When we think of criminals, we tend to think of muggers or burglars. What we don’t think of are the ones who wear suits, call themselves executives, and steal billions of dollars from ordinary Americans every single year. We don’t think of insider traders. Insider traders use non-public information when trading stocks, to gain an unfair advantage over ordinary traders, because they know what’s going to happen before everyone else.
For example, suppose a board member at a large company knows they will be declaring bankruptcy in a week. He decides to tell all his friends so they can withdraw their stocks and save money. One week later, while every other investor has lost all their money, these insider traders haven’t lost a penny.
Unfortunately, our insider trading laws place an unrealistic burden on our prosecutors, making it difficult to stop these criminals.
Lets take a look at some of the most egregious examples:
Weeks before the 2008 financial crisis began, while everyday investors were still in the dark, insider traders yielded over $68 million, corrupting our markets before the worst recession in history.
Seb Murray, citing David F. Larcker, Professor of Corporate Governance at Stanford, July 15, 2020 [Seb Murray, citing David F. Larcker; The James Irvin Miller Professor of Accounting, Emeritus Senior Faculty of the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford; 7-15-2020; “Stimulus Money Might Stimulate Insider Trading”, Stanford Graduate School of Business; Stimulus Money Might Stimulate Insider Trading | Stanford Graduate School of Business]
Testimonies from federal officials and prosecutors in our courts have revealed that current insider trading law, while widely believed to be effective, is actually the opposite.
Preet Bharara, senior US attorney for corporate crime & Robert Jackson, commissioner for the Securities & Exchange Committee, 2018 [Preet Bharara and Robert J. Jackson Jr.; senior federal prosecutor and SEC Commissioner; 10-9-2018; “Insider Trading Laws Haven’t Kept up with the Crooks”; NYT; https://www.nytimes.com/2018/10/09/opinion/sec-insider-trading-united-states.html]
A two-decade long study from researchers at the New York University discovered that 25% of transactions before major stock events are inside trades; however, 95% of these criminals are never prosecuted.
Stephanie Mau, investigative reporter for whistleblower security with expertise in insider trading, 2014 [Stephanie Mau; investigative reporter for whistleblower security, expert in the stock market and corporate crimes; 7-2-2014; “Insider Trading Is More Common Than You Think”; Whistle Blower Security; Explore Our Ethics Blog for Industry Insights - Explore Our Ethics Blog for Industry Insights]
Official federal reports have shown that every month, insider traders cheat over $10 billion from everyday investors.
Erik Sherman, a journalist citing SEC Form 4 filings, which are the official federal documentation of insider trades, October 16, 2019 [Erik Sherman; prize-winning independent journalist; 10-16-2019; “Insider Stock Sales Are Up This Year. Here’s What That Tells Us”, Fortune; Insider Stock Sales Are Up This Year. Here's What That Tells Us | Fortune, ]
Sweeping insider trading reform passed the House in December with rare bipartisan support, but when it got to the Senate it disappeared after numerous insider trading investigations into multiple senators and because of an unexpected amendment that derailed the bill.
Tim Kasulis, Senior Federal Attorney for Insider Trading Law, August 14, 2020 [Telemachus [Tim] P. Kasulis; expertise in DOJ, DHS, HHS, SEC, CFTC, FTC, FERC, NYSE, PCAOB, FINRA, spent eleven years at the United States Attorney’s Office, investigated and prosecuted cases involving insider trading; 8-14-2020; “Lessons from the Insider Trading Prohibition Act After Its Likely Demise In the Senate”; Law; https://www.law.com/2020/08/14/lessons-from-the-insider-trading-prohibition-act-after-its-likely-demise-in-the-senate/;
The United States federal government should enact the originally drafted form of the Insider Trading Prohibition Act (ITPA).
[ITPA text – https://www.congress.gov/116/bills/hr2534/BILLS-116hr2534ih.pdf]
Why is this necessary and why would this have any chance of actually solving this problem?
Current insider trading law is a patchwork of different requirements that federal prosecutors must meet in order to beat these criminals, which have made it nearly impossible to win court cases.
The Insider Trading Prohibition Act would give the government the upper hand by removing these unnecessary hurdles.
Kayla Quigley writes for the Fordham Journal of Corporate & Financial Law in 2020 [Kayla; J.D. Candidate, Fordham University School of Law, 2021; B.B.A. Villanova University, 2018; 2020; “The Insider Trading Prohibition Act: A Small Step Towards A Codified Insider Trading Law”; Fordham Journal of Corporate & Financial Law; https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=1495&context=jcfl;]
Hedge fund managers like Richard Lee, who stole nearly $2 billion from innocent investors, have exploited legal loopholes to escape the law.
Passing the Insider Trading Prohibition Act would close these loopholes once and for all.
Reynolds Holding, a senior fellow at Columbia law school with a degree in law from Harvard University, September 12, 2019 [Reynolds Holding; senior fellow at Columbia Law School, law editor at Reuters Breakingviews, national editorial producer for the Law & Justice Unit at ABC News, senior writer for Time magazine, executive editor of Legal Affairs magazine, investigative reporter and columnist for The San Francisco Chronicle, degree in law from Harvard University; 9-12-2019; “Insider-trading law fix is within reach”, Zawya; https://www.zawya.com/mena/en/markets/story/Insidertrading_law_fix_is_within_reach-ZAWYA20190912053106/, ]
Intelligence experts agree that federal police are more than capable of catching insider traders with advanced data analytics that detect anomalies in the stock market.
Todd Ehret, Senior Regulatory Intelligence Expert for Reuters, 2017 [Todd, Senior Regulatory Intelligence Expert for Reuters Regulatory Intelligence, with 20 years of experience in the financial industry and expertise on financial regulation and the SEC; 6/30/17; “SEC’s advanced data analytics helps detect even the smallest illicit market activity”; Reuters; https://www.reuters.com/article/bc-finreg-data-analytics/secs-advanced-data-analytics-helps-detect-even-the-smallest-illicit-market-activity-idUSKBN19L28C; ]
TLDR: We know we can prosecute insider trading, there are some people in the SEC who are actually willing to do it, but every time we try and pass a law to formally make this a crime, it gets altered in some committee and then attacked (along the lines of whatever they added in to sabotage the bill). The people who were on the committees who made this decision included Feinstein, Imholte, and Loeffler (who at the very time they made this decision were trading with non public info related to covid).