SEC on track with new insider cases

By Anne Tucker Nees

Wall Street turns out scandals that could rival a John Grisham plot, from the Madoff Ponzi scheme, to the collapse of Lehman Brothers, and now the largest insider trading investment ring.

The Securities and Exchange Commission recently filed charges against 14 individuals for violating insider trading laws through an illegal investment ring involving an estimated $53 million. Taking a cue from a mob-boss playbook, the parties used disposable cellphones, bags of cash dropped around Manhattan, and James-Bond like code names to trade the tips and attempt to escape detection. A lengthy investigation complete with wire taps and surveillance allowed the SEC to uncover this tangled web.

These indictments signal a renewed emphasis by the SEC on regulating and enforcing the rules of the market, such as prohibitions against insider trading. Tougher enforcement is crucial to ensure a fair playing field for all investors and to restore confidence in corporate America.

The latest indictments, just 14 months after the collapse of Lehman, come as our economy is stifled with unemployment rates topping 10 percent and credit markets are still struggling. While insider trading didn’t directly cause these calamities, the indictments expose the short-term profit mentality that is pervasive on Wall Street. One defendant allegedly described trading on the illegal tips as “shooting fish in a barrel.” Such gaming of the system played a crucial role in feeding the housing bubble and proliferation of mortgage-backed securities that drove our economy off a cliff.

More broadly, this insider trading case highlights the long-held belief that life on Wall Street is very different from life on Main Street. When only those on Wall Street have access to secret information that generated over $50 million in profits, how can those of us on Main Street expect to compete? The answer is simple, the home team wins. Even with research and skill we cannot overcome the advantage that Wall Street gains with inside information.

As a nation of investors we should be gravely concerned. The number of individual investors in the stock market doubled during the 1990s. Today, more than 50 percent of Americans own stock, and those numbers skyrocket if you focus on households earning $50,000 or more.

When it comes to stocks, the information age arrived long before the Internet. The Securities Acts of 1933 and 1934, passed in response to the stock market crash of 1929 and the ensuing Great Depression, have three primary goals: protect investors, assure public confidence in the markets and promote consumer information, with the third goal largely serving the first and second. As a society, we recognized long ago that information about the future performance of a company is the investor’s crystal ball about stock decisions.

Thus, in a market where fractions of companies are sold for tremendous amounts of money, information is often the actual commodity being sold. To hoard such information among those who control the markets handicaps Main Street investors and undermines the goals of market regulation: investor information, protection and confidence.

Some may criticize these indictments as politically motivated, or as a waste of resources when the SEC failed to detect Bernard Madoff. But when our government is re-evaluating banking regulations, the SEC’s investigation procedures and executive compensation, why should market trading, which directly impacts over half of citizens, be exempt?

They should not, and violations of these rules harm us all by creating a biased system that excludes Main Street investors. We must remove Wall Street’s home court advantage by enforcing the rule that investors must disclose such information to the public or abstain from trading on it. Fair markets are corrupted by those with access to sensitive nonpublic information who are allowed to enrich their portfolios or to sell such information to the highest bidder.

In 2009, the SEC stepped up oversight over hedge funds, which operate largely outside of its purview, sending the message that everyone playing on Wall Street must abide by the same rules. In addition, drafts of financial overhaul legislation circulating in Congress seek to include hedge funds within the SEC’s registration and reporting requirements. If such legislation passes, and it should, it would place hedge funds firmly on the SEC’s enforcement radar, deterring wrongdoers and facilitating early detection of trading violations.

Anne Tucker Nees teaches at Georgia State University College of Law.