Losing Battle Against Insider Trading : SEC Considers Informer Rewards
Securities and Exchange Commission Chairman John S. R. Shad said Friday that the agency is so frustrated by its inability to curb illegal insider trading that it is considering offering a reward to informers.
In an interview aired on Cable News Network’s “Moneyline” program, Shad said he has asked the agency staff “to look into the possibility of some form of rewards.” The proposal has not been presented to the full commission, he indicated, but he added that other federal agencies, notably the Internal Revenue Service, do offer tipsters a share of recovered funds.
An SEC spokesman said late Friday that any bounty program would have to be approved by Congress. Also, any agency request for legislation would require a vote of the commission.
In the last few years, the SEC has made a priority of uncovering insider-trading abuses but, by most accounts, it is fighting a losing battle. Cases in which stocks of companies involved in takeover bids move sharply in advance of public announcements are particularly irksome, Shad indicated in Friday’s CNN interview.
Although Shad did not mention any specific cases, the SEC and the New York Stock Exchange are investigating trading in shares of RCA before the Dec. 11 announcement of its planned merger with General Electric. In the three trading days before that announcement, RCA shares gained more than 33%, rising to $63.50 on extremely heavy volume--including an increase of more than $10 in the 24 hours preceding the merger announcement.
Shad said the SEC has scheduled a public “round-table,” to take place Feb. 19, at which the commission and its staff will meet with corporate executives, market makers, arbitrageurs and others to discuss ways of curbing insider trading in takeover stocks.
Securities experts informed of Shad’s remarks Friday said a bounty program might overcome the agency’s principal problem in winning criminal cases against illicit traders--the necessity of relying on circumstantial evidence.
Most cases are brought after stock exchange officials notice unusual trading patterns in individual issues, then work back to determine who had access to non-public information. However, securities professionals believe that only a fraction of insider cases are unearthed this way.
“It’s an imaginative proposal,” a securities lawyer currently defending an accused insider said of Shad’s suggestion. “Thieves often fall out, and it’s hard for an insider trader not to let anyone know what he’s doing.”
“It can’t hurt,” said Donald S. Malawsky, the New York Stock Exchange senior vice president in charge of trading surveillance and a former regional SEC enforcement chief. He observed that, after only a couple of bounty-inspired prosecutions, the program might have a significant deterrent effect.
The shortcomings of circumstantial evidence were demonstrated last month in the case of Thomas C. Reed, a former national security specialist in the Reagan Administration.
Gave Up Profits
Reed was acquitted in December of criminal charges that he made more than $420,000 in 1981 by trading in options on AMAX Corp. after he learned from his father, an AMAX director, that the company had received a takeover bid from Chevron.
Four years ago, Reed gave up the profits to settle an SEC civil suit without admitting or denying the charges.
A federal jury acquitted him of the criminal counts. Although Reed had called his broker three minutes after a telephone call to his father, prosecutors had no direct evidence regarding the subject of the conversation.
