Caution: Don’t Drink the Gray Water
While SAC might be the SEC’s biggest inside trading target ever, the opening salvo in the ongoing fight against self-dealing and insider trading was fired by the Bush Administration in 2007. That is, the revamp of the rules started before the meltdown and it has continued. Not long after Mary Schapiro moved from FINRA to SEC, she announced the SEC plan to abolish flash trading in 2009. Nevertheless, the target was painted, even if the bull’s eye was tough to see from a distance.
The on-again off-again insider trading case against SAC, who have decided to plead guilty and pay a US$1.1 billion fine, is one of the strangest in recent memory, tracking as it did from a Rabbi to stepping-stone employees of SAC like a TV crime drama. In February 2010, Rabbi Milton Balkany was charged with attempting to extort a payoff of $4 million from Steve Cohen at SAC in exchange for keeping quiet about six alleged instances of insider trading by Chip Skowron who had by then left SAC for Morgan Stanley and then FrontPoint. Meanwhile, Rabbi Balkany was simultaneously attempting to trade the same information to the US Attorney in exchange for a better prison sentence for an associate, Hayim Regensberg, who earlier had been convicted of running an IPO Ponzi scheme. At the time, the circumstances just seemed too bizarre to be entirely on the level, but Skowron was charged with insider trading in April 2011.
Then the SEC document destruction scandal hit the … presses. In August 2011 Rolling Stone broke a story from an SEC whistle blower alleging that the SEC had systematically destroyed thousands of documents from its Matters Under Investigation (MUI) preliminary files, that they were apparently required by law to maintain for a period of 25 years. Speculation quickly mounted that the cache of materials destroyed included investigations of the likes of Bernie Madoff, and of course, Goldman Sachs, Lehman, Steve Cohen and SAC.
Leveling the Playing Field
The scandal petered out as Chip Skowron was convicted and sentenced in November 2011 to five years, but the warning shots about insider trading were getting easier to hear. Congress finally voted with great fanfare to give up their ability to trade on inside information early in 2012. Even though they quietly gutted the transparency provision of the STOCK Act earlier this year, insider trading remains illegal for members of Congress, their staffs and for employees of the Executive branch.
Keeping in mind that the black & white rule for ordinary mortals has been ‘disclose or abstain,’ the playing field is closer to level now than at any other time in US market history. That’s true, even if one chooses to believe that the SEC swept everyone’s dirty laundry under the rug. In practice, that’s a tried and true way to make progress on the problem of corruption. That is, forgive the past, but scrutinize the present.
A level playing field is good news for almost everyone. As Steve Cohen says, the 3,000 honest employees of SAC shouldn’t be penalized for the actions of a few bad apples. By the same token, the thousands of honest asset managers shouldn’t have to compete against a few cheaters.
- SAC Agrees to Plead Guilty to End Insider-Trading Case (bloomberg.com)