The increased focus on Insider Trading controls in India is amongst a long line of efforts globally undertaken against the “scourge” of Insider Trading. Discover the regulatory efforts aimed at combatting unethical behaviour and insider trading breaches. Dive into some of the most riveting cases globally and the consequences of non-compliance.
UPSI
Insider trading is the buying or selling of a publicly traded company’s stock by someone who has nonpublic material information or, as it is know in India, Unpublished Price Sensitive Information (UPSI) about that stock. This is illegal and unethical because it gives an unfair advantage to those who possess the inside information. Insider trading can be extremely profitable for those who engage in it, but it can also result in heavy fines and prison sentences.
Although regulators like the SEC and SEBI have rules to protect investments from the effects of insider trading, sometimes incidents of insider trading are often difficult to detect because the investigations involve a lot of conjecture. Much of this can now be settled because of additional regulations like the SEBI regulations Structure Digital Database.
Here are five notable cases of insider trading, beginning in the early 20th century and spanning into modern times.
The cases in question have attracted a lot of public interest. However, the purpose of this article is to examine the regulatory reactions and sanctions, rather than the particulars of the cases themselves.
Let’s Take A Look At Five Key Insider Trading Litigations Globally
Insider Trading – “Heard On The Street” – 1986
R. Foster Winans, a renowned journalist in the 1980s, was caught in an insider trading scandal after leaking information from his “Heard on the Street” column at the Wall Street Journal to a stockbroker at Kidder Peabody. The broker, Peter Brant, then used the information to place trades before the article was published, allowing both parties to profit. The scheme was discovered when Brant’s aggressive trading drew the attention of the American Stock Exchange, leading to an investigation by the SEC. Winans admitted to his involvement, and he and Brant were charged with violating insider trading laws. Winans served nine months in prison for his role in the fraud, and he paid a $4,500 fine to settle a civil insider trading case brought by the SEC.
UPSI – Tipping – 2004
Martha Stewart and her broker, Peter Bacanovic, were sentenced to five months in prison, five months of home confinement, and two years’ probation for lying about a stock sale, conspiracy, and obstruction of justice. Stewart was ordered to pay a $30,000 fine, while Bacanovic was fined $4,000. The charges against Stewart arose after she sold all of her 3,928 shares of ImClone Systems Inc. The prosecution argued that Stewart was tipped that the founder of ImClone was trying to sell his shares, and she sold hers as a result. The case garnered national attention and resulted in Stewart’s resignation as CEO and chairwoman of her company.
Enron – Insider Trading – 2006
Enron was a multinational energy company that went bankrupt in 2001 due to fraudulent accounting practices. Jeff Skilling, the former CEO of Enron, was at the centre of one of the biggest corporate scandals in history. Skilling was sentenced to 24 years in prison for his role in the scandal, but his sentence was reduced to 14 years in 2013. Insider Trading for one of the key charges. He also had to pay a $45 million fine and forfeit $84 million in assets. Skilling’s downfall was the result of his aggressive pursuit of risky investments, which led him to engage in unethical and illegal practices. It ultimately destroyed the company and ruined the lives of thousands of employees and investors.
Rajat Gupta, Goldman Sachs, Raj Rajaratnam – 2012
Former Goldman Sachs board member Rajat Gupta was sentenced to two years in prison and a $5 Mn fine for feeding inside information to Raj Rajaratnam, a hedge fund owner who was his friend. Gupta was accused of tipping off Rajaratnam of Warren Buffet’s decision to invest $5bn in Goldman Sachs. This allowed Rajaratnam to buy the stock before the news was made public. Rajaratnam allegedly made a profit of $800,000 in just 24 hours over the trade. Gupta was convicted of conspiracy and three counts of securities fraud. The case took less than a month to reach a verdict, highlighting that it should not take years to decide if someone is innocent or guilty.
The Most Lucrative Insider Trading Scheme in U.S History – 2018
Mathew Martoma, a former portfolio manager at SAC Capital Advisors LP, was sentenced to nine years in prison and ordered to forfeit $9.3 Mn for engaging in the most lucrative insider trading scheme in US history. The sentence was due to the “enormous” $275 Mn gain SAC obtained from illegal trades in pharmaceutical stocks, based on tips Martoma received regarding a clinical trial for an Alzheimer’s drug. The case against Martoma was part of a wider crackdown on insider trading that has seen eight SAC employees convicted and the hedge fund plead guilty to fraud charges and pay $1.8 Bn in criminal and civil settlements.
These five high-profile insider trading cases showcase the devastating impact of greed and unethical behaviour on individuals, companies, and the economy. While some perpetrators faced prison time and fines, the damage caused cannot be easily quantified. Hence it is essential to have the right tools to manage insider trading and prevent it from happening in the first place. The consequences are too severe, and the cost to the self, company and the economy too high.
