In the wake of several high profile insider trading indictments and prosecutions, the United States government has begun a vigorous campaign against what federal investigators say is a "rampant" crime wave.
Currently, the government is investigating some 240 individuals and preparing insider trading cases against approximately 120 of them, including Wall Street insiders, hedge fund traders and other insiders in the corporate world, according to reports.
Illegal insider trading is defined as the buying or selling of equities or investments based on knowledge not available to the general public. Trades may be made for profit, or to avoid a loss. Persons convicted of insider trading can be fined and or sent to prison.
The most significant recent insider trading case and one of the biggest in history was the conviction of billionaire hedge fund operator Raj Rajaratnam. He was sentenced to 11 years in prison, ordered to forfeit $53.4 million and pay a $10 million fine. Rajaratnam's prison sentence was the longest ever imposed on an insider trading conviction and demonstrates the government's new resolve in ending these widespread crimes.
In its effort to bring alleged insider trading violators to justice, to deter further such cases, and to make the public aware of the severity of the crime, the FBI issued an anti-insider public-service announcement featuring the actor Michael Douglas. Douglas played the notorious corporate raider and insider trader Gordon Gekko in the 1987 movie, "Wall Street."
The fictional Gekko famously said, "Greed is good," in a long speech to shareholders, as he justified the break up and asset-by-asset sell off of the corporations he bought; Gekko did not mention, however, his insider trading.
In his public-service announcement Douglas says: "I'm Michael Douglas. In the movie 'Wall Street,' I play Gordon Gekko ... The movie was fiction, but the problem is real ... To report insider trading, contact your local FBI office." Douglas reportedly made the announcement pro bono.
Tagged "Perfect Hedge," the FBI probe includes what it calls "targets," people believed to have committed insider trading violations, and "subjects," possibly other violators who may help the government build cases against the targets. The government investigation appears to be the most widespread and deepest of the modern era.
Concurrent with the government's drive against insider trading, are proposed amendments to the Federal Sentencing Guidelines for these violations now pending (as of early March) before Congress. With increased severity of prison sentences and heavier fines for securities fraud, the government hopes to both prevent such crimes and to put pressure on defendants and those convicted, to cooperate with the government in investigating and prosecuting others similarly accused.
These potentially heavy sentences should provide strong incentives for cooperating with the government. Information provided by cooperating witnesses and their testimonies at trial, are key elements in successfully prosecuting an insider trading charge, the government claims.
Previously, the government based most of its insider trading cases on wiretaps and other tactics also used against narcotics traffickers and terrorist targets.
The proposed new sentencing guidelines include a point system for determining the duration of a sentence. A conviction for what the bill calls "sophisticated insider trading" would be assigned two points. Four points would be assigned to the convicted violator if they were an officer or director of a publicly traded company, affiliated with a brokerage company or an investment or financial advisor. More points require more prison time, possibly as long as a decade behind bars.
The Bottom Line
Despite the government's new focus on insider trading, insider trading rings continue to exist, which, the government alleges, encompass people from "... more walks of life." Among these alleged violators are analysts, bankers, consultants, corporate officials and traders.
However, some attorneys specializing in white-collar crime have accused the government of too broadly defining insider trading. Many traders, claim the attorneys, trade on information they believe is legal, which may conflict with the government's definition of what's legal. The stepped-up government probe is expected to eventuate in additional arrests and indictments, with an eventual reduction in the crime.