Government regulators and members of Congress yesterday stepped up the campaign for harder punishment of securities investors who profit from non-public information.
Rep. Timothy E. Wirth (D-Colo.), citing the disclosure of insider trading by presidential assistant Thomas Reed, said Congress must make it clear that it considers insider trading to be "thievery and serious fraud, which merit tough sanctions."
Wirth, chairman of the House subcommittee on telecommunications, consumer protection and finance, and Securities and Exchange Commission Chairman John S. R. Shad endorsed legislation that would triple civil penalties and raise maximum criminal fines from $10,000 now to $100,000.
Insider trading--the use of non-public information to buy or sell securities--has increased dramatically in the past three years due to a spate of mergers and tender offers and to the expansion of trading in options contracts to buy or sell stocks at a set price in the future.
An investor can buy an option at a tiny fraction of the cost of the underlying stock. And, once a tender offer or merger is announced, the value of the option increases at a much greater percentage than the stock price. This presents an opportunity to reap huge profits with scant risk.
The violators include both insiders like corporate executives using advance knowledge of earnings or oil discoveries, for example, that could affect the price of the stock, and outsiders like accountants and attorneys who acted on inside information passed to them.
The most publicized example of inside trading recently involved Reed, who turned a $3,000 investment in options into a profit of more than $400,000 in two days. Reed was ordered by the Securities and Exchange Commission to give back the profits and a grand jury reportedly is now investigating his trading.
Under Shad, the SEC has stepped up its offensive against insider trading, but it is limited to requiring investors to surrender any gains. At the request of Congress, the SEC developed a bill to increase the penalty for insider trading up to three times the profit gained or loss avoided.
The bill would also increase the fines for most criminal violations of the Exchange Act from $10,000 to $100,000, the first increase in nearly 50 years.
While the Congress and the SEC want stiffer penalties, industry and private bar witnesses yesterday criticized the provisions as too broad and asked for a precise definition of insider trading and a statute of limitations. They want the law to apply only to those who knowingly act on non-public information and a stricter standard of proof for the prosecutors.
SEC enforcement director John Fedders testified that it would be harder to win cases under those conditions.
However, Fedders and Shad ultimately agreed yesterday with the Republican members to draft an amendment providng for a two-tier system: a broad definition for cases where the SEC merely seeks a return of profits and a narrower one for cases in which punitive sanctions are sought.
In an interview with Washington Post editors and reporters, New York Stock Exchange Chairman William M. Batten also called for harsher penalties. "We're bearing down to identify insider trading," he said. Batten explained that the various stock exchanges cooperate in spotting it through surveillance systems. Their computers contain a profile of the normal volatility and volume of each stock. If these are exceeded, investigators are alerted