Views on improving the integrity of global capital markets
10 February 2014

Insider Trading: Ex-SAC Trader Verdict, Rejected SEC Charges Help Inform Debate

The outcomes of several cases over the past few weeks are providing some clarity regarding what is considered insider trading. A federal jury recently found former SAC Capital trader Mathew Martoma guilty of obtaining and trading on material nonpublic information. However, the U.S. Securities and Exchange Commission (SEC) was on the losing side in its case against a former railway employee who led his family into buying the stock of his employer. And while the legal cases were playing out here in the U.S., the European Parliament voted in favor of establishing minimum jail sentences for those convicted of insider trading.

Martoma: the Latest SAC Capital Conviction

A federal jury took only two days to find Martoma guilty of securities fraud. The jury was compelled by the evidence that Martoma “seduced and corrupted” two doctors involved with clinical trials. The doctors provided him clinical trial results prior to their work being released to the investing public. This knowledge allowed Martoma to assist SAC Capital avoid losses by selling off  positions in the firms Elan and Wyeth.

Martoma’s conviction represents the eighth such conviction of individuals associated with SAC Capital. While the firm settled charges against it last year — and agreed to pay a record $1.8 billion in fines and penalties and restructure to become a family office practice — it currently faces no additional outstanding federal changes. SAC chief Steven Cohen is still involved with a civil case brought by the SEC. These charges center on the perceived lack of supervision Cohen exhibited over the actions surrounding Martoma’s conviction.

SEC Loses Insider Trading Case

Days before the Martoma decision was announced, the SEC saw a jury side with the defendant in another case of suspected insider trading. A case that had begun several years earlier brought charges against a former employee of Florida East Coast Railway and several family members.

The case centered on a mosaic of information and observations of the defendant, Cliff Steffes, regarding the acquisition of Florida East Coast Railway by Fortress Investment Group LLC —none of the information was confidentially provided to him. The jury determined that his observations of additional shipping yard tours, including one by executives of the ultimate acquirer, combined with rumors and questions about possible lost jobs if the firm were sold among employees, did not constitute material nonpublic information. Steffes made an informed hypothesis based on his understanding and shared his recommendation with his family.

EU Parliament Stiffens Penalties for Insider Trading

The European Parliament voted to enact minimum four-year prison terms for serious market manipulation cases, including insider trading. The new legislation replaces the Mark Abuse Directive while expanding to address newer trading platforms. The legislation also “explicitly bans the manipulation of benchmarks, such as Euribor and Libor.”

As reported in the Irish Times, “Justice commissioner Vivian Reding said the directive was an important cross-border initiative, which would close the loopholes open to exploitation by criminals.” The new legislation is expected to be officially adopted in June with member states having two years to incorporate the requirements into national laws.

Where Does CFA Institute Stand?

CFA Institute has long supported the enforcement of rules and regulations prohibiting trading on material nonpublic information. Additionally, we support the ability of analysts and individual investors to base their investment actions on a mosaic of nonmaterial information that also happens to be nonpublic. These cases and the EU’s new prison penalties help shed light on what constitutes acceptable actions while reinforcing  the risk of crossing the line.


Photo Credit: Associated Press

About the Author(s)
Glenn Doggett, CFA

Glenn Doggett, CFA, is a director of professional standards for CFA Institute. His responsibilities include providing member guidance in applying the ethics and standards of practice policies, supporting related educational and public awareness activities, and working with the Standards of Practice Council of CFA Institute on its initiatives. He is co-host of the free, live, interactive webinars used by CFA Institute to promote ethical decision making and global best practices. Previously, Mr. Doggett, as a member of the CFA Institute Financial Reporting Policy Group, represented membership interests regarding reporting and disclosures initiatives, including XBRL. Prior to joining CFA Institute, he worked in the financial information sector with SNL Financial, where he focused on the real estate and energy industries, directing the development and maintenance of a financial data storage system. Mr. Doggett holds a BA in economics from the University of Virginia. He was awarded the CFA charter in 2006 and is a member of CFA Society Virginia.

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