Aaron Rubinstein, 32, says he and his 35-year-old brother, Kenneth, are "not friends," even though they both are lawyers in New York, where they were raised in a poor Lower East Side family.
"He was a Wall Street lawyer and I was a Park Avenue lawyer," is the way Aaron Rubinstein describes their relationship. While they both worked in Manhattan and lived in Scarsdale, he said, they didn't even meet for lunch. One of the few interests they shared, Aaron Rubinstein says, was their fascination with the stock market.
But the Securities and Exchange Commission contends that Kenneth also shared with his brother inside information on planned acquisitions by clients of his firm, Fried, Frank, Harris, Shriver & Jacobson, that allowed the two to make stock market profits of $616,000 for themselves, relatives and friends.
On June 21, the SEC filed suit against the Rubinsteins, accusing them of violating anti-fraud provisions of federal securities laws. On April 20, Kenneth Rubinstein resigned from Fried, Frank, and last month entered into a settlement with the SEC. While neither admitting nor denying the allegations, he was enjoined from further purchases of the securities and agreed to give up profits of $196,000 that the SEC says he earned on the transactions.
Aaron Rubinstein, however, is fighting the SEC allegations in a civil trial that began in U.S. District Court here last week. He acknowledged that he invested in stocks after receiving tips from his brother, but denied that he knew why Kenneth Rubinstein recommended the purchases.
As the presiding judge, Morris K. Lasker, remarked, "The stakes are high in the case."
The stakes are high for Aaron Rubinstein because his firm, Kaye, Scholer, Fierman, Hays & Handler, has given him a paid leave of absence and a deadline of Dec. 31 to clear his name.
And the case is important to the SEC, which has been trying to crack down on insider trading violations, which are difficult to detect and prosecute. Many Wall Street observers believe insider trading is as stubborn and pervasive as the common cold, resistant even to tight security measures -- such as the use of code names for planned mergers -- by law firms, accountants and corporations.
Michael H. Rauch, a litigation partner at Kenneth Rubinstein's former firm, testified at Aaron Rubinstein's trial about some of the security arrangements that Fried, Frank takes to protect privileged information, including the use of code names to keep unannounced tender offers a secret.
In 1981, for example, when Humana Inc. asked Fried, Frank to handle the planned acquisition of Brookwood Health Services, Inc., the deal was code-named "Bear." When Fried, Frank was involved with the acquisition of Texasgulf Inc. by Societe Nationale Elf Acquistaine, the transaction was code-named "Water."
Those two mergers were among five cases cited by the SEC in their suits against the Rubinstein brothers. The agency alleged that the Rubinsteins and others made $13,056 by buying Brookwood shares before Humana's tender offer was announced, and $32,688 by trading on advance information on the Texasgulf acquisition.
To win its civil suit against Aaron Rubinstein, the SEC must convince Judge Lasker that Rubinstein knew that information he received from his brother was non-public and available only to "insiders."
One difficulty the SEC has in pursuing insider trading cases is the question of how far -- beyond the officers, directors and principal owners of a company -- the term "insider" can be applied. The agency has accused an increasing number of professionals such as lawyers and accountants of trading on privileged information.
In 1980, the Supreme Court overturned a lower court decision that a printer, Vincent F. Chiarella, was an insider when he invested on the basis of information in a prospectus his firm was preparing to publish for a tender offer. The high court held that Chiarella wasn't an insider because he had no fiduciary duty toward shareholders of the target company. But the decision still left the definition of an "insider" murky.
Nevertheless, the commission's campaign against insider trading, which began in earnest in 1978, has gained urgency with the surge of mergers and acquisitions. Of the 50 civil injunctive actions on insider case brought by the SEC since 1978, 29 have concerned corporate takeovers.
Theodore A. Levine, associate director of the SEC's division of enforcement, concedes that "you're never going to eradicate" insider trading, but adds, "I think we're having a deterrent effect."
Among the new and proposed deterrents cited by Levine:
* Cooperation between the commission and the securities exchanges in tracking unusual activity in stocks has been increased.
* More criminal cases are being brought for insider trading. Between 1972 and 1979, there was only one criminal prosecution on insider trading. There have been five since 1980. Most SEC officials, however, are not satisfied with the number of criminal referrals, and those insiders who are convicted rarely draw prison sentences.
* Legislation has been proposed to toughen civil penalties for insider trading. Currently, the law permits the commission to demand that an insider give up only his profits. But as attorney Robert B. Blackburn of the SEC's New York office notes, "From a business standpoint, it's almost a no-lose situation. If you get caught, you give up your profits. If you don't, you make a bundle." The proposed law would call for penalites of three times the amount of profits from insider trades.
* A recent agreement with the government in Switzerland gives the SEC access to bank records on insider trades carried out through Swiss accounts. The agreement grew out of a case in 1981, when the SEC moved against officials of Santa Fe International Corp., alleging that they made millions of dollars by investing modest amounts in options when they knew that Santa Fe was about to be acquired by the Kuwait Oil Co. The SEC said the investments were made through Swiss banks, and the Swiss government helped with the case.
SEC officials say the expansion of the options markets -- which allow an investor to lock up shares with a fraction of the stock market value -- increases the temptation for insider trading.
Says John Fedders, chief of enforcement at the SEC: "When you combine the options market, which requires minimal capital, with the predictability of the stock market reaction to a pending tender offer, you have a situation where a thief with inside information who is willing to breach his duty to a client or employer can put little money at risk and have the potential for enormous rewards."
In its case against Aaron Rubinstein, the SEC alleges that a sizable chunk of a portfolio he built up through trading in options resulted from purchases made on the basis of information supplied him by his brother and which he knew to be privileged.
Figuring he was on "the verge of making a lot more money" when he became a full partner, Aaron testified that he and his wife took $14,000 in savings in 1978 and began playing the market. By using options and buying on margin, they built the value of their holdings up to several hundred thousand dollars.
Aaron Rubinstein acknowledged that he invested -- and advised others to invest -- in stocks based on tips from his brother. But he denied that he knew the origins of the tips.
"The last thing I would think was that my brother was passing along privileged information," he said.