Knowing too much
Insider trading
The market for prosecutions heats up
The Economist - Apr 12th 2014 | NEW YORK | From the print edition
WHEN Frank “Perk” Hixon junior, formerly a senior executive at Evercore Partners, a small investment bank, pleaded guilty earlier this month to insider-trading charges, it marked the 80th conviction for the crime prosecutors in New York had secured since 2009. Over much the same period the Securities and Exchange Commission (SEC), Wall Street’s main regulator, has taken action against insider trading 249 times. The most notable of these cases, the conviction of Rajat Gupta, a former boss of McKinsey and former board member of Goldman Sachs and Procter & Gamble, was recently upheld on appeal.
Many still question the value of pursuing insider-trading cases, but the ability of enforcement agencies to bring and win new cases is beyond argument. Their success is all the more striking as the crime itself is a relatively new one. The first insider-trading case was brought only in 1961 and, but for the principle involved, was forgettable. The defendant was a stockbroker who sat on a corporate board that approved a dividend cut. He tipped off another stockbroker who sold shares for clients before the news became public. The penalty was trivial: a small fine and suspension imposed by the New York Stock Exchange. But it was accompanied by an extensive opinion setting out a theory for insider-trading enforcement written by a law professor, William Cary, who had just become chairman of the SEC.
It required the takeover boom of the 1980s and the resulting value of early information on deals to bring Cary’s ideas to the fore. Prosecutors have since honed their methods for proving wrongdoing, using “electronic breadcrumbs” to follow the crime back to its source. Evidence against Mr Hixon, for example, included the times of trades made in the name of a former lover and a relative, and the location of computers used to make them. This information squared with his travel schedule and with the moments when he gained access to valuable information.
Credit-card receipts, mobile-phone records and details of the use of public-transport passes have become standard tools for investigations. People increasingly leave trails of data. Secrets may be getting harder to keep.
Regulators and prosecutors are also pushing to expand the scope of the law. It is broadly accepted that employees who are exposed to commercial secrets in the course of their work have a duty to avoid trading on them or tipping others off about them. By the same token, outsiders have a duty not to misappropriate such information. But on the margins, the extent of these duties can be hard to define.
An article published last year in the Columbia Business Law Review by Stephen Crimmins, a lawyer formerly with the SEC, shows the tension. A jury last year exonerated Mark Cuban, the owner of a professional basketball team, for selling a stake in a company after being told it would take an action he opposed. He was not an executive, and did not leak the information; he just used it himself. A jury concluded he had no duty to the company. Last year another jury determined that there was nothing wrong with using valuable information overheard when a friend was speaking on the telephone.
In yet another case decided last year, a jury found for workers at an Illinois railyard who had bought shares in their company after seeing unfamiliar people in suits looking around. They had concluded a takeover was imminent. In 2009 a computer hacker who stole inside information from a public-relations firm about one of its clients was spared insider-trading charges in connection with the crime.
The Justice Department has said it is assessing whether high-speed trading violates insider-trading rules, in as much as it involves divining trades that are about to be executed and jumping in ahead of them. “Insider-trading theories can be stretched to cover all sorts of things,” says Mr Crimmins, but doing so undermines clarity about what is legal. That may not bother prosecutors.
From the print edition: Finance and economics
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