Tough law takes aim at inside traders
Insiders, beware! Inside traders have something new to fret about in the wake of congressional passage of a tough new securities law. Bounty hunters will be able to collect a reward for pointing out inside traders.
If that development isn't threatening enough for illegal insiders, they also face the possibility of lawsuits from private investors who allege that money has been lost as a result of the manipulation of a particular stock.
The legislation had not yet been signed into law by President Reagan as of this writing. This is the first such law to emerge from Congress following last year's stock market plunge and the latest spate of insider trading cases on Wall Street.
The legislation, sponsored by Edward J. Markey (D) of Massachusetts, chairman of a House subcommittee monitoring the securities markets, would impose tough fines on people convicted of insider trading. The bill passed the House in September by a 410-to-0 vote; it later passed the Senate on a voice vote.
Whether Mr. Reagan will sign or veto the measure is of increasing concern in Congress. He has recently vetoed several popular bills emerging from this Congress, including a measure that would have imposed limits on television programming for children.
``If he were to veto the [insider-trading] measure, we just don't see why the White House would want to do it before the election is over - and take the political heat,'' an aide to Congressman Markey says. Still, even if the White House were to veto it, proponents say, Congress would move quickly to pass a similar measure early next year.
The new law, among other things, would boost the maximum criminal penalties for insider trading from five years in jail to 10 years. Fines would be increased from $500,000 to $2.5 million for a company and from $100,000 to $1 million for an individual. The bill also allows the Securities and Exchange Commission (SEC) to provide a bounty to any person who tips off authorities about an insider-trading violation. It holds firms liable for the infractions of their workers in the insider trading area. And it updates the right of an investor to sue an inside trader if the investor lost money on the market because of an illegal insider-trading practice.
Legislation such as this can be reassuring to some smaller investors who have fled the market, says Cheryl Pierce, editor of Blue Chip Values, a newsletter published in Chicago. ``But I don't think that laws like this will be enough. Investors want a rising stock market. And what we're getting now is not so much a broadly advancing market as scattered advances, based in part on takeovers.''
The need for market reform is probably a more important step in winning back more investors than just new insider-trading laws, as useful as they are, says Al Frank, editor and publisher of The Prudent Speculator, a newsletter published in Santa Monica, Calif.
Insider-trading cases continue to make headlines throughout the United States. Last week, a federal grand jury in New York indicted two stock trading firms - Marcus Schloss & Co., an arbitrage firm, and Victor Teicher & Co. - on criminal insider-trading charges.
The new legislation would have mixed implications for future cases, says John Olson, a lawyer with Gibson, Dunn & Crutcher in Washington, D.C., and an expert on insider-trading law.
Perhaps the most controversial section of the legislation is the bounty provision, which would allow the SEC to provide a reward to a tipster who blows the whistle on an inside trader.
``The bounty clause is less important in practice than in prospect,'' Mr. Olson says.
``The bounty provision is discretionary,'' he notes, and the ``SEC will be very cautious in using that remedy because of the squeamishness within society about that type of process.
``The problem is not getting tips,'' Olson adds. ``The challenge for the SEC is following through on all the information it gets,'' given the modest size of the enforcement staff.
Olson also believes the increased penalties under the law ``are more symbolic than practical. I just don't see judges handing out 10-year prison terms'' on insider-trading cases, he says. The typical sentence is now ``about three years.''
Perhaps the most interesting aspect of the law, Olson says, is the requirement holding firms liable to fines for the illegal actions of their employees. Virtually all major investment houses now have internal rules against insider trading, he says. But there ``will always be some people who figure out a way to breach the system.'' Olson wonders how far courts and juries will go in holding investment houses liable for the illegal acts of their employees.
He believes that the one glaring omission in the new law is any strict definition of what constitutes ``insider trading.'' The bill, as enacted, in effect leaves that definition up to the courts. But attorneys for the industry argue that such a provision is required to protect investment houses from unnecessary lawsuits.