Lawyer Article
Insider Trading Still an Issue: People Continue to Fall for Old Scheme that Leads to Jail Time. Greed, Arrogance Hang at Center of the Trap.
May 23, 2011
As societies mature, people try to avoid the mistakes of their predecessors. But unfortunately, when it comes to white-collar criminals who profit from insider trading, learning from others' mistakes may mean looking for new ways to outsmart the law. Even when they know someone is looking, it is hard for some people to keep their hands out of the cookie jar.
Most people think of insider trading as an average guy getting a hot stock tip from a highly placed friend. It's wrong, and illegal, because other investors don't get access to the same juicy information; the law says that company executives, consultants, suppliers, lawyers and others must abide by the rules to keep things fair.
But it seems that every time I speak on this topic at universities, I have several more examples of seemingly smart people who wound up in jail because they thought they'd found a new improved way to game the system.
Raj Rajaratnam, managing partner of New York-based hedge fund advisory firm Galleon Management was recently convicted of 14 felony counts in what many called the biggest insider trading case in a generation. Prosecutors alleged a massive $52 million bribery and insider trading scheme involving a sophisticated network of a “Who’s Who” of the rich and powerful.
“Rajaratnam was among the best and the brightest --- one of the most educated, successful and privileged professionals in the country,” said U.S. attorney Preet Bharara in a statement. “Yet, like so many others recently, he let greed and corruption cause his undoing.”
Insider trading has been around as long as stock markets have existed. One of the most notorious cases was Ivan “The Terrible” Boesky in the 1980s, considered by many to be the inspiration for Gordon Gekko in the “Wall Street” movies.
Observers say his game plan was easy to spot, since he traded stocks just days before big deals or announcements. But crime didn't pay; he settled charges of insider trading, was sentenced to three years in prison and had to pay $100 million.
Another famous case involved Martha Stewart. Accused of insider trading for dumping stock on a tip before a pharmaceutical company revealed bad news, she was convicted in 2004 of conspiracy to obstruct justice and making false statements. She has now re-established herself, but who knows how much money she didn't make while she was in prison.
Recently, regulators have cracked down on expert-networking firms such as Primary Global Research. The firms provide consultations with people who work for specific companies. In February, the SEC charged six consultants and employees, a hedge fund and four portfolio managers and analysts with insider trading. Investigators allege that market-moving non-public knowledge, rather than basic market research, was exchanged.
Last year the SEC charged 19 other high-ranking corporate executives in the Galleon case alone. All told, 2010 figures show the SEC instigated 53 civil and administrative insider trading actions involving 138 people.
Those charged include lawyers, board members, high-level executives and others who should be at the top of their game. If they are smart enough to earn advanced degrees and make millions legally, how could they be stupid enough to break the law?
For whatever reason, people think they can outsmart the good guys. In one case last year, the SEC says three suspects tried to cover their tracks by using code words such as “frequent flyer miles” and “potatoes.”
In an interview with the Wall Street Journal earlier this month, mortgage banker Kenneth T. Robinson, who had allegedly been making insider trades since 1994, said, “I didn't think anyone would notice.”
Even though he knew it was stupid, he said he couldn't refuse a friend's offer of a shortcut to quick profits.
“It didn't seem like it would raise eyebrows when it wasn't millions of dollars,” he told the reporter.
Robinson cooperated with investigators and helped catch two co-defendants—a lawyer at the prestigious Palo Alto-based firm of Wilson Sonsini and a New York-based stock trader. Robinson pleaded guilty April 11.
Will insider trading ever stop? It's doubtful. When it comes to making money, people have remarkably short memories. Yet for whatever reason—greed, arrogance or a sense of entitlement, some people seem determined to try to game the system.
But as long as regulators, investigators and prosecutors remain diligent, people will keep going to jail. And if potential suspects pay attention to the “perp walk”—a powerful person in a well-made suit being led off in handcuffs—perhaps fewer smart people will end up outsmarting themselves.
Still, it seems it is a human condition: We all have a “cookie monster” within us. Most of us self-govern, some of us are helped by knowing someone is watching, but some, it seems, cannot help themselves. Each generation seems to have to learn anew.
Sandy Smith is a senior member in the Atlanta office of Womble Carlyle and chair of the Institute for Research in the Social Sciences at Stanford University.
This article originally appeared in the Atlanta Journal-Constitution’s “Business Voices” section on May 22nd, 2011.
This document is intended as an informational reminder and does not constitute legal advice. If you have any questions or would like to discuss a particular situation, please contact Womble Carlyle Sandridge & Rice, LLP. The purpose of this article is to provide general information about significant legal developments and should not be construed as legal advice on any specific facts and circumstances.