NEW YORK — The Wall Street illegal-insider-trading investigation may lead everyday investors — already rattled by a stock-market meltdown, a one-day “flash crash” and the Bernie Madoff scandal — to conclude that the game is rigged.
“A large part of trading has to do with trust, and I don’t have it,” said Mark Swenson, a 43-year-old plumber from New Hampshire who refuses to buy individual stocks. “When a stock moves up 10 percent, you don’t know why.
“We can pretend that everyone has access to the same information, but they don’t.”
Even before news broke that federal investigators were looking into whether hedge funds traded on inside information, small-time investors were pulling their money out of stocks — despite a remarkable run for the market since the spring of 2009.
Americans have pulled $60 billion out of U.S. stock funds this year, according to the Investment Company Institute, a trade group.
Meanwhile, investors have piled money into Treasurys and bond funds considered safer investments. And at the same time, banks such as Wells Fargo have reported that money is moving into checking and savings accounts.
This has coincided with turmoil in the stock market that goes back a decade to the collapse of the Internet bubble and portfolio-draining scandals involving high-flying companies such as Enron. Then came the housing bubble, the collapse of Wall Street firms such as Bear Stearns and news that Madoff had bilked investors out of billions.
“Virtually everyone on the Street believes there are significant improprieties, and I think there is an even more important point for the massive number of investors who are not Wall Street players,” said former New York Gov. Eliot Spitzer, once known as the “sheriff of Wall Street” for aggressively prosecuting white-collar crime as the state’s attorney general. “And that is, for most of us, you can’t beat these guys at their own game.”
The first strike in a new federal offensive to root out illegal insider trading on Wall Street came Wednesday with the arrest of Don Ching Trang Chu, a consulting-firm executive who prosecutors said tipped off a hedge- fund manager about corporate earnings before they became public.
Investigators said Chu was heading to Taiwan on Sunday, ahead of multiple expected arrests.
Small investors may be comforted to know that professional investors don’t always fare better, even with the edge they have over the masses. Numerous studies have shown that mutual funds overseen by professional stock pickers often are outperformed by computer-driven index funds.
The record for hedge funds hasn’t been so impressive either. Since 2008, when the number of those funds hit 10,000, nearly 3,000 have gone out of business, according to Hedge Fund Research in Chicago.
“The edge is hugely exaggerated,” says Richard Ferri, founder of the investment-advisory firm Portfolio Solutions and an advocate of low-cost index funds. “If the small investor does the right thing, he can do better than 99 percent of anyone else.”
