SEC vs Chanos: Another Silly Sideshow

Has the SEC learned nothing? Its investigations of David Einhorn, rather than the companies he was shorting, were idiotic. Its ban on short-selling financial stocks was idiotic. (The XLF financials ETF was at $22 when the ban was implemented; it’s now at $9.) In general, the SEC has historically been much more inclined to investigate short-sellers than it has been to investigate the companies they’re shorting — which is also idiotic.

And so today we receive the news that the SEC is investigating Jim Chanos regarding short-sales of Fairfax Financial:

The Securities and Exchange Commission is investigating whether several hedge funds traded improperly after being given advance notice by a research analyst of his negative report on a prominent insurer, people familiar with the agency’s investigation said.

Blodget has chapter and verse on the allegations, which center on the fact that Chanos seems to have known all about a Morgan Keegan research report before it was published. But nobody — not Blodget, not Bloomberg, not Chittum — bothers to note that advance information about a Morgan Keegan research report is not inside information about Fairfax Financial.

Now I’m no lawyer, and I have no idea whether the report constitutes material information, or what exactly the SEC considers "publishing" a report to entail. (How many clients need to receive a research report before it’s considered public?) It’s also very common for research analysts to talk frequently with their buy-side clients such as Chanos in order to swap ideas and strengthen their investment theses. If many of the ideas in the Morgan Keegan report ultimately came from Chanos’s shop — and there’s nothing wrong about that, so long as the Morgan Keegan analyst independently believes and verifies them — then it’s understandable that the analyst might tell Chanos that he’s going to put the ideas in an upcoming report.

The SEC case here seems nit-picky to me: the insider information they’re so concerned about isn’t the content of the Morgan Keegan report, but rather the knowledge of its impending publication. Which raises rather obvious questions of doesn’t-the-SEC-have-anything-better-to-do, given the massive frauds which are increasingly being uncovered at real companies, including especially financials.

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