SEC Uses Infographic and Deferred Prosecution Agreement to Bring Insider Traders to Justice

SEC infographic: Insider Trading in Advance of eBay’s Acquisition of GSI Commerce

Insider trading has the attention of the U.S. Securities and Exchange Commission (SEC), as their litigation record proves, but a related settlement announced last week included a couple of firsts.

First, was the stunning use of an infographic in an SEC press release detailing the charges and their outcome.

Second “First”

Deferred-Prosecution Agreement

A voluntary alternative to adjudication in which a prosecutor agrees to grant amnesty in return for the defendant abiding by certain requirements. For example, a case of corporate fraud may be settled using a deferred prosecution agreement in which the defendant agrees to pay fines, enact corporate reforms, and fully cooperate with the investigation. Fulfilling the requirements will result in dismissal of the charges.

– The American Heritage Dictionary of Business Terms

The other “first” is the Commission’s use of a deferred prosecution agreement with an individual (as opposed to an entity) who provided significant cooperation that aided the SEC in making its case against a number of other defendants and a measurable reduction in penalties for others who likewise cooperated.
“Although [the senior executive’s] tips spun a web of illegal trading, some of the downstream tippees substantially assisted in our investigation while others hindered it,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.

The reduction in penalties for those tippees who assisted us, together with the non-prosecution agreement for one of the traders, demonstrate the benefits of cooperating with our investigations. The increased penalties for others highlight the risks of impeding our work.

Prosecution Score Card

“Cooperation helps” (or, “impede our work at your peril”), is a conclusion one can draw from the outcomes in this case:

Tipster Outcome
Top Corporate Executive / no cooperation
  • Officer-and-director bar
  • Civil penalty = 2x’s his tippee’s profits
Second Tier Executive / cooperation
  • Civil prosecution
  • No penalty
Second Tier Executive / no cooperation
  • Civil penalty = 3x’s his and his tippee’s profits
Third Tier Executive / no cooperation
  • Penalty = 2x’s his trading profits
Profiteer’s Tipster / no cooperation
  • Penalty = half of his and his tippee’s profits
Unnamed Individual / material cooperation
  • Non-prosecution agreement
  • No penalty

Those who cooperated escaped without a penalty or skipped being prosecuted altogether.

 

About Ann Longmore

Ann is Executive Vice President of Willis' Executive Risks practice. Based in New York, she has been with the compa…
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