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Comment by b_tterc_p | Hacker News Reader

Seems highly unlikely that there’s any actual secretive insider trading happening here. It would be a HUGE risk for practically no gain, distributed across many individuals, committed by primarily people who wouldn’t stand to benefit. The firm should probably switch to vanguard or whatever... but the existence of this hedge fund does not mean the firm is using its insider knowledge maliciously. Most consultants won’t even know what other people on their team is working on, and most are in and out after 2 years.

The article buried the mitigating factor in the middle of the article. Hedge fund managers don’t coordinate with consultants, and 90% of MIO’s capital is managed by outside funds, including this one the article is about.

The problem mckinsey faces is that they consult for everyone.

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> a HUGE risk for practically no gain

Eh? A few dropped words during a social dinner, or even a knowing glance, you call that a huge risk? And a hedge fund getting (even only 1 bit of) information from some well-informed people, allowing them to adjust their position on a firm, can lead to substantial gains, obviously.

> Most consultants won’t even know what other people on their team is working on, and most are in and out after 2 years.

This is not about junior guys.

> Hedge fund managers don’t coordinate with consultants.

Well, yeah, officially, of course. But that's precisely what the article is about.

> a HUGE risk for practically no gain

The same thing happened in the Libor scandal, those involved took a very big risk for not such a big gain and look what that caused: a market worth hundreds of billions of dollars (if not more) being manipulated in exchange for stuff like Champaigne bottles and some fancy dinners out (all of the latter worth at most $10,000).

The LIBOR scandal was predicated on them using online chat rooms, instead of just the kind of proven “wink and a nod over drinks” that’s being alleged here. In essence, they took an even bigger risk than what is being described in this article, and as you say, for lesser rewards.

Things have changed a lot since 2012. Of course, we don't have information that we are not privy to, but I still think it's unlikely. I'm saying this as a finance professional, but of course, I really don't know what other people would do, but I know that my firm wouldn't traffic in something so high risk. Not because of some moral opposition of course, but just because the potential fines could potentially be an extinction event for the firm.

I hope you’re right, but the skeptic in me says that people who commit crimes tend to do so thinking they won’t get caught. It’s the problem with the death penalty or any harsh regime of sentencing; the deterrence effect is nonexistent.

I don’t disagree that there’s opportunity for bad actors. This exists for everyone. But the NYT is trying to imply with no evidence that there is a habitual firm policy of leveraging client secrets for insider trading at the firm’s hedge fund. That doesn’t make sense. If you’re going to commit fraud, you don’t do it in a fund to be allocated across thousands of partners, you do it for something that’s actually going to matter for you in some way. Like the guy who got caught.

The only evidence of badness within this they could find was a pharma company invested in by an outside firm.

The NYT has also released another article about why they’re writing these hit pieces.

https://www.nytimes.com/2019/02/19/reader-center/mckinsey-he...

Basically it boils down to them having a hunch that a big private company is bad. And have they really found anything? No, not really. They just keep churning out pieces that say this could be bad if the firm has no internal controls though they can’t find anything to suggest it’s true, or one off studies that are linked to bad outcomes. Their reporting isn’t factually incorrect, but it’s being written with their own stated bias to find bad things. They’re not hearing leads and digging further. Given that this is true, their investigation has found basically nothing.

Yes, it always seems like only a stupid or crazy person would do it, yet here's a fairly recent case of a McKinsey Managing director doing just that: https://en.wikipedia.org/wiki/Rajat_Gupta

Considering the former head of McKinsey went to jail for insider trading, the probability is not so small.

Interesting data science exercise...visualize all the MIO LinkedIn connections to McKinsey people.

> Seems highly unlikely that there’s any actual secretive insider trading happening here.

There's no smoking gun and the Times did seem to be fishing around for one in this piece. It's a bit of a lurcher.

On the other hand:

> Internal documents examined by The Times show that from 2000 to 2010, MIO’s flagship fund, the Compass Special Situations Fund, had an average annual return above 9 percent, compared with a 1.6 percent loss in the S&P 500 Index. In 2008, when the broader United States stock market fell more than 36 percent, the Special Situations Fund lost about half that amount.

It's possible to get that kind of return with nothing but public information. But it's a lot easier if you have miraculous hunches every now and then.

I think the trick with this matter is that as long as the incentive outweigh the risk to at least 1 actor at some point in time, they will attempt to make a move that can be seeing as insider trading. It becomes a matter of whether society and the company are ok with the risk and the mitigation efforts that are being implemented.

Let's not kid ourselves, people have been caught in stuff like insider trading for peanuts before.

The perception alone matters to clients, that's enough to take action let alone potential insider trading type ethical issues. I work at a firm doing a lot of M&A work and Chinese walls are a big deal to alot of our clients in that space. Also we're a smaller firm and able to manage confidential projects, I'd think McKinsey of all people could figure out how to do this.

This is McKinsey's official response: https://www.mckinsey.com/about-us/media-center/mckinsey-stat...

McKinsey has a lot of Chinese walls internally: most partners and consultants who have been working for one client would never advise that client's competitors. The firm is very careful about keeping the trust their clients have in them, as that's ultimately what they're selling.

How do you think McKinsey even makes money?

Charging massive consulting fees

I feel that you may underestimate the amount of insider trading that goes on in private equity. Remember also, the line between insider knowledge being legal or not is somewhat gray.

I doubt there is an on record scheme with company memos and other communication discussing inside info. It's probably much closer to work friendships and casual partnerships that pass much of this information along.

As long as you can build a reasonable model to line up with the information you get, it's pretty difficult without a smoking gun to get caught.

This comment fundamentally misunderstands what insider trading is. There is no such thing as "insider trading" in private equity - insider trading by necessity is gaining an unfair advantage via non-public information. Private equity and venture capital investors both get access to substantial non-public information and are allowed to buy and sell equity in the private markets with as much or as little non-public info as they want, because that is not disadvantaging other public investors lacking that information.

While I would agree that the comment you're responding to is probably using the term incorrectly, there is definitely such a thing as insider trading in private equity.

Knowing that a public company is about to be taken private by a friend's PE firm is material non-public information (MNPI). Knowing that a PE-backed company is about to be bought by a public strategic acquiror is MNPI. Knowing that sales of a private company's products to a public company are changing rapidly is MNPI (think of knowing the order pipeline for an electronics manufacturer who sells to Apple).

Trading on any of this MNPI would absolutely count as insider trading, and is watched closely by PE/VC firms, who are all regulated by the SEC and FINRA (in the US, at least)

This MOI story seems to come up every few years, but McKinsey has kept everything so private that typically all the articles can say is "MIO seems suspicious, and may be conflicted"

A few past articles: https://www.wsj.com/articles/mckinsey-investments-werent-dis... https://www.ft.com/content/7c6700bc-2976-11e6-8b18-91555f2f4...

Apologies, I tend to use private equity for all private fund investments, which isn't technically accurate. Thanks for the clarification.

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