If you are like me, you have spent a lot of time thinking about insider trading – you learn about it in school, you watch movies like Wall Street and The Wolf of Wall Street, you draft and review insider trading policies, you answer questions about when an individual can trade in compliance with an insider trading policy. If you tell someone at a cocktail party that you are a securities lawyer, they will probably ask you about insider trading, because that is what people often associate with the SEC and the securities laws. Despite all of this contemplation of insider trading over the years, when Insider Trading Day rolls around and the SEC announces a bunch of insider trading cases, I ask myself: “Why do they do it?”
Insider trading enforcement has long been a focus of the SEC. Over the years, in cases like Cady, Roberts and Texas Gulf Sulphur, the SEC sought to address the fundamentally unfair notion of trading on the basis of material nonpublic information, and the judge-made theories of insider trading emerged from the general antifraud provisions of the securities laws. As this SEC Historical Society piece notes, in the 1980s, when former SEC Chairman John Shad was asked about insider trading, he announced “we’re going to come down with hobnail boots.” Hobnail boots, for the uninitiated, are boots with nails inserted in the soles, so they would really hurt if some SEC Chairman attacks you with them. And with that statement, we got the great insider trading characters of our age in Ivan Boesky and Michael Milken, and of course the fictional Gordon Gecko from the movie Wall Street. It is not as if the SEC and criminal authorities ever went soft on insider trading after the 1980s – during my time at the SEC, insider trading always topped the list of Enforcement priorities and many cases were brought in the ensuing years.
So why, after we toil over an 8-page insider trading policy, conduct countless insider trading training programs and send periodic reminders about insider trading topics to employees and directors, do some people still choose to pilfer material nonpublic information and share it with their friends for profit? Obviously greed is the real motivator, but the one thing that I think is common in insider trading cases is that, for some reason, the individuals involved did not think that they would get caught.
I observe that there appears to be a common misconception among individuals charged with insider trading that their various efforts to hide their misconduct and their trading through faceless markets will somehow prevent detection. Unfortunately for them, nothing could be further from the truth. The SEC and the SROs dedicate substantial resources toward market surveillance, and inevitably they will detect trading anomalies and connections that allow them to investigate potential insider trading cases. With constant advances in data science and computing, these market surveillance efforts just get bigger and better, making the chances of conducting an undetected insider trading ring much smaller. Perhaps this is a point that we should all emphasize more in our insider trading training sessions, because I would hope that if people realized just how sophisticated the surveillance effort is, they might think twice about misappropriating the company’s material nonpublic information and trading or tipping.
– Dave Lynn