The SEC's Tough New Offensive on Insider Trading
But the Securities & Exchange Commission's recent action against Galleon evinces a new offensive against the notoriously difficult-to-prosecute crime. Armed with informants, wiretaps, and intricate software tools, the federal agency—still smarting after missing the Bernard Madoff Ponzi scheme—is signaling a bolder stance on insider trading. "It would be wise for investment advisers and corporate executives to closely look at [the Galleon] case and consider what lessons can be learned and applied to their own operations," SEC enforcement chief Robert Khuzami said in a press conference.
The Galleon case is notable for its unusual reliance on wiretaps and informants. It draws on the resources of the U.S. Attorney's Office for the Southern District of New York, which brought criminal charges. Both agencies suggest such tactics will become more common, especially if lawmakers pass a bill proposed this month making it easier for them to share information. Such efforts are a big change: It used to be that the SEC's most covert action was to cold-call executives about recent trades, say former agency officials. Says Wayne Black, a private financial-crime investigator and former drug cop: "The fact that they used the stuff you see for mobsters, drugs, and terrorism shows they're very serious."
Getting More Granular While the Galleon case grew out of old-fashioned detective work, the SEC is increasingly looking to sophisticated technology to nab hucksters. In March the agency retained the Center for Enterprise Modernization, a federally funded arm of the nonprofit MITRE, to help sift through thousands of tips each year and come up with new computerized tools. The SEC is also ramping up its in-house data analysis.
Regulators now rely on the data-mining work of FINRA, the securities industry's self-regulatory body, and of other regulators. FINRA has some 50 people sifting through trades for signs of suspicious activity, including two dozen dedicated to insider trading. FINRA then alerts the SEC and other regulators to red flags. Such data-mining prompted the SEC's insider-trading case in December against Lehman Brothers broker Matthew Devlin and others accused of circulating tips to a group that included former Playboy playmate Maria Checa.
The close ties between new SEC officials and key federal prosecutors may also speed up the process. Most insider-trading cases are joint efforts between the SEC, which brings civil charges, and the office of the U.S. Attorney, which bring criminal charges. SEC attorneys in the past have felt that federal investigators were unfamiliar with securities laws, holding up some investigations for weeks or months.
But Khuzami is an alum of the Manhattan U.S. Attorney's Office who made his name hunting the terrorists in the wake of the 1993 World Trade Center bombing. He also headed a securities fraud task force there for three years. "You have three top people at the SEC who know the criminal process," says Fiona A. Philip, a partner at Howrey and former enforcement counsel to the SEC chairman. "There's a level of trust there."