MONEY & INVESTING
Investors have a right to a level playing field in which they have confidence that: market prices are for real; that no one has unjust advantage; that proper disclosures are made timely; and that the game is not rigged… in addition to price transparency and high degree of liquidity.
While such attributes are true for all financial markets, there are characteristics of the securities markets that make them unique. They require special safe guarding the investors from securities fraud. Whether parading in traditional and newly disguised forms, securities fraud is very destructive to the long term integrity of the securities markets.
There are two governmental legal bodies that can prosecute cases in which investors have been harmed: the Department of Justice and the Securities and Exchange Commission. There are important differences in what they can do and how they enforce.
According to the group Occupy the SEC, the DOJ is responsible for all criminal enforcement and “for civil enforcement of the anti-bribery provisions with respect to issuers.” The SEC “brings civil enforcement actions, and can obtain injunctions, orders of disgorgement, and orders barring defendants from the securities industry…. (And) often the DOJ’s criminal complaints track the civil complaints filed by the SEC.” But the SEC cannot bring criminal charges. ei What is the flavor of recent DOJ prosecutions? Surely, there were crimes against investors in the mortgage crisis. What happened pc to the bad guys who harmed innocent investors?
Not much of anything happened to them. TThough well within the scope of the DOJ to have brought criminal charges against many of the corporate players in the mortgage crisis, the DOJ chose otherwise. Its enforcement pattern seems to be: big institutions and big fraudsters get a pass.
Harsh assessment of the DOJ under Obama? Actually not, as this administration’s own attorney general, Eric Holder, has offered reasoning behind “too big to jail” thinking, as follows: “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. …And I think that is a function of the fact that some of these institutions have become too large.”
Since that March 7, 2012 (grotesque) comment, Mr. Holder has been back pedalling — big time.
Beyond Holder and the DOJ, securities enforcement lays squarely with the SEC, the only government agency with the sole focus of protecting the investor. The SEC regularly brings enforcement cases involving: insider trading (unfair trading, later explained in detail); breaches of public trust (where a public official uses offices for personal gain); accounting fraud by publicly traded companies; Ponzi schemes, etc. The self-serving manipulations of some managements (e.g., excessive grants and payments of options, salaries, perks, severance and retirement packages) are surely repulsive and operate to shareholder detriment ….but most often these actions are not illegal.
The most interesting and impactful SEC cases are insider trading cases (trading based on material and nonpublic information.) Insider trading generally brings about unjust trading gains. Having inside information is not fraud, since insiders have it all the time. Information is nonpublic until it is widely disseminated by the company through, for example, press releases, 10Ks, 10Qs, etc.
Insider trading takes many forms. It can involve information provided by a senior corporate officer to a neighbor, who traded; by an investment banker to a money manager, who traded; by a secretary who has read corporate documents and told household members, who traded; by an accountant of a publicly traded firm who tells a fellow country club member, who traded; by a scientist who has confidential information on drug clinical trials and now “consults” for a hedge fund, which traded.
Every once a while, an insider trading case comes along that offers legendary Wall Street drama. (Sometimes the drama even makes its way into movie production.) The case(s) surrounding SAC, a multibillion dollar hedge fund (founded by reputed trader Stephen A. Cohen) has been in the cross hairs of SEC Enforcement for six years.
According to the New York T imes Dealbook, “Nine former or current SAC employees have been tied to insider trading while at the (SAC) fund; four of them have pleaded guilty. Earlier this year, SAC agreed to pay $616 million to settle two civil cases brought against it by the SEC.”
Though there has been no case filed against the fund or its founder in the six years. There is good reason to believe that will soon change, since the five-year statute of limitations for charging SAC/Cohen based on a former employee’s, Matthew Martoma’s, insider trading will expire in July.
The most developments in the case are that, SAC sent a letter to its investors indicating that their “cooperation (with the SEC) is no longer unconditional.” There are now five SAC executives (Cohen and four others) called to testify before the grand jury. Cohen is expected to take the Fifth Amendment and be silent.
While seemingly an option for the other executives to take the Fifth, such might not be the case. If the DOJ really wants SAC and Cohen, then the DOJ might offer the four other executives immunity from criminal prosecution because, as the NYT explains, immunity “supplants the Fifth Amendment, so the person must testify or risk being held in contempt, which usually means going to jail until the end of the grand jury’s term.”
Such a case will be an interesting financial press drama and it might go down as a landmark in securities enforcement. ¦
— Jeannette Showalter, CFA is a commodities broker with Worldwide Futures Systems, 571- 8896. For mid- week commentaries, write to firstname.lastname@example.org.