VIEWPOINTS : Ira Lee Sorkin: Investors Should Get a Fair Shake : SEC Needs Additional Enforcement Powers
Ira Lee Sorkin knows how to quit as a winner. In the last two months, the New York office of the Securities and Exchange Commission, which he has headed since May, 1984, has brought or participated in some of the most attention-grabbing insider trading cases of all time.
These include the Dennis Levine case, in which the former mergers specialist at Drexel Burnham Lambert pleaded guilty to using confidential information to trade stocks, and the so-called yuppie-five case, in which a former law firm associate and four cronies, all under the age of 30, were indicted for trading on merger information stolen from the firm. (The associate has pleaded not guilty, while his four friends pleaded guilty.)
Sorkin, a 43-year-old Tulane and George Washington University law school graduate, will leave the SEC on Sept. 30 to return to private practice at the New York law firm of Squadron, Ellenoff, Plesent & Lehrer, where the clientele includes Fox Television and film magnate Rupert Murdoch.
His latest tour with the SEC is his second. Fresh out of law school, he joined the commission as a New York trial attorney in 1968. In 1971, he moved to the U.S. attorney’s office for the Southern District of New York, the prestigious office covering Manhattan. He joined the Squadron firm in 1977 and had become a partner when he left in 1984 to head the SEC’s New York office. That position made him one of the commission’s principal enforcement officials.
Sorkin recently talked with Times Staff Writer Michael A. Hiltzik.
Q Did you anticipate that insider trading would be such a major part of this job? A The answer is no, but it’s hard to say that insider trading has occupied most of our time. Every case we’ve brought has been important.
To the little over-the-counter broker who’s violated the law seriously enough to bar him from the business--to him, his case was more important than a hundred Dennis Levine cases and a hundred E. F. Hutton cases.
Q Still, insider trading has obviously taken a high profile among enforcement issues. The latest cases have generated a lot of comments about what insider trading is, and even whether it’s so bad. Why do you think it’s important to pursue? A For a couple of reasons. First, I think it really lessens confidence in the markets. The markets are risky to begin with. There’s no question that not everyone is on an equal playing field.
There is nothing wrong with that because some people are sophisticated and have the expertise, education and ability to analyze and interpret public information to make as informed an investment decision as they possibly can.
They will always be in a better position than the widow in Boise, Idaho, or the corn farmer in Iowa or the rancher in Texas.
We’re not trying to bring these people on the same plane as the professionals. What we are trying to do is stop the use of non-public information that has been obtained through theft.
There is a sense that if someone is not getting a fair shake in the markets, they stay out, and that certainly is the last thing that the industry and the economy and the country and the world really needs.
Second, corporations are entitled to have their confidences kept confidential. If an investment banker’s client tells him confidences, he then is required simply to keep his mouth shut if another investment banker or an arbitrageur or a broker or an investor calls him up and says: “What’s your client doing?”
Q Today there are more trading orders coming from abroad, and more trading done through offshore bank accounts. Does that complicate your job? A Absolutely. We tried the first stock manipulation case involving a Swiss bank account about 12 years ago. When we dealt with that bank, it was like dealing with aliens who don’t speak your language. We just ran into a brick wall.
Today we can deal better with foreign institutions. That’s helped, but that is not to say an investigation is any less difficult.
We can very quickly today find out who’s trading in a stock and where the accounts are that are trading. But that only begins the inquiry, because you don’t know who the beneficial owner of the account is.
Q There is an argument that insider trading is inevitable because even in the simplest deal, so many people are involved that someone is going to succumb to the temptation of using non-public information. A I think we’re realistic enough to know at the commission that we’re not going to end insider trading any more than we’re going to end murders and muggings and robberies and narcotics.
Forgive me for being philosophical, but mankind’s been trying to do that since Cain slew Abel, and hasn’t been very successful.
But we are trying to see a diminution of insider trading so it does not have so great an impact on confidence in the markets.
But I’m not so sure it’s inevitable. There are many, many law firms, arbitrageurs, investment bankers and brokers who are quite honest and do not do this sort of thing. I can’t say that insider trading is any more rampant in the industry today than it was 10 years or 70 years ago.
But insider trading is a means today of making a lot of money very quickly with virtually no effort.
In the past, if the president of a company knew in advance that its earnings were going to be good, there was just so much stock he could buy.
Stocks never rose so quickly on this classic type of inside information. If a company’s earnings were going up, the stock might move a couple of points.
But now, if a stock is selling at 40 and someone’s going to come in and make a bid at 60, boom! That’s 20 points built into it right there. So that’s what’s increased the tension.
Q Won’t those inquiries only become tougher as the securities markets become linked globally? A The example I use, which is one of the great horror stories of all time, is that it’s 3 a.m. in New York, and the stock of an American corporation is being traded on the Tokyo Stock Exchange, and after some inquiry you find out that the order was placed through a Hong Kong bank by a Liechtenstein trust whose principals are three Panamanians, none of whom is a U.S. citizen, now residing in Nigeria. What do you do at that point? How do you begin?
The most serious problem facing the commission in the next five years is the internationalization of the markets. You’re going to have more foreign corporations registering stock in the United States. You’re going to have U.S. corporations trading overseas. Each jurisdiction has its own requirements as to what should or should not be disclosed to the public.
Q What is the commission doing to confront the problem? A The concern I have is that the commission is basically so overwhelmed with paper that, at least from my limited perspective, there’s not enough time to focus on the more cosmic issues, the future planning. The commission is a reactive agency, and I’m not sure it has enough time to focus on long-range future planning. I think that should be remedied.
Q Even in light of domestic illegalities, what new powers do you think the SEC needs? A My own personal view is that the SEC should have the power to fine. Also, I’m not sure our civil injunctions have as much of an effect as we would like. We see many recidivists coming back and doing what they did before. I think we’ll be bringing more criminal contempt cases in the future. I think we also have to find a way to increase the participation in our processes of the Justice Department.
We’ve worked effectively for many years with the U.S. attorneys in New York, but by and large in the rest of the country you can’t get these guys involved. Quite frankly, the only way we seem to be making an impact is through the threat of jail and the fear of jail, but the SEC has no criminal power.
I’d like to see--now this is radical and revolutionary--the time come when we can avail ourselves of the Justice Department as readily and quickly as the SEC in New York avails itself of the investigative tools of the U.S. attorney in New York. I would even go so far as to say that in limited circumstances, the SEC should have the right to obtain search warrants and perhaps even wiretaps.
Q That might further strain the commission’s resources. Do you think the SEC needs more manpower generally? A The SEC’s always been outgunned. And, quite frankly, we could always use more staff: more lawyers, more investigators, more financial analysts.
On the other hand, we have to deal with Gramm-Rudman and the deficit just like any other federal agency. I’m not optimistic that we’re going to be given any greater share of the pie than anyone else. I think that if we tripled or quadrupled the number of staff, we’d still be understaffed.