An Exception That Proves the Rule: Ivan Boesky
The efficient market hypothesis indicates that investment advisers should not have the ability to beat the market. Yet that is exactly what Ivan Boesky was able to do until 1986, when he was charged by the Securities and Exchange Commission with making unfair profits (rumored to be in the hundreds of millions of dollars) by trading on inside information. In an out of court settlement, Boesky was banned from the securities business, fined $100 million, and sentenced to three years in jail.(After serving his sentence, Boesky was released from jail in 1990.) If the stock market is efficient, can the SEC legitimately claim that Boesky was able to beat the market? The answer is yes. Ivan Boesky was the most successful of the socalled arbs (short for arbitrageurs) who made hundreds of millions in profits for himself and his clients by investing in the stocks of firms that were about to be taken over by other firms at an above market price. Boesky’s continuing success was assured by an arrangement whereby he paid cash (sometimes in a suitcase) to Dennis Levine, an investment banker who had inside information about when a takeover was to take place because his firm was arranging the financing of the deal. When Levine found out that a firm was planning a takeover, he would inform Boesky, who would then buy the stock of the company being taken over and sell it after the stock had risen. Boesky’s ability to make millions year after year in the 1980s is an exception that proves the rule that financial analysts cannot continually outperform the market; yet it supports the efficient markets claim that only information unavailable to the market enables an investor to do so. Boesky profited from knowing about takeovers before the rest of the market; this information was known to him but unavailable to the market.