters, the yakuza have been diversifying their portfolio by branching out into insider trading. Since few of the tattooed gang members are in places to acquire inside information the old fashioned way, they’ve developed a new technique. They beat it out of those who have it.

“Investigators are also alarmed at renewed yakuza interest in the stock market, with the threat of violence being used by gangs to gain inside information before investing their money, ” the UK’s Guardian reports.

Just to be clear, when we talk about the benefits of repealing insider trading statutes, we’re not encouraging this sort of thing.

Yakuza moves from street to boardroom [Guardian]

Joseph Nacchio, former almost brother of Karate Kid idol and Qwest CEO, was sentenced to 6 years in prison for making $52 million by dumping Qwest stock when he knew his company was on a special tanking Qwest. Nacchio was convicted in April. The icing on the sentencing cake, from the New York Times:

Judge Edward Nottingham of United States District Court also ordered Mr. Nacchio to forfeit $52 million in assets he gained in illegal stock sales, imposed a maximum $19 million fine and ordered him to serve two years’ probation after serving his sentence.

Whether Nacchio’s new home will be a federal “pound me in the ass” prison (or the TV edit, “pound me into ash prison”), remains to be seen. Whether Nacchio’s lawyers will come up with something more clever in appeals than a tainted jury from pretrial publicity also remains to be seen.

Ex-Qwest Chief Gets 6-Year Sentence [New York Times]

(Note: The following is what happens when our graphics intern leaves and I am left to render artistic interpretations in Paint)

We got so caught up in the excitement over the board of directors, Bancroft family, Rupert Murdoch, News Corp drama that we’d totally forgotten about the insider trading angle to this story. But fortunately we have the Securities and Exchange Commission to remind us that prior to the public learning of the deal, a Hong Kong couple with ties to Dow Board member David Li, chief executive and chairman of the Bank of East Asia, allegedly engaged in insider trading.

According to published reports, the SEC has issued a Wells Notice to Li, informing him that it plans on filing civil charges against him.

For those of you who have never gotten one—a Wells notice is a sort of like a bill from the utility company stamped Final Notice. Except that instead of shutting off your electricity, if you don’t respond to the notice you wind up getting sued by the SEC. It’s basically your last chance to convince them that they shouldn’t file a lawsuit against you. Or, as a friend of ours once put it, it’s a notice that it’s time to move your funds off-shore, get out of the country and hire some very good lawyers.

SEC to File Civil Charges Against Dow Jones Director [Wall Street Journal]

Turns out to be the winning Clue for the SEC, in a $66k insider-trading settlement with Graham Lefford, former butler to American Idol creator Robert Sillerman. Lefford was “managing” Sillerman’s house in Southampton, and doing some day trading on the side. Lefford decided to buy 5,000 shares of Sports Entertainment Enterprises (now CKX) coincidentally about 12 minutes after signatures were faxed to cement a $100 million deal to buy a stake in Elvis Presley’s estate.

Shares of the then penny stock shot up 9,000% in two days after the announcement, netting Lefford almost $49k from a $600 investment. Lefford agreed to relinquish his profits and pay a penalty plus a bit of interest (amounting to the $66k), all without having to admit any wrongdoing, the SEC’s preferred method of toothless “enforcement.”

Sillerman does make all his help sing “A Moment Like This” and sign a confidentiality agreement that prohibits using information obtained during work for personal benefit.

PS – When going to the CFO.com link, does anyone else get a “Youth Porn Rehabilitation” Google ad on the side of the page or is my computer trying to tell me something (by that I mean rehab for teens who look at porn, not people looking at teen porn…key difference)?

A Whodunnit in the Hamptons [CFO.com]

Late Tuesday Blackstone made a $26bn bid for Hilton, trying to find the only thing that could potentially steal press from the KKR IPO. Shares of Hilton (NYSE: HLT) closed at $36.05 on Tuesday, and shot up over 26% to above $45 a share by this morning. Blackstone’s bid is for $47.50 a share.

Unsurprisingly, there was rampant insider trading preceding the Hilton deal. The number of Hilton call options traded on Tuesday before the bid announcement exceeded the average daily trading volume by an ever-so-subtle 600%. The Hilton daily call option volume is usually around 2,900 but shot to 22,000, all before the deal was announced.

One fact that is sure to restore the confidence of the average investor is that not all of the inflated Hilton option volume was a result of insider trading. Some options were traded by following the lead of insider trading. From Dow Jones:

That’s exactly what prompted Jon Najarian, a trader who tracks unusual activity for OptionMonster.com to buy call options on Hilton last week. He spotted a buyer of an unusually large amount of call options on June 27, he said, something that prompted him to alert his clients and add his own position in the calls.

Traders Bought Options Just Hours Before Hilton Deal News [Dow Jones via CNN Money]
Hilton Deal Bolsters Rivals as World Markets Climb [New York Times]

Investment banks in London may be vulnerable to infiltration by “organized criminals,” UK regulators said yesterday. The Financial Services Authority issued a warning that UK firms were too lax about preventing their own staffs from leaking insider information in takeover situation. The warning comes after studies which have suggested that insider trading takes place in connection with a quarter of M&A deals in London.

It’s hardly surprising that investment banks might be targeted for “mafia-style infiltration.” Over a year ago, the UK’s Serious Organized Crime Agency warned that “new age” mafioso “plants” were a serious threat to UK companies attacking computer systems. The vast fortunes of the financial industry, and lax enforcement of insider trading regulations, must make UK investment banking a very attractive target for organized crime.

In the US, organized crime has long been interested in finance. As long as eight years ago, Gary Weiss was writing articles in Business Week showing that “the Mob is far more active on Wall Street than might appear from the public pronouncements of regulators and law enforcement officials.” His 2003 book, Born to Steal, is chock full of examples of the role of organized crime in securities markets. Organized crime’s role in pump-and-dump boiler room operations is so well known that it was prominently featured in several episodes of the Sopranos television series on HBO.

A bit of caution, however, is probably in order whenever regulators start issuing warnings of this sort, particularly when they employ the alarming suggestions of “mafia-style” criminality. The FSA has been calling for stronger enforcement powers and bigger budgets lately, and this report certainly serves to add urgency to their cause. And measures designed to crack down on the worst of criminals seldom stay confined to their original targets. In the US, anti-racketeering laws that were passed to aid federal law enforcement’s crackdown on the Mafia are now regularly used against white-collar criminals.

FSA warns of criminal gangs cashing in on insider dealing [Times of London]

Feel sorry for Goldman, Citadel, and some lesser known market makers in the derivatives trading game. Take a market with record M&A activity, mix in some leaky investment banks, overeager investors, poor regulatory oversight and slow enforcement and you get a lovely record breaking stew of insider trading. We’ve covered the greatest hits so far this year - the Oyster Bar debacle, the Pakastani investor’s TXU jump and the myriad of pumpage and dumpage in potential deals like Dow Jones. The one guest in this insider trading party that’s often overlooked is the market maker.

Market makers account for 44% of the options trades in the US, which means they take advantage of record derivatives volume, but also the brunt of insiders buying call options on securities they know will spike in value when a transaction is announced. Citadel and Goldman can eat some of these losses, but boutique shops take the hit a littler harder. For instance, PEAK6, a market maker for over 2,000 companies, got hammered with several million dollars of losses in the Dow Jones mystery-spike when the firm was forced to sell off securities at below market value.

The SEC is investigating more cases of insider trading this year than the agency took on in the 1990s, and the year’s only half over. The 22 cases also only scratch the surface when it comes to the extent of the insider trading going on, making SEC enforcement an unlikely if impossible deterrent to insiders looking to cash in.

Goldman, Interactive Undermined by Insider Trading on Options [Bloomberg]

Meet Mary Sue Williams. She’s a waitress at Undo’s, a restaurant that overlooks Interstate 70 in the sleepy town of St. Clairsville, Ohio, population: 5,057. She enjoys taking care of regulars, and has plenty of them, as she’s been working at the Italian eatery for nine years. She has two daughters, Jenni and Sarah, and a husband named Mark, who works as a cook at the local Denny’s. Mary Sue’s never bought or sold real stock in her life, though she may be the winner of CNBC’s Million Dollar Portfolio Challenge.

Currently in sixth place (Williams says she used the “Warren Buffett approach” and invested in things she knew about: lubricant manufactuerer WD-40 (WDFC) and Crocs (CROX)), there’s a good chance that she’ll be bumped to first place in the fake contest because the contestants ahead of her have proven themselves to (possibly) be lying cheaters who can’t even stop themselves from trying to scam a simulated game on the internet, run by CNBC and promoted by Tim Sykes. So far, nothing’s been said about players 1-5 doing hard time for their misdeeds, but this seems like punishment enough. Mary Sue Williams, we salute you.

The Million-Dollar Waitress [BusinessWeek]

Ladies and gentlemen, are you yourselves aware that we have entered the greatest era of all time? Not the Paleozoic, Disco or Laundry Detergent ones, though those are all personal faves. We’re talking about the era of Insider Trading, and the Golden one at that. Yes, our little fiduciary duty shirkers, we have hit the insider trading sweet spot and we consider it our responsibility, nay, obligation to ride it all night long.

In 2006 alone, evidence of insider knowledge popped up in the purchases of 57 companies, including HCA Inc, Freescale Semiconductor and Harrah’s Entertainment. Outstanding work, everybody. Turn to the guy on your right and pat him on the back. We even got a shout out from Senator Arlen Specter, who expressed being interested in hearing about insider trading-related “indictments, even more interested in convictions and most interested in jail sentences.”

But the best bit of press came from Federal Reserver Chairman Ben Bernanke when he drew attention to our cause on May 15, saying that “U.S. securities laws against insider trading and market manipulation apply broadly to all financial institutions, including hedge funds, and to trading in a wide range of financial instruments, including securities-based over-the-counter derivatives transactions.” The WSJ’s Dennis Berman thinks this means: “Don’t insider trade on credit-default swaps.” Sure, whatever! We’re just beside ourselves with the mention! Honestly, can you stand it? Can you barely keep your legs shut?

And First Data? Watching that whole thing happen was like when a father (mother, etc) sees his baby boy become a man for the first time. Beautiful. Moving. Poignant. As Mr. Berman, a proponent of insider trading put it himself, “before the buyout boom is over, let’s hope we learn the secrets of how it is really done.” Let us, indeed.

Secrets to Keep: Insider Trading Hits Golden Age [WSJ]

The U.K. is in the midst of a grand experiment in the legalization of insider trading. Although technically prohibited, insider trading takes places ahead of a quarter all deals in the UK but there have been no prosecutions this year and only eight since 2001, according to the Financial Services Authority.

Responsible people assume that insider trading is hurting the status of UK as a trading hub. “If the U.K. aims to become a central place for international business then we must have impeccable quality control,” Peter Hahn, a former Citigroup investment banker and now fellow in corporate finance and government at Cass Business School in London told Bloomberg. “The scale of the problem is serious.”

The market seems to indicate otherwise. During this period of widespread de facto legal insider, the UK has become the most active market for initial public offerings. The number of IPOs in the UK this year is up 300% over the same period two years ago. It is now the third-largest equity market and accounts for about 20% of all trades in Europe.

While there must be costs associated with rampant insider trading, the benefits of non-enforcement may be even greater. Enforcement and compliance can deter market participation by investors. And insider trading itself can make the market more efficient by increasing the amount of information in the market.

No-one seems to be talking about these possibilities. Officials at the agency want to change the laws to make it easier to prosecute insider trading. And, of course, they want more money, staff and better office supplies. But “officials” of almost every sort always want more power, personnel, perks and money, so that’s hardly news.

What is news is that the UK has inadvertently undertaken this experiment in legalizing—or ‘legalising,’ as they would say—insider trading. And it seems to be working out pretty well.

FSA Struggles With Insider Trading That Doesn’t Happen in U.K. [Bloomberg]

Stock picking contests on the internet are not quite working out. Inadequate security systems allowed cheaters to swindle CNBC’s recent content. And last night the TheCheat.com TheStreet.com cancelled the first round of its Beat the Street Competition because some contestants had “employed trading strategies to achieve returns that could not be duplicated in the real world.”*

After the jump, you can read the full memo from TheStreet.com about the cancellation. But we’re curious about what these “trading strategies” might have been. TheStreet.com isn’t giving up the details on these strategies. We’d like to hear what you think.

But to start things off, we polled a couple of our friends for ideas.

“I think the cheaters were trying to exploit irrational spreads between currencies and interests rates without the rest of the world finding out what they were doing,” said a cigar chain-smoker named Jimmy who is mildly obsessed with the collapse of Long-Term Capital.

“Nah. They were definitely trying to listen to some physicist-cum-Quant who had too much access to Excel and tried to use the Riemann Hypothesis to time the energy commodities markets,” said a former Citadel project manager named Trish.

“I’m positive that the plan was to IPO companies using obscure financial valuations based on ‘economic net income’ to reap windfalls,” said guy we’ll just call Steve BlackGuy.

“They were going to invest based on advice they heard on a prominent financial news network between the hours of six and seven in the evening,” said another person who we are making up.

Since you can’t really trade currencies or commodities in the contest, much less IPO a company in the Beat The Street contest, we’re pretty sure none of these are right. And the last is just plain implausible—no one would ever try that idea. So in comments below, we invite you to give us your unworldly trading strategies.

* Disappointingly, the phrase “strategies to achieve returns that could not be duplicated in the real world” has nothing at all to do with the true story, of seven strangers, picked to live in a house, and have their lives taped, to find out what happens when people stop being polite, and start getting real.

[After the jump: TheStreet.com’s memo.]

Earlier: Insider Trading At CNBC: The Plot Thickens Imperceptibly

[John Carney contributed to this article.]