The headline of this article really sums it up: After a Decade, SAC Capital Blinks. There was a time where insider trading was barely investigated, and if someone was caught the punishment was a mere slap on the wrist. The story of the lengthy and patient investigation of SAC Capital illustrates the new priorities of the Department of Justice and SEC. The federal authorities spent ten years patiently gathering evidence, waiting for their big break, which came when they found an employee at hedge fund Galleon Group who was willing to cooperate. Then the investigators spent years using techniques traditionally reserved for the mob, including wiretaps and pressuring low level employees to cooperate.
Now the government can claim victory. Yesterday SAC Capital agreed to plead guilty to all five counts of insider trading, pay $1.2 billion in fines, and terminate all business managing money for outsiders. This is a great example of what we talked about in class – how prosecution of a corporation is fairly easy in terms of a legal standard, once you get employees to plead guilty and testify against the corporation. Thus, SAC Capital had little room for negotiation; although the company held out for years and tried to plead to fewer counts and a lesser penalty, the government held tough and won out.
This case comes on the tails of a government victory against Bank of America, and right before what should be a huge government settlement with J.P. Morgan. The federal authorities promised they would get tough against the financial industry, and it seems they are on a roll. Insider trading is different, however, than mortgage fraud. Many critics believe our insider trading laws are antiquated and unrealistic; that there is nothing wrong with trading based on insider information. Information flows quickly today, especially online. Outsiders, everyday people like you and me, may not have as much information as the insiders at SAC Capital, but we no longer have to wait for a paper copy of an SEC filing to read about a company.
I know there are lots of finance concentrators in my class. I wonder what those of you who are entering the industry think about this federal enforcement effort. Is it good for the industry to be held accountable? Are insider trading laws useless?
One Comment
Renee Schwacke posted on November 12, 2013 at 6:58 pm
I think the consequences of insider trading are appropriately harsh. Although the penalties and fines may seem awfully high, I think they align with the nature of the industry and the huge upsets insider trading can cause financially. Some people are under the impression that in order for a crime to be punishable some physical harm should ensue, but in actuality the financial harm generated from insider trading can be far greater. I think it is easy for inside traders to fall victim to the indirect blindness pitfall, because the inside trader does not directly see the results of his/her actions right away or specifically know the individuals the trades will effect. Because the actions are of an indirect nature the penalties seem high, but when evaluating inside trading through a complete picture its justifiable to hold guilty firms accountable.