This Forbes.com article give readers an insight on the difference between criminal and civil violations.
I suppose if you were looking to buy/sell publicly traded stocks based on inside information, you would probably want to do the kind that, if detected, would result in a civil penalty (fine) rather than a criminal one (jail and fine). Nobody wants the “Big F” (Felony). But what is the difference between a criminal violation of insider trading versus a civil one?
Raj Rajaratnam was sentenced to 11 years in prison as a result of trading on inside, confidential information related to publicly traded companies (namely Goldman Sachs). His profits were said to be over $80 million and his firm, Galleon Group, has since closed. William Marovitz, husband of then Playboy CEO Christie Hefner, traded on Playboy stock between 2004 and 2009 based on “pillow talk” inside information that allowed him to realize gains of over $100,000 trading on Playboy stock. For his infraction, Marovitz paid a fine without admitting wrongdoing. While Marovitz and Hefner have since divorced, he was never in jeopardy of spending a night in federal prison. So why is one person jailed and the other fined for essentially the same crime? It depends on a number of factors.
I reached out to Jordan Thomas, Labaton Sucharow partner and Chair of the Whistleblower Representation Practice and also a former Assistant Director and Assistant Chief Litigation Counsel in the Division of Enforcement at the SEC, for his perspectives. Thomas told me that in his experience the triggers for criminal insider trading charges were based on three primary factors:
1) Significance of wrongdoing (amount of money involved, the number of people affected by the trade and the duration of the activity)
2) Corroboration of others to prove a criminal case and provide evidence of wrongdoing (need someone to flip or have someone on tape)
3) Recidivists of any securities violations (always looking to clean up Wall Street)
The Department of Justice (DOJ) may get involved once the Securities and Exchange Commission (SEC) has initiated its investigation. Thomas said, “You can assume that there is regular communication between the SEC and the DOJ on cases. If the SEC believes there is enough information that could lead to a criminal conviction, the DOJ may undertake its own, independent, investigation to see if it leads to the same conclusion.”
The SEC is not the only organization feeding the DOJ with prospective criminal cases. The Financial Industry Regulatory Authority (FINRA), the largest independent regulator in the U.S., is also looking for insider trading activities and regularly makes inquiries on suspicious trades to brokerage firms and brokers. If those inquiries turn something up, they too share that information with either state or federal authorities.
As to whether prosecutors these days are more willing to go after criminal versus civil, Thomas said, “There is a quiet revolution in white collar criminal securities cases led by cooperators and whistleblowers. New enforcement tactics like wire taps, previously used in organized crime, has yielded powerful evidence of criminal intent.” One only has to look at the wire taps used in the prosecution of dozens of insider trading cases in the Southern District of New York to see how effective that has been in bringing cases and getting guilty pleas/verdicts. When the Feds had no tapes, there were plenty of cooperating witnesses willing to finger a defendant.
According to Thomas, both the SEC and FINRA now can analyze massive volumes of trades and detect red flags that start their investigations. With regard to Compliance departments within firms taking cases to authorities, Thomas said that his experience has been that while illegal actions are detected internally, those are rarely sent on to state or federal law enforcement. “Compliance departments who have discovered wrongdoing within the company, rarely report it to authorities. They typically give offenders their walking papers and allow them to go find a new job,” Thomas said, “which isn’t much of a consequence for someone who has seemingly been successful at making money on Wall Street.”
Michael Bachner, white collar defense attorney in New York who has seen his share of insider trading cases, also noted that both FINRA and the SEC are the stalking horses for criminal cases eventually taken over by the FBI or state criminal authorities. On why some cases go criminal, Bachner believes that the defendant’s role plays a big part. ”If the person targeted for insider trading [tips] is a lawyer or some fiduciary that had an obligation to keep information confidential, then criminal authorities will want to send a message to the profession that that type of behavior will not be tolerated,” Bachner said.
As to whether civil cases deter criminal behavior, both Thomas and Bachner said that those involved in insider trading cases that result in civil charges rarely offend again. As Bachner put it, “Insider trading crimes are typically crimes of opportunity with a rational person making an irrational decision to act.” If civil litigation is so effective, it makes one wonder what is the purpose of these long prison terms associated with criminal prosecution of insider trading? I’ll leave that one for another day.
In the meantime, there are so many people with access to inside information that need to stay diligent. Bankers, lawyers, analysts, and executives are all part of mergers, purchases, earnings preparation and operational strategies. Bachner’s observation is a one you should take to heart …. insider trading is a crime of opportunity, a crime of passion undertaken at a moment of weakness. If you trade on inside information, the chances that you will get caught have gone up significantly and your odds of going to prison are just a coin flip away.
Stay Strong!
Evan Granowitz was named as a Southern California Rising Star in 2009 and 2010 by the Super Lawyers magazine. Follow this Twitter page for more updates.
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