It's the dog days of the summer. Vendors are releasing but a trickle of products, most people are coming and going from their annual seaside break. And financial executives have been stirred out of the doldrums only by a few (notable) stock market jolts. But the SEC is hard at work. Really.
Together with the Justice Department, the agency just unveiled three high-profile securities fraud cases, with probably more to come. And the latest cases highlight just who the SEC is most likely to hunt down when it quite rightly wields the axe against insider trading.
The S.E.C. filed civil charges in two cases. The first case named William A. Marovitz, the husband of Playboy Enterprises' former chief executive, Christie Hefner, who is accused of trading in Playboy shares from 2004 to 2009 based on information he obtained from her. The second was against a former major league baseball player, Douglas V. DeCinces, and three people he is accused of tipping. They are charged with trading in advance of a takeover of Advanced Medical Optics by Abbott Laboratories in 2009.
The United States attorney's office for the Southern District of New York filed criminal charges against H. Clayton Peterson, a former head of the defunct accounting firm Arthur Andersen and a former director of Mariner Energy, along with his son Drew, over trading in Mariner stock before the announcement of its acquisition by the Apache Corporation in April 2010. They each entered guilty pleas and the S.E.C. also filed civil charges against them.
The cases are interesting because they provide some clues about why the government chooses between pursuing only civil charges or prosecuting defendants criminally as well. Any violation of a securities law or rule, such as Rule 10b-5, can be prosecuted by the Justice Department, so it is a matter of prosecutorial discretion whether criminal charges will be filed. The difference is crucial because the S.E.C. can only seek monetary penalties, while a criminal case can result in a substantial prison sentence.
As for who is most likely to be singled out by the SEC, the watchdog seems to be particularly keen to charge corporate directors and senior officers who tip or trade and are leaking information, Peter J. Henning, a professor at Wayne State University Law School, writes in the Times.
They are clearly violating a duty of trust owed to the company and its shareholders, and therefore much more likely to be charged when they purposely leak information.
Mr. Peterson was prosecuted, even though he did not trade any Mariner shares, because tipping his son so that he could buy shares for his family and friends was such a blatant breach of his fiduciary obligation. Mr. Marovitz, on the other hand, was accused of taking information from his wife and betraying her directions not to trade, a much less serious breach of duty, or at least one that does not have the same impact on a company and its shareholders.
Mr. DeCinces received the information about Advanced Medical Optics from someone described in the S.E.C. complaint only as the "source" who was "directly involved" with the deal, which sounds like the person was not a corporate employee but worked for an outside adviser. The "source" has not yet been identified, and I expect there is a good chance the Justice Department is considering criminal charges if the person worked for an investment bank or law firm involved in the deal because that type of disclosure is nearly as harmful as one from a corporate officer or director.
Meanwhile, those most likely to be targeted for criminal prosecution are market professionals -- brokers, hedge fund managers and investment advisers -- who trade on confidential information.
There is perhaps no better example of the focus on the recipients of inside information than the prosecution of Raj Rajaratnam, the head of the Galleon Group, and various hedge fund managers who received tips from expert network firms.
The SEC is also likely to pay closer attention to those who make a lot of money from their illegal trading.
[...] the more money you make, the more likely a criminal charge will be filed. The $5 million profit on Mariner stock and options is much more likely to draw the Justice Department's interest than Mr. Marovitz's $100,000 of gains and losses avoided.