Traders Beware — The SEC Is Watching

The Securities & Exchange Commission is taking a new and aggressive position on insider trading. The message is clear: “Traders beware! We are watching.” Investigators are not only watching; they are using new tactics to hunt new targets, casting their nets to ensnare players both big and small. Several recent investigations and convictions reflect this changing tide within the agency.

Traditionally the SEC has taken a “wait-and-see” approach – initiating an investigation after trades occur. No more. The recent conviction of Raj Rajaratnam, billionaire hedge-fund mogul, represents one of the first times that the agency has implemented “blue-collar tactics” to catch a “white-collar” criminal. It relied on a network of wiretaps and informants to catch Rajaratnam and several other co-conspirators in the act. The $40 million defense mounted by Rajaratnam could not convince a jury to see beyond the defendant’s recorded conversations. Those wiretaps and other evidence made the prosecution’s case virtually bullet-proof.

It’s not just the big guys. The SEC is also taking aim at small-time offenders, and even federal and congressional employees who were once thought immune are now in their crosshairs. The case against FDA chemist Cheng Yi Liang is a good example. Armed with information about impending drug approvals, Liang made 27 trades over four years. The trades involved 19 companies and resulted in comparatively small profits. Despite the SEC allegation that Liang acted alone and not as a conspirator in a large-scale trading ring, he faces the same civil and criminal charges faced by offenders like Rajaratnam. Even worse, Liang’s family members have also been indicted since Liang used their names on brokerage accounts and shared his profits with them, including his 84 year-old mother currently living in China.

Caution and prevention are the lessons to learn from this recent shift. Tougher – and expanded – enforcement means that the rules have changed. Whether you are a broker-dealer, the officer of a company with new technology or a market edge, or the friend of someone who is, you should reflect on the changing situation and be guided accordingly. Compliance is not only the right thing to do, but it is good business.

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