A massive trove of tax information obtained by ProPublica, covering thousands of America’s wealthiest individuals, reveals what’s inside the billionaires’ bag of tricks for minimizing their personal tax bills — sometimes to nothing.
In late 2015, Dodge & Cox, one of the nation’s largest mutual fund managers, began buying large quantities of shares of a cloud-computing company called VMware. Over three quarters, Dodge & Cox amassed almost $700 million in shares. That was good news for anyone who already owned shares of VMware, since big purchases tend to push a stock price upward.
One such shareholder was David Hoeft, a member of the Dodge & Cox committee that made the decision to buy the shares and an advocate for investing in technology companies. Hoeft, who has spent 30 years at Dodge & Cox, is now the company’s chief investment officer.
For decades, regulators have tried to clamp down on front-running, the term for when investment professionals make personal purchases or sales of securities when they know that their employers or clients are about to buy or sell the same securities. But a massive assemblage of confidential stock trading data obtained by ProPublica reveals that the practice may be continuing on a notable scale.
Hoeft is one of dozens of investment managers at hedge funds and mutual funds who personally traded the same securities that their organizations were buying and selling, ProPublica found. He stood out in this group for the volume and fortuitous timing of such trades. From 2011 to 2019, Hoeft traded stocks on at least 31 days in the same quarter or the quarter before Dodge & Cox traded the same securities. The transactions were worth nearly $50 million. (All told, Hoeft’s personal trades, most of them in stocks his employer was not trading, totalled more than $725 million during the period.)
Knowing that a fund is going to buy or sell stock can qualify as the sort of confidential information that’s unlawful to trade on. And Dodge & Cox’s ethics policy is unequivocal. It tells employees, “You may not front-run any trade of a Fund or Client Account.” An employee, it explains, “may not … purchase a Reportable Security if you intend, or know of the Dodge & Cox Group’s intention, to purchase that Reportable Security or a related Reportable Security on behalf of a Fund or client.” The same goes for a sale. Employees are warned to “avoid any actual or potential conflict of interest or any abuse of an employee’s position of trust and responsibility.”
Dodge & Cox’s chair at the time, Charles Pohl, excoriated front-running, explaining how it hurts customers in a 2022 comment to the Securities and Exchange Commission. “Trading by free riders,” Pohl wrote, “often drives the price of a security up (when we are trying to buy a block) or down (when we are trying to sell a block) and results in direct harm to our clients and Fund shareholders.”
Imagine essentially that just before a well-informed high roller puts down a large bet on a particular horse, which has the effect of making the odds for betting on that horse less favorable, someone who works for the high roller slips in and makes their own bet on the same horse.
The managers of investment funds have a distinct edge when trading in their personal accounts. Because they control billions of dollars’ worth of their clients’ funds and can deploy a staff of analysts to unearth reams of data and insights about companies, they can sometimes foresee how demand for a stock will change before the public does.
This kind of trading also creates a potential conflict of interest if, for example, employees are advocating internally for the fund to hold or buy more of the stock they personally own. And by trading the same securities as their fund, employees personally profit from research that is owned by their employer and that their clients essentially paid for.
In a statement, Dodge & Cox said that the firm had given advance approval for all of the trades identified by ProPublica, and a review of Hoeft’s trades after ProPublica asked about them found none violated the firm’s policies. “There is no evidence that he engaged in front-running or any other improper trading activity,” Dodge & Cox said. The firm declined to discuss the specifics of trades.
The statement also included comments from Hoeft, who said, “Throughout my career, my highest priorities have always been seeking the best investment opportunities for our clients and fully complying with my legal and ethical responsibilities. For all the trades ProPublica has questioned, I have adhered to the firm’s Code of Ethics and our strict policies on personal trading.”
A Dodge & Cox spokesperson acknowledged that Hoeft was part of the small committee that was making investment decisions for the firm but declined to specify how large a role he played in any stock decisions or to discuss the timing of those decisions. “It’s the committee that decides” by majority vote, the spokesperson said. “Not David.”
Hoeft (whose last name is pronounced “hayft”) seems an unlikely person to skirt even the most modest of rules. He has a longstanding reputation as ethical and self-effacing. And unlike the vast majority of those who showed up in ProPublica’s analysis, Hoeft does not work at a hedge fund, where the rules around personal trading are typically more lax. Hoeft’s employer is a mutual fund company that has cultivated a reputation for caution and business practices that are above reproach.
The name Dodge & Cox may be largely unknown outside the investing world, but the company manages $337 billion. That includes the retirement accounts of thousands of Americans. It raises the question: Is Dodge & Cox’s chief investment officer putting their interests — or his own — first?
In the 1970s, the SEC proposed what seemed like a modest rule: Employees at investment management companies would be barred from trading a stock in their personal accounts if they knew their employer was considering trading the same stock.
Industry players opposed the proposed regulation. Commenters warned that it was “dangerously ambiguous” and “impossible” to apply. At what point in the research phase, for example, would a firm cross the threshold into officially considering a transaction?
Wall Street fended off the SEC. In the decades that followed, scandals involving the personal trading of investment advisers have bubbled up periodically. The concerns reached new heights in the 1990s. As mutual funds became the primary way Americans saved for retirement, some fund managers were accused of enriching themselves at the expense of their clients. One technology fund manager was accused of trading dozens of stocks in his personal account within days of his employer doing the same.
The incidents got the attention of the public and Congress. Amid concerns that investors would lose faith in mutual funds, the SEC pledged a broad investigation. The commission reviewed a year’s worth of personal stock trades for hundreds of managers at 30 mutual fund companies.
Their review, which was publicly released in 1994, found “potentially abusive” trading and instances of fund managers purchasing or selling securities shortly ahead of their funds. But the SEC concluded that a government-imposed ban on trading by fund managers — or even a partial ban, prohibiting trades in securities the fund held — wasn’t necessary.
Their rationale was that abuse was rare. More than a third of the managers hadn’t traded at all, and the median number of trades for the year was just two. The SEC also considered the arguments made by industry: that funds wanted employees who lived and breathed the market, and that if they banned personal trading altogether, they would have to pay their employees more. And the agency reasoned that a ban would not stop bad actors from continuing to front-run.
The agency opted to leave it to each investment company to determine its own guardrails, but it pleaded with firms to act. The SEC chair at the time, Arthur Levitt Jr., implored mutual fund companies to curb personal trading, saying “this industry can hardly afford even the appearance of conflicts” of interest.
The SEC does require investment firms to maintain codes of ethics, and to collect and review their employees’ personal trades. But otherwise how firms self-regulate varies widely. Some ban personal trading in particular industries. Others require employees to refrain from trading stocks only when the investment fund is actively considering buying or selling them.
The SEC can get involved if regulators believe a trade violated the law. As with any potential insider-trading case, federal authorities have to prove two main elements. First, they must show that the trader had what’s known as “material nonpublic information”: a significant fact, not yet publicly known, that would affect the company’s share price. Second, they must show that the employee who traded on that information, or provided the tip to the person who did, had a duty not to disclose it or use it for personal benefit.
In the context of front-running, a big future transaction in a company’s stock can count as material. That’s particularly true, securities experts said, when that transaction is informed by proprietary research conducted by the fund, as any reputable firm’s moves usually are.
“You’re trading while in possession of information that is not yours,” said Donald Langevoort, a Georgetown law professor and former SEC attorney. “If you are aware the fund is going to trade, and it’s a block big enough to move the market, that’s insider trading.”
People who know Hoeft today describe him much the same way his childhood friends do: quiet and humble, but with a piercing intellect. Hoeft grew up in rural Wisconsin. His father was a manager at a plastics plant for the American Can Co.
Hoeft was an industrious teen, working at a Ponderosa steakhouse after school during the academic year and spending his summers doing everything from mowing grass at a local airport to checking the packaging of Keebler Sandies Pecan Shortbread at a production plant. He also read encyclopedias and dictionaries to expand his vocabulary. And in a sign of what was to come, Hoeft turned in a stellar performance in a stock-picking contest at school.
His academic prowess landed him at the University of Chicago, where friends say Hoeft stood out for keeping to himself even among a student body with a reputation for being introverted. But alongside Hoeft’s kind and tranquil demeanor was intensity and discipline. He spent long hours in the library and was relentless in long-distance races for the school’s track team. The same trait has persisted in adulthood. Hoeft, a cyclist in his free time, has persisted in pedaling to work even after he got hit by a car, according to one friend.
Immediately after graduating from Harvard Business School in 1993, Hoeft joined San Francisco-based Dodge & Cox. The firm, founded in 1930 with a focus on cautious value investing, suited his Midwestern sensibilities. Far from Wall Street, a genteel culture prevails. Raised voices are frowned upon, as are swaggering star traders. Instead, investment decisions are made by committee. Dodge & Cox styles itself as a methodical and conservative player, picking fewer stocks and maintaining fewer funds than its rivals.
“Everything about it felt like a place from the 1950s,” one former staffer said. “You weren’t wearing jeans there.”
Hoeft’s specialty became the technology sector. Trendy new software and flashy young companies were not the purview of Dodge & Cox in the 1990s and early 2000s. Persuading the stodgy organization to invest in tech companies was a challenge. As a value investor, the firm typically based valuations on free cash flow, but many tech companies were not profitable by traditional accounting metrics. Hoeft framed tech stocks in a way that resonated with value investors. “If you roll the tape forward far enough,” he said years later, “you can get to a point where the valuation could look attractive. You aren’t necessarily buying the company that you see today, if you’ve got a five-year-plus time horizon. You’re investing in what you think the company is going to look like in the future.”
As tech companies matured, what initially started as a disadvantage worked to his favor. Hoeft’s expertise became more prized internally. He was also popular in a workplace multiple former staffers described as polite but awkward. In comparison, one said, Hoeft “was the most normal.” He was quick to sit more junior employees down for talks about their futures, taking them under his wing.
Over three decades, Hoeft steadily rose to his current role as chief investment officer. And along the way, he became incredibly wealthy. His tax records show he went from making a few hundred thousand dollars a year in the 1990s to earning hundreds of millions at Dodge & Cox in the years since. In 2018 alone, he made $74 million at the firm.
Despite his fortune, Hoeft, now 56, has maintained his Midwestern aversion to flashiness. He and his family live modestly — his sons grew up wearing hand-me-down clothes and shoes from their cousins — and he applies his value-investing philosophy to his personal life. For example, Hoeft determined that a slightly used car has far more value than a new one, so he has tended to drive pre-owned vehicles. (He made an exception recently, for a hybrid Toyota RAV4.)
And Hoeft doesn’t own his home, opting instead to live in the Presidio of San Francisco, a former Army post now maintained by the federal government as a park at the foot of the Golden Gate Bridge. The onetime military lodging there is available to rent, and Hoeft lives in the house once used by a commanding general. (In a rare splurge, he recently paid to build an addition to the 1940s home, a futuristic-looking space with floor-to-ceiling glass walls that one of its designers dubbed The Presidio Glasshouse.)
Among friends, Hoeft keeps the focus on his wife, an academic. She “was the amazing neuroscientist,” said Nicole Kontrabecki, a former neighbor. “He took a backseat. The most distinctive thing about him is there was nothing distinctive about him.”
The scale of Hoeft’s personal trading certainly qualifies as distinctive. In recent years, the annual dollar value of his transactions has regularly exceeded $100 million.
Among the other stocks that Hoeft traded in proximity to trades by Dodge & Cox were tech companies HP, Xerox and DXC. The transactions followed trajectories that resembled Hoeft’s VMware trades, with Hoeft buying or selling during the same quarter or the quarter before a comparable transaction by Dodge & Cox. Hoeft’s sales, all of them seemingly profitable, generated proceeds that ranged from $2.8 million to $7.8 million.
Dodge & Cox declined to provide details about Hoeft’s role in making decisions about NetApp. But at the very least it was a company on his radar: He spoke publicly about NetApp in 2015, saying it was undervalued in a Barron’s article about his firm’s investment strategy.
Trades like Hoeft’s may push the bounds of what his firm’s ethics policy and the law allow, according to securities experts.
ProPublica compared his personal stock transactions to the holdings reports Dodge & Cox is required to publicly file at the end of each quarter. Because changes in a firm’s holdings are disclosed only at the end of each quarter and do not specify the dates of each trade, the precise sequence of events is often unclear. ProPublica identified at least 31 days, from 2011 to 2019, in which Hoeft traded a security the firm also traded during the same quarter or the quarter after. (The number of coinciding trades may be an undercount because ProPublica’s data does not include all stock purchases.)
Dodge & Cox consistently emphasizes the need to act ethically, according to former employees. Staffers are regularly reminded to be careful about their personal trades. They’re told to avoid making moves they’d be embarrassed to see on the front page of a newspaper. A compliance staff reviews their personal brokerage statements and preapproves their stock trades.
“The view at Dodge & Cox is we built our reputation for doing the right thing for our clients, and you can blow that in one day, and we don’t want that,” one former employee said. “You never felt like you could cut corners.”
Dodge & Cox is perhaps even more sensitive about the notion that its data or research would be used by others. It is so guarded about the value of its real-time trading data — and the harm its use could do to its investors — that it opposed a recent proposed regulation that would have required more disclosure on the grounds that it “strikes at the heart of our business.”
“We frequently trade large blocks of securities, and because we are price sensitive investors it can … sometimes take weeks or months to fully implement an investment decision,” Dodge & Cox’s Pohl wrote to the SEC in 2022. “Earlier reporting deadlines and more frequent reporting will provide greater opportunities for front-running and other predatory trading by market participants looking for a free ride.”
Still, Dodge & Cox goes only so far in policing its own employees. Employees are generally allowed to trade securities the company holds. Stocks are placed on a restricted list, which means personal trades are prohibited, when employees officially designate them as stocks they think the firm should consider making a move in.
That could leave weeks, if not months, during which a potential investment is being scrutinized, with multiple stages of vetting and discussion before a potential move is formalized and a vote by committee is set in motion. And during that period, there’s little to prevent an employee from buying or selling the same stock, beyond the ethics policy, which applies to “contemplated” transactions. At that stage of the process, the controls essentially amount to the honor system, a former high-ranking employee told ProPublica.
In its statement, Dodge & Cox objected to what it called the “unfair and false suggestion that our compliance policies are akin to an honor system. To the contrary, we have strict and robust compliance policies that are designed specifically to prevent front-running, profiting from short-term trading, and other types of improper trading behavior.”
At the time of his 2015 VMware trades, Hoeft was associate director of research, tasked with examining investment opportunities for the company and managing analysts who were doing the same. He was also a member of the committee that selected stocks for Dodge & Cox’s marquee fund.
It’s unclear how involved he was in the firm’s decision to buy VMware shares. But public statements he made around that time suggest it was a stock and sector he was watching. In a 2014 interview about Dodge & Cox, for example, he said that he was attracted to a separate data storage company, in part because it held a large stake of VMware stock. And a former colleague recalled that Hoeft looked at VMware for the firm in the early 2010s.
Dodge & Cox’s spokesperson declined to say whether Hoeft was advocating for the company to invest in VMware.