In 2022, Elon Musk bought about 9% of the stock of Twitter Inc. US securities laws at the time required him to disclose his stake within 10 days after he acquired 5% of the stock. He hit 5% on March 14, 2022, so his deadline to disclose the stake was March 24. He didn’t file the disclosure, and kept secretly buying more stock.

When he ultimately disclosed his ownership on April 4, 11 days late, Twitter’s stock predictably jumped, as the market (correctly) anticipated that he would buy the whole company at a premium. Had he followed the law and disclosed his stake earlier, the stock (presumably) would have jumped earlier. But he didn’t▸ AI summary, and from March 24 through April 3, he bought about 13 million more shares at lower, pre-disclosure prices. On some simple math▸ AI summary, Musk saved about $143 million by illegally waiting to disclose his purchases so he could buy more in secret.^[1]

There is really nothing more to it than that: Musk broke the law, and he made tens of millions of dollars by breaking the law, and in 2025 the US Securities and Exchange Commission sued to make him give the money back.^[2]

But: Give the money back to whom? Musk bought about 13 million Twitter shares in illegal secrecy, paying about $39 per share. Had he made the required disclosures, he would probably have paid about $50 per share. If he saved $11 per share, then it stands to reason that the people who sold him the stock each lost about $11 per share. He should give them the money.

There are some problems with this reasoning, though. For one thing, it is pretty hard to trace US stock transactions; Musk doesn’t know who sold him his stock, and those people don’t know they sold to Musk. Probably, he bought most of that stock from market makers, banks and electronic trading firms, who tend to be involved in most US stock trades. But the market makers did not, in any obvious sense, lose $11 per share on their Musk trades. They probably bought the stock from somebody else, at right around $39 per share, seconds before or after they sold it to Musk. They are not particularly sympathetic victims, and if they got the money it would be a pure windfall. Perhaps Musk should give them the money and they should give it to the people they bought the stock from, but those people might also have been electronic trading firms; there is no sensible way to find the ultimate “victims.”

Also, even if you could find some individual investor who sold stock to Musk at $39, so what? Nobody forced that person to sell. If Musk had never bought any Twitter stock, she probably would still have sold at $39. Perhaps in some sense she was deceived about the value of the company; perhaps she thought “this company is not worth a penny more than $39” but would have thought otherwise if she knew about Musk’s interest. But perhaps not. Maybe she had a tuition bill to pay and just put in a market order to sell. The stock market is a large distributed system; it’s not like she was negotiating directly with Musk and he tricked her.

Also, how do I know that Musk would have paid $50 per share, instead of $39, if he had followed the rules and disclosed his stake on time? I don’t. I have some decent evidence: Musk did disclose his stake 11 days later, and the stock did jump to about $50, and Musk’s involvement was surely the main news about Twitter in 2022. But it is hard to prove the counterfactual, and perhaps if Musk had disclosed a 5% stake on time the market would have reacted less than it did to his late 9% disclosure.

Also, what is the counterfactual here? If Musk had disclosed his stake and the stock jumped to $50 and he kept buying, he would have paid an extra $143 million to get to 9%. But would that have happened? He could have stopped buying once he disclosed. Then nobody would have sold to him at $39 or at $50. Perhaps he would have ended up buying the rest of Twitter at $54.20 per share, as happened in real life, but perhaps not. Maybe with only a 5% stake he would have given up on buying it. Maybe he would have offered less.

This is not really about Musk. This sort of problem happens a lot in the stock market. If somebody (1) makes money from stock trades (2) illegally, it stands to reason that (3) somebody else lost the money. But the stock market is a diffuse and complex system, and it’s not easy to match the exact people who lost the money, and the exact amount of money they lost, to the illegal transactions.

So we talked in 2024▸ AI summary about a pump-and-dump case. Some guys with online nicknames like “Mystic Mac” and “The Stock Sniper” talked up some stocks online, their followers bought the stocks at inflated prices, the pumpers sold their shares at inflated prices and then the stocks collapsed. The SEC and the Justice Department brought charges against the pumpers, because that is the most basic sort of securities fraud. A judge in Texas, though, threw out the charges, concluding that there were no victims. Sure, if the pumpers had lied about stocks to identifiable victims, and then sold their stock directly to those victims at inflated prices, that might have been fraud, but there’s no way to prove that that’s what happened. The pumpers lied to their followers, the followers bought the stock at inflated prices, and the pumpers sold the stock at inflated prices, but you don’t know that the pumpers sold the stock to the followers — presumably they sold mostly to market makers — or what the followers would have done if there was no pump. Maybe they would have bought the stock anyway?

I called this opinion “wild” — “Pump and Dumps Are Legal Now,” was my headline — and in fact it was overturned on appeal last year. But there is something to it. The accounting of profits and losses in pump-and-dump schemes is not straightforward; the profits of the pumpers do not map simply to the losses of the victims.

If you do a pump-and-dump, and the SEC comes after you, they will probably demand that you give back the money you made. But: Give the money back to whom? Sure sure sure the SEC can count how much money you made on the pump-and-dump, but it can’t easily count how much money people lost to you, or who they were. In the first instance, the SEC will demand that you give back the money to the SEC. And then it might set up a “fair fund” for victims, and have some process for people to submit claims and reimburse them. But it will not be surprising if the amount of money the SEC takes from you does not equal the amount that it returns to victims, because your profits and your victims’ losses are not the same thing.

Isn’t that weird? Some people think so. Bloomberg’s Greg Stohr and Nicola White report▸ AI summary:

Three times over the past decade, the US Supreme Court has cut the Securities and Exchange Commission’s ability to extract millions of dollars from alleged wrongdoers.

Critics of the commission say it’s not enough. In arguments Monday they are asking the justices to put new limits on “disgorgement,” one of the SEC’s most potent enforcement tools, designed to recoup illicit profits and return them to victims. …

Critics say the SEC is using disgorgement to enrich the Treasury, rather than compensate victims. The commission’s fiscal 2025 financial report indicates it holds more than $5 billion in collected disgorgement and penalties that haven’t been distributed to victims. …

The latest case involves Ongkaruck Sripetch, who was accused by the SEC of engaging in a variety of fraudulent schemes tied to at least 20 penny stock companies. The SEC said Sripetch, who controlled a website called Stockpalooza.com, joined with associates to promote shares and then dump them before the price cratered. The schemes generated $6.6 million in illicit profits, the SEC said.

Sripetch agreed to a judgment against him while continuing to fight the disgorgement award. A federal district judge then ordered Sripetch to give up $3.3 million in profits and interest. The 9th US Circuit Court of Appeals affirmed, rejecting Sripetch’s contention that the SEC needed to show what lawyers call “pecuniary harm.”

Sripetch says the 2020 Supreme Court ruling – and its requirement that disgorgement be “awarded for victims” – indicates it can be used only when the SEC can show quantifiable harm that would allow for compensation.

“This court made clear what disgorgement means – it requires restoring the status quo and returning funds to victims,” who necessarily must have suffered pecuniary loss, his lawyers argued.

“The clash could also affect the SEC’s lawsuit against Elon Musk,” they note. (Here are the briefs from Sripetch, and the SEC, and a group of “remedies and restitution scholars.”) If you do fraud in the stock market, in some intuitive sense the victim of the fraud is the stock market: You extracted a certain amount of money from the market, but exactly who put that money into the market is not always clear. The SEC’s job is to protect the stock market, so it will try to make you give the money back. But there is no easy way to make you give the money back to the market.

I have written about▸ AI summary one important difference between private credit and other kinds of credit (syndicated bank loans, bonds), which is:

1. Private credit lenders raise money first, and then use it to make loans, while
2. Banks and bond underwriters make loans first, and then raise money to fund them.

If a company wants to borrow money, it might meet with a bank, who will say “yes, we can help you, we’ll just need to find some investors who have the money,” and then the bank will go out and market bonds or loans to investors, and if it succeeds in finding investors then the financing will close.

Or the company might meet with a private credit direct lender, who will say “yes, we have the money right here, here you go.” There’s no need for marketing; the private credit lender has the money already. The private credit lender isn’t generally lending its own money: It has raised a fund from investors, and it’s lending their money. There was marketing. It just happened first. In private credit, the lenders market the loans and then make them; in bank lending and bonds, the banks make the loans and then market them.

This is oversimplified^[3] but useful. For instance, it explains one of the main appeals of private credit to borrowers, which is that it can offer more speed and certainty than a bond deal or a broadly syndicated loan. There might be other advantages. Here is a paper from March on “The Cyclicality of Direct Lending,” by Franz Hinzen, Giorgio Mondini, Paul Rintamäki and Sascha Steffen:

In direct lending, nonbank financial institutions originate bilaterally negotiated loans to risky firms. We document that issuance in this segment of the private credit market is countercyclical relative to issuance in other high-yield corporate credit markets, such as syndicated loans. This countercyclicality is the result of firms substituting across credit markets. Rather than forgo debt financing, firms switch to direct lending when credit conditions in other credit markets tighten. This substitution behavior is especially pronounced among sponsor-backed firms. Contrary to the concern that private credit could amplify credit supply shocks, our results indicate that private credit may dampen the corporate credit cycle. Thus, our findings have important implications for assessing the financial stability ramifications of the rapid growth in private credit.

From the paper:

We show that, among firms receiving a loan in a given quarter, the share borrowing in the private credit market increases when conditions in the syndicated loan market tighten. For example, when spreads in the leveraged loan market widen, and deal-making becomes more difficult, the share of firms that raise funds in the private credit market increases. 

They do not exactly explain why private credit is available when syndicated loans aren’t, but intuitively my model could explain it. When credit conditions are good, there are lots of syndicated bank loans and bond deals, because those are cheaper than private credit, and it is also easy for private credit firms to raise funds. When credit conditions are bad, there are no syndicated bank loans or bond deals (because no one will buy them), but the private credit firms still have all those funds that they raised, so they can go ahead and make loans.

There is, I suppose, such a thing as the time value of portfolio managers. A talented hedge fund portfolio manager in a year is worth less, to a hedge fund, than a similarly talented hedge fund portfolio manager today. If you run a multistrategy hedge fund, and you come across a talented portfolio manager who would be perfect for your firm, you might want to pay her $100 million if she can start today. But if she has to wait a year to start, she might only be worth $80 million. You have clients and money and a need now, and she has the skills now. In a year, who knows? Maybe you will have lost money and won’t be able to afford her. Maybe you will have made so much money that you can afford someone better. Maybe her skills will have atrophied or her strategy will no longer be relevant. 

In the modern hedge fund market, almost every talented hedge fund portfolio manager is available on, roughly, a one-year delay. (Sometimes more, sometimes less, but a year is the right order of magnitude.) The big multistrategy hedge funds make their portfolio managers sign noncompete agreements, and when they leave the managers have to wait out long gardening leaves before starting at a competitor. Hedge funds mostly just live with this when they hire outside talent. The hedge-fund talent market is primarily a futures market.

But there is a small spot market for experienced hedge-fund talent. Some of those futures are expiring every month. Some portfolio manager gave notice at her old firm 11.5 months ago and is starting at her new firm in two weeks. Her old noncompete has almost expired, and her new noncompete hasn’t started yet. There is a tiny window of spot availability. If you outbid her new firm, you could get her on only a two-week delay, which is surely worth more than getting some other comparable manager on a one-year delay.

So you should be able to outbid her new firm: They agreed (a year ago) to pay her the one-year-forward price, while you’re bidding for her immediate availability. Of course I suppose they could raise their bid to match, though they might be annoyed if she asks. Anyway, Bloomberg’s Nishant Kumar reports▸ AI summary:

Hedge funds have been trying for years to lock down their star traders. Many have expanded and tightened noncompete agreements, longtime industry fixtures. ...

Enter the “interception trade,” another recent addition to the hedge-fund lexicon. The term refers to a burgeoning sub-market for talent in which employers target employees who have already agreed to join another firm. It all comes down to timing. Employers must strike at the precise moment a potential hire’s noncompete agreement expires, or even just before. One recruiter has started to keep a list of people he’s placed in new jobs along with the dates their mandated leaves expire, in case new, more lucrative opportunities come up.

Jason Kennedy, a London-based recruiter, is blunt about what’s going on. He likens it to breaking up with someone you’re engaged to marry. In financial markets, options lose value as they approach their expiration date. With traders, it’s just the opposite. Their value goes up as their forced leave runs out.

“The less gardening leave he has, the more valuable he becomes to the buyer,” Kennedy says.

The problem with recruiting hedge fund portfolio managers is that they understand optionality.

We talked last week about tax alpha and pre-tax alpha. Basically:

1. You can generate some tax benefits by borrowing some money, buying a lot of stocks, shorting a lot of other stocks, and harvesting the losses from whichever side of the trade loses money. This is sometimes called a “tax-aware long-short strategy.”
2. You can try to buy stocks that go up and short stocks that go down. (If you do this, you will generate “pre-tax alpha,” that is, market-beating returns.)
3. The first thing is a lot easier than the second.
4. But if you do the first thing without doing the second thing — if you just look for tax benefits — the Internal Revenue Service might shut you down, because you need some “economic substance” to your business beyond tax savings.

“Tax Alpha Needs Some Real Alpha,” was my headline. A reader pointed me to this recent paper on “The Tax Benefits of Pre-Tax Alpha,” by Joseph Liberman, Nathan Sosner and Pedro Freitas of AQR Capital Management (a big purveyor of tax-aware long-short strategies), making different but related points:

We present new evidence that pre-tax alpha materially enhances the tax benefits of tax-aware long-short beta-one equity strategies. The positive effect of pre-tax alpha on tax benefits strengthens with leverage and investment horizon. Two mechanisms drive this result. First, pre-tax alpha accelerates the growth of net asset value (NAV), which leads to higher dollar tax benefits as the asset base over which these benefits are realized grows. Second, pre-tax alpha leads to creation of new positions, acting similarly to recurring capital contributions. Position creation also lowers the cost of transitioning a long-short strategy to a long-only portfolio. In combination, greater tax benefits, faster NAV growth, and reduced transition costs stemming from higher pre-tax alpha translate into significantly higher after-tax post-transition wealth created by tax-aware long-short strategies.

Again, both for tax legal reasons and also for extremely obvious financial reasons, it is better to buy mostly stocks that go up, even in a portfolio built to harvest tax losses.

Elsewhere, Bloomberg’s Loukia Gyftopoulou reports▸ AI summary:

A short seller is taking aim at the more than $1 trillion that’s invested in strategies that reduce taxes for the rich — putting one of the US’ most staid money managers in its crosshairs.

Orso Partners has amassed a bet against Affiliated Managers Group Inc., the $813 billion investment firm that backs Cliff Asness’ AQR Capital Management, according to a letter to investors seen by Bloomberg. AQR has been at the forefront of building out an ecosystem of trades — often called tax-aware long-short strategies — that has sprung up recently as Wall Street rushes to help wealthy Americans deal with taxable gains after years of rising markets. ...

AQR’s recent growth “is built on regulatory arbitrage that faces immediate scrutiny,” Orso portfolio manager Nathan Koppikar said in a letter to investors. 

Seems a little unsporting for a hedge fund to try to raise other investors’ taxes.

From last week:

The Securities and Exchange Commission [Thursday] announced the launch of Material Matters With SEC Chairman Paul Atkins, a new podcast that provides stakeholders and the investing public with exclusive interviews and insights around the agency’s policy and rulemaking agenda. 

Chairman Atkins will be joined by guests across the agency, government, and industry, including fellow commissioners, division directors, legal and policy experts, authors, and corporate leaders.

“I’m excited to launch Material Matters, a new podcast that will provide the American public with an inside look at the SEC’s vital work and its implications for our economy,” said Chairman Atkins. “I look forward to welcoming accomplished guests from both inside and outside the agency who play a critical role in our efforts to strengthen U.S. capital markets for the next generation.”

I have not yet gotten my invitation to appear on this podcast but I will be sure to let you know when I do.

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