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Congressional Insider Trading

Congressional Insider Trading

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Statement by the S.E.C. head of enforcement on the position of insider trading by members of Congress and their staff.

Statement by the S.E.C. head of enforcement on the position of insider trading by members of Congress and their staff.


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Published by: Bad Government Review on Dec 02, 2011
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12/2/11 3:04 PMStatement on the Application of Insider Trading Law to Trading by Members of Congress and Their StaffsPage 1 of 9http://www.sec.gov/news/testimony/2011/ts120111rsk.htm
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Statement on the Application of Insider Trading Law toTrading by Members of Congress and Their Staffs
by Robert Khuzami
Director, Division of EnforcementU.S. Securities and Exchange Commission
Before the United States Senate Committee on Homeland Securityand Governmental AffairsDecember 1, 2011
Chairman Lieberman, Ranking Member Collins, and Members of theCommittee:Thank you for the opportunity to provide a statement for the record on behalf of the U.S. Securities and Exchange Commission on the subject of insidertrading.Insider trading threatens the integrity of our markets, depriving investors of the fundamental fairness of a level playing field. To deter this conduct and tohold accountable those who fail to play by the rules, the detection andprosecution of those who engage in insider trading remains one of theDivision of Enforcement’s highest priorities.My statement provides a summary of the Division of Enforcement’s recentwork in the area of insider trading, an overview of the law of insider tradingas developed through our enforcement program and judicial precedent, and adescription of how the current law of insider trading applies to securitiestrading by Members of Congress and their staffs.
Enforcement’s Insider Trading Program
Insider trading has long been a high priority for the Commission.Approximately eight percent of the 650 average annual number of enforcement cases filed by the Commission in the past decade have been forinsider trading violations. In the past two years, the Commission has beenparticularly active in this area. In fiscal year 2010, the SEC brought 53 insidertrading cases against 138 individuals and entities, a 43 percent increase inthe number of filed cases from the prior fiscal year. This past fiscal year, theCommission filed 57 actions against 124 individuals and entities, a nearly 8percent increase over the number of filed cases in fiscal year 2010.The increased number of insider trading cases has been matched by anincrease in the quality and significance of our recent cases. In fiscal year2011 and the early part of fiscal year 2012, the SEC obtained judgments in18 actions arising out of its investigation of Galleon hedge fund founder Raj
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Rajaratnam, including a record $92.8 million civil penalty against Rajaratnampersonally. The SEC also discovered and developed information thatultimately led to criminal convictions of Rajaratnam and others, includingcorporate executives and hedge fund managers, for rampant insider trading.In addition, we recently filed an insider trading action against Rajat Gupta, aformer director of both Goldman Sachs and Procter & Gamble, whom weallege provided confidential Board information about both companies’ quarterly earnings and about an impending $5 billion Berkshire Hathawayinvestment in Goldman Sachs to Rajaratnam, who traded on that information.Among others charged in SEC insider trading cases in the past fiscal yearwere various hedge fund managers and traders involved in a $30 millionexpert networking trading scheme, aformer Nasdaq Managing Director, aformer Major League Baseball player, aFood and Drug Administrationchemist, and a former corporate attorney and a Wall Street trader who tradedin advance of mergers involving clients of the attorney’s law firm. The SECalso brought insider trading cases charging aGoldman Sachs employee andhis fatherwith trading on confidential information learned by the employeeon the firm’s ETF desk, and charging acorporate board memberof a majorenergy company and his son for trading on confidential information about theimpending takeover of the company.
The Division also has targeted non-traditional cases involving the misuse ormishandling of material, non-public information. This past fiscal year, theCommission charged Merrill Lynch, Pierce, Fenner & Smith with fraud forimproperly accessing and misusing customer order information for the firm’sown benefit. The Commission also censured broker-dealer JanneyMontgomery Scott LLC for failing to enforce its own policies and proceduresdesigned to prevent the misuse of material, nonpublic information. CharlesSchwab Investment Management was charged for failing to have appropriateinformation barriers for nonpublic and potentially material informationconcerning an ultra-short bond fund that suffered significant declines duringthe financial crises. This deficiency gave other Schwab-related funds an unfairadvantage over other investors by allowing the funds to redeem their owninvestments in the ultra short-bond fund during its decline. The Commissionalso charged Office Depot, Inc. and two of its executives for violatingRegulation FD by selectively disclosing to certain analysts and institutionalinvestors that the company would not meet its earnings.To respond to emerging risks, the Enforcement Division has developedseveral new initiatives targeted at ferreting out insider trading, which haveenhanced our effectiveness in this area. During our recent reorganization, theDivision established a Market Abuse Unit, with an emphasis on variousabusive market strategies and practices, including complex insider tradingschemes.The Market Abuse Unit has spearheaded the Division’s Automated BluesheetAnalysis Project, an innovative investigative tool that utilizes the “bluesheet” database of more than one billion electronic equities and options tradingrecords obtained by the Commission in the course of insider tradinginvestigations over the past 20 years. Using newly developed templates,Enforcement staff are able to search across this database to recognizesuspicious trading patterns and identify relationships and connections amongmultiple traders and across multiple securities, generating significant
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enforcement leads and investigative entry points. While still in its early stagesof development, this new data analytic approach already has led to significantinsider trading enforcement actions that were not the subject of an SROreferral, informant tip, investor complaint, media report, or other externalsource.
As part of the reorganization, the Division also established a cooperationprogram to encourage key fact witnesses to provide valuable information.Insider trading investigations are extremely fact-intensive. Enforcement staff undertake the often painstaking work of collecting and analyzing trading dataacross equity and options markets, analyzing communications (email,telephone calls and instant messages, among others) and analyzing market-moving events (e.g., announcements of corporate earnings, productdevelopment, and acquisitions and mergers) to identify persons who mayhave engaged in insider trading or who may have information about suchactivity. Our new cooperation program is a valuable tool that can help usbreak open an insider trading investigation earlier in the process, therebypreserving resources. We are already seeing the effectiveness of thecooperation program in our insider trading cases and expect this trend tocontinue as more cooperators come forward in our investigations.With an aggressive investigative approach that includes early coordinationwith the FBI, Department of Justice, and other law enforcement agencies, wehave been able to identify potential cooperators who may assist criminalauthorities with their covert investigative techniques, helping amass criticalevidence in numerous insider trading investigations. Our work with certainSROs has provided valuable early tips, helping us mitigate the harm frominsider trading schemes by freezing the illicit proceeds before funds aremoved to offshore jurisdictions.
Law of Insider Trading
There is no express statutory definition of the offense of insider trading insecurities.
The SEC prosecutes insider trading under the general antifraudprovisions of the Federal securities laws, most commonly Section 10(b) of theSecurities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5, a broadanti-fraud rule promulgated by the SEC under Section 10(b). Section 10(b)declares it unlawful “[t]o use or employ, in connection with the purchase orsale of any security . . . any
manipulative or deceptive device or contrivancein contravention of such rules and regulations as the Commission mayprescribe as necessary or appropriate in the public interest or for theprotection of investors.” 
Rule 10b-5 broadly prohibits fraud and deception inconnection with the purchase and sale of securities. As the Supreme Courthas stated, “Section 10(b) and Rule 10b-5 prohibit all fraudulent schemes inconnection with the purchase or sale of securities, whether the artificesemployed involve a garden type variety of fraud, or present a unique form of deception,” because “[n]ovel or atypical methods should not provideimmunity from the securities laws.” 
There are two principal theories under which the SEC prosecutes insidertrading cases under Section 10(b) and Rule 10b-5. The “classical theory” applies to corporate insiders – officers, directors, and employees of acorporation, as well as “temporary” insiders, such as attorneys, accountants,

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