Just a few days after the publishing of my last column on questionable financial practices, the $15 billion hedge fund SAC Capital Advisors settled an insider trading investigation by the Securities and Exchange Commission (SEC) for more than $600 million.
As I mentioned in my previous column, insider trading earns much more scrutiny and usually sees far greater penalties than other, more financial wrongdoings. While massive, arguably systemic collapses during the Great Recession that earned some Wall Street institutions bailouts led to little or no legal action, the SEC has successfully prosecuted - or at least settled with - numerous firms and individuals over insider trading allegations.
The SEC should be happy for any successful conviction.
For one, insider trading is illegal in a much more obvious way than many of the firm-client issues discussed in my previous column. If your uncle at Dell emails you one morning to say "hey, we're about to release earnings and it's not great, sell now," that's obviously insider trading. In one case, a trader's Yahoo! search history showed queries for "Ways to Avoid Insider Trading."
In one of the most infamous scandals, Martha Stewart sold roughly $230,000 of ImClone stock after a tip from the company's chief executive that a new drug would not receive FDA approval. Stewart spent less than five months at a minimum security prison and agreed to pay a fine of $195,000, or three times the losses she avoided by selling before the stock's drop.
Though successful convictions often carry heavy fines and prison sentences, insider trading is often thought of as victimless crime. The transactions of one individual shareholder have a miniscule ? and often unnoticeable ? effect on the market as a whole.
The most basic argument is that insider trading is fundamentally unfair and puts individuals at an advantage in the "level playing-field" of the stock market. There are indeed victims to the crime of insider trading - the people who bought Stewart's stock before shares collapsed, for instance. But those buyers would most likely have bought their shares regardless of whether or not Stewart knew of the impending drop.
Furthermore, these fines never find their way back to the parties affected by the trading itself. In the SAC Capital case, the SEC could have sued for a maximum fine of $825 million. Instead, SAC will pay $616 million to the government and - best of all - admit no guilt in the case. Even then, SAC will hand the money over to the United States Treasury ? not the investors hurt by the trading in the first place.
"Wow $616 million is a lot!" you may be thinking to yourself. "Glad we showed him a lesson!"
But, no. Steve A. Cohen, SAC - get it? - Capital founder, decided to pick up a Picasso for $155 million last week. He also finalized his purchase of a $60 million house in the Hamptons, just down the road from his first house in the Hamptons. He owns two houses in the Hamptons. Two. And a Picasso. "Dear SEC, #sorrynotsorry. Sincerely, Steve."
Though the settlement has recently been held up, this is hardly a crushing victory for the SEC. The most successful prosecution of an insider trading case came earlier this year, when Raj Rajaratnam was sentenced to 11 years in prison.
Even then, however, you get the sense that even when SEC wins, it loses. The SEC's new chairwoman, Mary Jo White, has said that the agency will be tough on Wall Street. For now, though, the toughest SEC is headquartered a few hundred miles south of New York. ROLL TIDE.
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Walt Laws-MacDonald is a sophomore majoring in quantitative economics. He can be reached at Walt.Laws_MacDonald@tufts.edu.
