The United States Securities and Exchange Commission (SEC) defines illegal insider trading as "buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security." Cases of insider trading often lead to civil charges levied by the SEC. If enough evidence warrants a criminal indictment, the culprits are also arrested and handed over to a U.S. Attorney's office for criminal prosecution. The following are three of the biggest penalties for insider trading in the United States.
On Oct. 3, 2011, Raj Rajaratnam was convicted on all 14 counts of securities fraud and conspiracy and sentenced to 11 years in prison. He was also fined more than $150 million in civil penalties. The Galleon Group founded by Rajaratnam in 1997 grew to become one of the largest hedge funds in the world, with over $7 billion under management. The firm shut down after Rajaratnam was arrested on Oct. 9, 2009, for insider trading and conspiracy charges.
The U.S. Attorney's office conducted a widespread investigation consisting of over 18,000 wire tap recordings involving more than 500 individuals. The SEC concluded that Rajaratnam traded on non-public insider information that involved earnings report numbers, mergers and contract details, and reaped over $25 million in illegal profits.
Details of the criminal case, including incriminating wiretap recordings, were made public to the media, spurring public outrage against the arrogant billionaire. To curtail any notions that billionaires got a free pass for insider trading, the courts made an example of the billionaire by handing down one of the longest prison sentences to date for insider trading.
Zvi Goffer Sentence
Zvi Goffer, an ex-trader at Galleon Group who went by the alias "Octopussy," was fired by Galleon in 2008. He later co-founded Incremental Capital LLC. Goffer was convicted of insider trading in 2011. Some of his actions included personally bribing lawyers for information on merger deals and recruiting tippers for sources of insider information. Goffer was convicted on 12 counts of securities fraud and two counts of conspiracy, and was sentenced to 10 years in prison and fines of $10 million.
SAC Capital, a leading hedge fund on Wall Street, pled guilty to insider trading and wire fraud charges in November 2013, and agreed to pay $1.8 billion, which was the largest single insider trading fine to date. After a decade-long pursuit, the SEC filed civil charges against Stephen A. Cohen in July 2013 for failing to supervise two portfolio managers who actively engaged in illegal insider trading that reaped hundreds of millions of dollars in profits. The two main culprits, Michael Steinberg and Mathew Martoma, were both charged separately for insider trading. Cohen avoided criminal prosecution.
Banned From Managing Outside Monies
The SEC sought a lifetime ban on Cohen managing outside funds. However, an SEC settlement limited the supervisory ban, due to an appeals court ruling that overturned another insider trading-related case in 2014, and due to charges being dropped for Michael Steinberg and six other defendants. The ban prohibits Cohen from acting as a supervisor at a registered fund and managing outside investment.
The SEC was also given provisions to monitor Cohen's firm and periodically conduct oversight exams. Cohen will be eligible in 2018 to manage outside funds. It is speculated that Cohen could raise up to $2.5 billion on the day he decides to return to managing outside funds. After shutting down SAC Capital, Cohen created Point72 Asset Management LP, a family office that employs 850 people, down from 1,000 at SAC. As of 2015, Point72 Asset Management LP managed $8 to $9 billion of Cohen's own personal funds.