THE RENEWED CAMPAIGN ON INSIDER TRADING: Part I
This is the first part of an occasional series on the renewed emphasis on insider trading by the Securities and Exchange Commission and the Department of Justice.
While insider training has always been a staple of the enforcement program, the recent emphasis on detecting and prosecuting it today rivals the efforts of the 1980s. Then, the SEC and DOJ brought cases which captured the headlines in a manner similar to those grabbed by the recent corporate scandals such as Enron, Worldcom and others.
The renewed emphasis may stem in part from reports around the globe of rampant insider trading. Markets in the UK, China, Japan, South Korea, Australia and Canada for example, have all reported significant increases in insider trading. Last fall, Congress held hearings on insider trading. In a recent report inquiring into a whistle-blower claim from a former SEC staff member, a Senate committee directed that the agency focus more resources on insider trading.
All of this increased activity has spurred regulators to band together in an effort to eradicate the perceived increasing tide of illegal trading. The SEC is part of those world-wide efforts. At the same time, the agency has joined with domestic regulators as part of its efforts.
The SEC has new initiatives focused on detecting insider trading. For example, in September 2006, the Commission launched an unprecedented sweep of Wall Street focused on the trading activities of major Wall Street brokers and banks and hedge funds. Enforcement Chief Linda Thomsen has repeatedly cautioned executives trading through Rule 10b5-1 plans that their safe harbor may no longer be safe. This past August, the SEC circulated a letter to hedge funds requesting what many view as an unprecedented amount of information about employees and clients in a position to acquire inside information in an apparent effort to profile prospective violators.
Despite intensified efforts, detection remains difficult and proof may be daunting. Frequently, the evidence is circumstantial, implied from what may be viewed as “suspicious trading” because of its timing or size. At the same time, that suspicious trading is not proof of illegal activity and may be the result of shrewd market observation and analysis which actually contributes to market efficiency.
To examine the renewed emphasis on insider trading we will examine recent SEC and DOJ cases in seven areas:
1. Major Wall Street players;
2. Trading prior to corporate announcements;
3. Pillow talk cases;
4. Spouse v. spouse;
5. Family and friends;
6. Corporate executives; and
After examining these areas, we will assess the new insider trading programs.
Next: Major Wall Street Players: A return to the “Den of Thieves?”