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.
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.
In July, federal prosecutors in New York and the SEC charged former Standard & Poor's analyst Rick A. Marano with tipping his brother and a former business partner about the upcoming sale of a company he learned about in his work for the credit-rating agency. Marano's lawyer could not be reached for comment.
Separately, the husband of a secretary at the law firm Skadden, Arps, Slate, Meagher & Flom LLP pleaded guilty and settled civil charges in June stemming from a tip that he passed on to curry favor with a politically connected friend. The tip was information that his wife acquired in her work as an assistant to a lawyer who handled mergers. That friend then shared the information with Gary B. Taffet, the former chief of staff to New Jersey Gov. James E. McGreevey (D). Taffet's lawyer said Taffet did not know that the information improperly came from an inside source and that he would fight the SEC charges on that basis.
To win a civil insider trading case, government lawyers must prove that the information was shared in a breach of fiduciary duty and that the person who received the information either knew or should have known it was passed along inappropriately. That legal standard sometimes can be difficult for regulators to meet, SEC enforcement official Thomas C. Newkirk said in a 1998 speech.
"Unless the insider trader confesses his knowledge in some admissible form, evidence is almost entirely circumstantial," Newkirk said.
Defense lawyers in a few noteworthy insider trading cases are signaling that they will push back hard against the SEC's interpretation of the law.
David M. Willey, the former chief financial officer at McLean's Capital One Financial Corp., was charged with insider trading by the SEC in July. Regulators allege that at a time Willey knew the company faced a negative evaluation from bank inspectors, he used company stock as collateral to exercise 87,700 stock options. He also exercised and sold on the open market 60,219 more options in his wife's account, over which he had control. The Willeys made more than $1 million on the sale of her shares, court papers said.
Defense lawyer Richard J. Morvillo of the D.C. law firm Crowell & Moring LLP said he plans to raise the question of why Willey held onto his own shares if he secretly knew negative information suggesting the stock price would go down. "Real inside traders sell to take advantage of the news," Morvillo said.
Lawyers for former Enron chairman Lay have said they will vigorously contest SEC allegations that he broke the law by selling $70 million worth of shares back to the energy company in 2001, at a time, regulators claim, he knew -- but the public didn't -- that Enron's finances were deteriorating. Lay disavows knowledge of the broader fraud at Enron and argues that since the sales were made back to the company and not on the open market, insider trading rules were not triggered. Lay also argues that an additional $20 million worth of sales he made on the open market were part of a long-standing stock sales plan.
Stock sales plans can insulate executives from insider trading charges because the officials may cite the plan as the reason for a particular stock sale, rather than any positive or negative information they secretly possessed.
But SEC lawyers contend that Lay amended his sales plan at a time when he knew Enron was faltering because of billions of dollars in hidden debt. That inside information, regulators say, invalidated Lay's sales plan and exposed him to civil charges.