Preet Bharara’s work rooting out insider trading is good news for U.S. investors, as long as you’re not one of the 240 people being investigated. But until governments tackle insider trading on a global basis, it’s like playing Whac-A-Mole. If your business model includes insider trading, you can pop up in Hong Kong or London almost as easily as Tokyo and Shanghai without much fear of prosecution.
That number — 240 people — is shocking. Prosecutors already have 57 convictions or guilty pleas since Raj Rajaratnam was arrested in October 2009, dozens more than during the Wall Street scandals of the 1980s. Bharara told the New York City Bar Association that insider trading on Wall Street was rampant. Rengan Rajaratnam, Raj’s brother, encapsulated the culture cynically but perfectly. Optimistic about his efforts to recruit a McKinsey consultant to their gang, he said to Raj, “Scumbag. Everybody is a scumbag.”
Alan Greenspan once famously said that the “market” would sort out financial fraudsters — regulators weren’t needed. Now we know the market actually includes quite a number of fraudsters who don’t seem to mind doing business with one another at all.
How did it get this bad?
We have been studying insider trading in Hong Kong for the past year. In reviewing enforcement of insider trading laws in major markets over the past 30 years, two factors stand out: the leniency shown crooks during the U.S. scandals of the 1980s and the effective tolerance of insider trading by governments everywhere else.
Twenty-five years ago last month, Rudy Giuliani and his team introduced the perp walk to Wall Street, handcuffing a Kidder Peabody arb in front of his colleagues and marching him out of the building. As one of the arb’s colleagues said, “if it was attention they wanted, they got it.” It was a good show, part of what’s needed for deterrence, but when it all ended six years later, most of the bad guys got off easy. Michael Milken was indicted on 98 felony counts and faced 755 years in jail. He pleaded guilty to six, was sentenced to 10 years, and was out in two. (Update: Milken was indicted on insider trading charges, but was not convicted and did not plead guilty to them.) His 1987 salary of $550 million didn’t quite cover his $600 million fine and restitution payments (Editor’s note: the original version of this column indicated that the fine Milken paid was $600 million; in fact, it was a $200 million fine and $400 million returned to investors). Ivan Boesky pleaded guilty to a single felony, paid a $100 million fine, and spent 21 months in a minimum security prison camp in California. Martin Siegel was out in two months. The most popular sentence handed down seemed to be a year and a day and federal guidelines at the time allowed parole after serving one-third of a sentence.