Darren Dalton looked out of the window of his office in the New York financial district, staring at a message. He had received a tip about how the military was going to start construction on a new base in Oregon for drone operations. His fund received a lot of information like this from congressmen who had oversight roles, and also executives in various companies. These officials and executives would have his fund “manage” their money so there would be no accusation of insider trading.
They would feed him information and he generated significant returns. The fund was closed to people if they did not contribute sufficient information except for some capital from his core fund. The returns on this fund were huge and generated about half the profit for his mainstream fund that was open to a wider pool of investors. The profits in the core fund were not publicly shared, but they were typically over 200% return per year. In comparison, his main fund returned about 15% per year and was considered a top performer in its risk category.
He personally made a lot of money on the core fund. He didn’t show up on lists of richest people, but only because his fund was privately held. He went to great lengths to hide how much money they pulled in. Darren was obligated to give generous donations to his member politicians to make sure they held onto their positions, but even spending 10s of millions a year was hardly worth worrying about.
What did worry him was today’s report. The land around the site of a new military base had been purchased yesterday in 16 transactions with different parties. Futures contracts on various construction supplies had also been acquired. In short, all the money from this tip was gone before he had a chance to act on it. Someone had blabbed about the project. No doubt people with similar operations to his own had snapped up the profit.
This could happen sometimes. After all, there were several politicians overseeing large projects and they often shared information with multiple investment funds. What worried him was that it was the fourth time in two weeks that people had beaten him to profit on an insider tip. Two other tips were from politicians, but one was from an executive who understood the value of his secrets. He kept his key people invested in the same managed fund, so how did this get leaked?
A couple bad weeks would hurt, but if this continued Darren could not keep up the huge returns his clients demanded. If they got wind of it, some would start pulling their money out. Many investments he had were not very liquid so a run of key investors could ruin him. He would need to use his own money to pay out anyone who wanted to leave. Worse, he would lose his trading edge and the implied protection against legal prosecution. In short, Darren seriously considered if it was time to pull his own money out and hand the fund over to one of his junior partners.
Angela Stein was one of the managers of his more public fund. After the returns from the core fund, her investments were the best performing. She had a talent for spotting startup companies with talented management. Some of her ideas had not panned out, but she would get involved and help fix issues. Her returns had been 30% last year and would easily beat that as one of her portfolio companies was moving into a rapid growth phase. She had helped with a timely injection of capital and introduced their management to a specialist who solved a tricky manufacturing problem. Darren felt bad dumping his problem on her, but it wasn’t entirely a bad deal. She could sink or swim. If she could turn it around, Angela would be a billionaire and well deserved. If she failed, well that was the risk you take playing the game at this level. Darren had finally talked himself into believing this wasn’t a horrible thing to do. He started moving his money out of the fund. He then called Angela to tell her the good news about her promotion.
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Angela Stein received a call. She had received a very detailed proposal about an undersea mining operation. It was an unusual pitch. The potential was huge and the level of detail in the proposal was better than what she usually received. The downside was that the partners were college students and a woman with zero professional experience.
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She had asked a few questions and quickly received detailed responses. These people didn’t have a pedigree, but they seemed highly competent. She forwarded a portion of the document to one of her research contacts to confirm that the idea was plausible.
As for her call, her boss was giving her a promotion and wanted her to take over the core fund! This fund managed billions and she knew the returns were too good to be true. Angela had always suspected there was insider trading involved.
“Congratulations Angela! Your performance has been fantastic, and we feel it is time to recognize your contributions and let you take a larger role in the company,” Darren gushed.
“Thank you,” Angela replied. “This is quite an honor, but I’m not sure I am ready to produce the kind of returns the core fund is known for.”
“Well, you have done amazing work with the resources available. The core fund has sources of information which are a little more…targeted.” Darren said with a smile.
“I see. Well, I’m excited for the opportunity, but I would like to take a couple days to think about if I can handle the extra responsibility.” Angela said. She had a bad feeling about this. If he pushed, she was definitely not taking the job.
“Oh, I see. Well, I hope you don’t mind if I am also making the offer to Wallace. Maybe a little competition would do you both some good.” Darren recovered smoothly. He was not stupid - he could tell Angela had concerns. Smart girl. Wallace was a well-connected Ivy Leaguer - his parents bought him into the right schools and helped him make connections to get some big deals. His returns were inflated above average due to tips from his family network. In a way he was a vastly inferior version of Darren’s own success. Darren should have dumped this on him from the start but had convinced himself Angela might actually turn it around. Oh well, his retirement was just going to get started earlier.
Angela left the office with a bad feeling. She wasn’t an idiot - if Darren was handing over the core fund, something must have gone really wrong. Either a big investor was pulling out, some legal troubles popped up, or maybe one of their large trades had cratered. The details didn’t matter much. Angela typed up her two weeks' notice and sent it to Darren and Human Resources. She had vacation time saved up, so she could leave immediately. She hadn’t taken a vacation in four years.
After walking out the door, she called up a contact she had saved on her phone. The woman on the other end was friendly, but she would only speak after a notable pause. It was like there was a bad connection or the woman was taking time to think carefully about everything she said.
“Hi Ms. White, this is Angela Stein. I was very impressed with your investment proposal but regret to inform you I will no longer be associated with the Blue Mountain fund.”
“... Don’t worry dear, we were interested in working with you more than that fund.” The woman replied.
“Oh, that’s nice to hear. Unfortunately, I’m not currently in a position to work with you. I expect my company will execute a clause that forbids me from working on investment deals for a year after my employment contract is ended. I can refer you to my friend Marty Tyler who works on similar deals.”
“...That is sweet of you, but not necessary. Marty was also on our list, but we are more interested in you. You should check your contract. It probably forbids you from working at another investment fund for the duration of the garden leave period. They are not legally allowed to forbid you from taking an advisory position in an unrelated industry - for example a technology or mining company. Furthermore, they cannot dictate how you invest your personal funds.” Melinda smoothly replied. Just who was this woman?!
“Well, that is a rather impressive understanding of my situation. It would be a large personal risk for me to commit the level of funds you had requested. I think the most I would be comfortable with is about $2 million for a 60% stake in your company.”
After a pause, Melinda’s voice sounded slightly different.
“...You wouldn’t be offering anything if you didn’t see the potential. Also, the funds you have on hand is not a problem since you are free to re-sell fractional ownership to your wall street contacts - for example your friend Marty’s fund. This company is going to succeed even if I have to go to someone else for funding. $4 million for 51% is my final offer.”