Opinion

The Great Debate

Insider traders are still trying to get it right

Sylvester Stallone once told an interviewer about advice he got from Carl Icahn when they were discussing investments. “The dumbest guy on Wall Street is smarter than you,” Icahn warned him. “Keep your money in the bank.”

The stories behind the scores of insider trading convictions since 2007 make me think Icahn might have been wrong.

Three more Wall Street types were busted this week for running an insider trading scheme that spanned five years and involved over a dozen corporate secrets. Their modus operandi — passing information from lawyer to middleman to trader — was almost identical to the one used by Matthew Kluger, Kenneth Robinson, and Garrett Bauer, who were arrested in 2011.

In a cinematic twist on detection avoidance, the middleman in this week’s case destroyed evidence by eating the Post-it notes and napkins on which he wrote company names, according to the criminal complaint. Apparently this didn’t work any better than the throwaway phones Kluger, Robinson, and Bauer used when they attempted to avoid detection.

The Kluger/Robinson/Bauer case might be worth some study for the next group of guys who want to cheat honest investors and not get caught.

America’s insider-trading trials have a heavy purpose

Since Raj Rajaratnam was arrested in late 2009, federal agents have swept up more than 60 hedge fund employees, consultants, and corporate managers in the largest insider-trading crackdown in history. Most of those arrested are now in or on their way to prison for sentences generally measured in years.

The sweep already dwarfs the cathartic closure to the 1980s, when a couple dozen high-profile convictions and guilty pleas were won. But it looks like prosecutors still have plenty of work to do. In February, U.S. Attorney Preet Bharara disclosed that 240 more investigations are ongoing, and it’s likely that prosecutors will file charges against half of the people being investigated. If the mostly short prison sentences of the 1990s – many less than a year – provided a deterrent, it didn’t last long.

But not everyone thinks criminal prosecution of insider trading is the way to go. The Rajat Gupta trial has brought the insider-trading apologists, not to mention Gupta’s friends, out in force. Columnists in both Slate and Forbes argue that the government should have pursued its case against Gupta with civil charges instead. Either they are new to the case or they somehow overlooked the fact that it was Gupta who sued the government to upgrade his case from civil to criminal proceedings. He wanted his day in front of a jury, and he got it.

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