The “classical theory” of insider trading targets “a corporate insider’s breach of duty to shareholders with whom the insider transacts[, and the] misappropriation theory outlaws trading on the basis of nonpublic information by a corporate ‘outsider’ in breach of a duty owed not to a trading party, but to the source of the information.” See United States v. O’Hagan, 521 U.S. 642, 651-53 (1997). The extra element that the government must prove in a criminal insider trading case, beyond what it is required in a civil action, is that the defendant acted “willfully.” 15 U.S.C. § 78ff.
The Securities and Exchange Commission is limited to fines and injunctions, but when the Department of Justice gets involved they will be seeking jail time for insider trading. Although their enforcement authority mostly overlaps, the DOJ exercises their jurisdiction sparingly. After all, the DOJ generally gets the case when the SEC refers the case to them.
Don’t lie to the SEC when they are investigating an insider trading case against you. It makes them angry and more likely to refer the case for criminal prosecution. You can always be quiet.
Case in point is the indictment filed against Peter Talbot and Carl Binette in connection with trading in the stock of securities for Safeco Corporation. Talbot worked at Hartford Investment Management Company. He saw some co-workers putting in long hours and concluded they were working on a potential acquisition. Talbot snooped around the company’s network and found files from those co-workers identifying Safeco as the target of the acquisition. Talbot told his nephew, Binette.
Talbot instructed Binette to buy call options on Safeco stock for $37,260,85 in a newly opened brokerage account. A week later, a competitor announced it was acquiring Safeco, sending up the stock price. The two sold their call options and realized a 1653% profit of $615,833.06.
The SEC looked closely at Binette because of all the red flags in that account. Binette was a 28 year old finance manager at a car dealership. It would certainly be odd that he would suddenly plop down over $30,000 on a speculative investment. It turns out he had borrowed $10,000 from his home equity line, $10,000 from his aunt, and $10,000 from each of his supervisors.
Binette lied to the SEC about whether he had spoken to anyone else about the Safeco securities. That’s obstruction of justice. That’s what landed Martha Stewart in jail. In this case, it sounds like they have good case for actually proving insider trading against Binette and Talbot, something they failed to do for Martha.
Binette even claimed that the trades were based on a dream. That’s another big red flag for the SEC. I could imagine a few chuckles coming from the SEC investigators when they heard that terrible excuse.
It’s also likely to land him in jail, instead of merely returning his ill-gotten gains and paying a fine.
- Indictment – USA v. Binette and Talbot
- Complaint – SEC v. Binette and Talbot
- Making a Bad Day Worse by Thomas O. Gorman in SEC Actions
- SEC Defendant’s ‘Dream’ Alibi Leads to Obstruction Charge by Bruce Carton in Compliance Week’s Enforcement Action
- DOJ Press Release – Uncle, Nephew Indicted for Insider Trading
- SEC Litigation Release No. 21133 – SEC Charges Five Individuals With Insider Trading In Connection With Safeco Corp.’s Merger Announcement
- When Is Insider Trading Subject To Criminal Prosecution? by Douglas Rappaport, Joshua Sohn and Neha Dewan