There was an interesting article at Bloomberg.com, which contends that insider trading is everywhere, and no one seems to care.
Having spent the better part of three decades as a securities attorney, and an investor, it seems to me that all three statements are not true. The stock market is not rigged, insider trading is not everywhere, and lots of people care about insider trading.
But the dispute over the article might turn on definitions. As I have discussed numerous times, not all insider trading is illegal. See, Insider Trading, the Legal and Illegal.
Is the Stock Market Rigged?
Do market professionals do better in the market than average investors? I certainly hope so. Dentists are better at drilling teeth than amateurs, race car drivers are better than amateurs, and so on. The fact that stock market professionals have better returns than the average investor should not be a surprise to anyone, and does not mean that the markets are rigged. Take a look at the returns of amateur day traders – most of them lose money. Why? Because the person on the other side of the trade is a professional, who has been trading for her entire life and is good at it.
That does not mean that the market is rigged.
Insider Trading is Everwhere
Everywhere is one of those absolute terms that litigation attorneys cringe at when their witnesses use it. It is too easy to cross-examine someone who uses terms like “always” and “never.” Show one example to the witness, and his credibility takes a hit. “Everywhere” is another one of those words. If it is not rampant, if everyone is not doing it, it is not “everywhere.”
Part of the issue is defining “insiders” and “insider trading.” Not everyone is an insider in the legal definition and a huge amount of what we lawyers call “insider trading” is not done by insiders at all. It is done by third parties who for one reason or another have possession of “material non-public information.” I have defended insider trading cases and investigations involving financial printers, truck drivers, pizza shop owners, taxi drivers, and investors who are not “insiders” of the companies whose stock they traded.
However, the article has some interesting allegations, and a review of various studies that have been done reviewing the trading of true “insiders.” According to those studies, some insiders do very well in trading the stock of their own companies. Take a few minutes to read the article, the findings of these studies reflect that corporate insiders may in fact have a distinct advantage over the individual investor when buying and selling their corporation’s stock.
One explanation is that people trade what they know, and there is nothing wrong with that. At the same time if “what they know” is that their company’s stock is going to take a hit, and they trade without disclosing, then that is insider trading.
Is it rampant or everywhere? It simply is not. It certainly occurs, and the SEC does a decent job of investigating and prosecuting the violators. Take a look at SECLaw’s archives of insider trading posts – the SEC announces insider trading cases, and settlements, on a regular basis.
No one cares?
This certainly is not true. The SEC and the state regulators, and federal prosecutors across the country certainly do care, and they demonstrate that by prosecuting insider trading cases civilly and criminally.
Does the SEC prosecute all of the corporate insiders who trade in violation of the law? Surely it does not, but the fact that is decides not to pursue some cases does not mean that no one cares. There are tons of reasons not to prosecute a case, and if the SEC does not believe it will win the case, it does not bring the case. I have successfully shut down a number of SEC investigations before a case was filed because we were able to convince the Staff that they would not prevail at trial.
The article claims that the SEC “only” brought 33 insider trading cases in 2020. I am not sure how they counted, and perhaps they are only counting cases that were filed in court, ignoring the cases where the investigations raised allegations that were settled prior to filing a complaint. That happens very often – because most people cannot afford to fight the SEC and cannot risk the draconian fines, penalties, and disgorgement that can result if they lose the case in federal court. Disgorgement of three times the amount of your profits (ignoring losses) from alleged insider trading is a significant motivation to settle if you can settle for a return of the profits. And those cases are never filed in court.
My basic search of the Westlaw database found 36 federal court decisions involving the SEC and insider trading in the last three years, and over 100 SEC press releases relating to insider trading cases and investigations. That is not a scientific study of insider trading cases but does indicate that there are many more than 33 insider trading actions brought by the SEC. This also ignores the insider trading cases brought by FINRA, and by state regulators.
And contrary to the figures quoted in the article, the SEC claims that between December 2016 and December 2020, the Commission brought over 150 insider trading actions against more than 250 parties, including, among others, investment bankers, corporate insiders. Again, we may be making distinctions based on the definition of the word “action” but clearly, the SEC cares about insider trading.
And finally, the article does not address the cases where individuals who are fired by their employers for allegations of insider trading that do not result in an SEC prosecution. There is no way to count those terminations, but they certainly exist and demonstrate that those employers care about insider trading.
Professionals Do Better than Amateurs, Not Everything is Insider Trading, and Prosecutors Do Care
Take a few minutes are read the Bloomberg article. There certainly is some merit to the proposition that insider trading occurs, and is not punished. That discussion involves issues well beyond a blog post, such as what types of insider trading do we want to punish, are all of these cases illegal insider trading, and should we be stopping insider trading at all.
One side note. The article makes a mistake and claims that Martha Stewart went to jail for insider trading. She did not. She went to jail for lying to investigators. She did not go to jail for insider trading, although she did settle those charges, after being released from jail. See The Story of Martha Stewart and the Telephone Call as well as The Martha Stewart Indictment.
Mark J. Astarita is a veteran securities attorney who represents investors and financial professionals nationwide in securities investigations and arbitrations. Have a question? Email him at email@example.com or call his office at 212-509-6544.
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