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Regulators Attacking Insider Trading

Rules Have Broadened Definition; SEC Brings 50 to 60 Cases a Year

By Carrie Johnson
Washington Post Staff Writer
Thursday, September 2, 2004; Page E01

Say "insider trading" and the hothouse climate of the late 1980s springs to mind, a time when Wall Street financiers such as Ivan F. Boesky made millions of dollars buying and selling stock based on secret tips.

Experts say improper trading flourishes in periods of rampant mergers and acquisitions, fueling insiders to cash in on their advance knowledge. But even in the relatively slow dealmaking scene of the past few years, the Securities and Exchange Commission has brought between 50 and 60 cases a year. Securities watchdogs recently have slapped such high-profile targets as Kenneth L. Lay and Martha Stewart with civil insider trading charges.


Ivan F. Boesky made millions of dollars based on stock tips in the 1980s, a time of frequent mergers and acquisitions. (AP)

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One reason, lawyers inside and out of the agency say, is that the SEC is casting a wider net for wrongdoers and using new rules to attack insider trading in its many forms.

Originally, insider trading applied only to instances in which corporate executives personally traded on secret information to take advantage of expected gains or plunges in a stock price. In the 1980s, the SEC began bringing more cases against outsiders who received stock tips and acted on them. But courts sometimes rejected the agency's arguments because it was difficult to prove that the person who tipped the outsiders had a duty not to disclose the information or had acted for personal gain.

Since then, legal decisions and new SEC rules that bar individuals who receive tips from misappropriating the information have made it a bit easier for the agency to pursue cases against the outsiders, experts said.

Securities regulators also are employing insider trading allegations more broadly, said John H. Sturc, a former SEC enforcement lawyer now at Gibson, Dunn & Crutcher LLP in the District.

For instance, the concept has been expanded to include executives who make stock trades knowing that their companies' earnings have been improved by accounting fraud, he said.

The SECalso had brought a handful of cases against companies and executives who selectively provided information to analysts and big investors, in violation of a 2000 agency rule designed to prevent leaks to favored shareholders.

Insider trading is "a perennial challenge to the marketplace," said Michael L. Zuppone, a former SEC lawyer now with New York law firm Paul, Hastings, Janofsky & Walker LLP. "What you have is a continuation of SEC efforts to police this arena."

Last month, the SEC accused Dallas lawyer Gary M. Kornman of insider trading, claiming that he had picked up tips on pending deals during meetings with executives and corporate board members in which he pitched his tax shelter business. Kornman made $142,000 on trades based on that information, according to court papers. Kornman believes the charges "go too far" and will vigorously fight them, said his defense lawyer, Jeffrey M. Tillotson.


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