U.S. Atty. Rudolph W. Giuliani, whose jurisdiction includes Wall Street, told Congress on Monday that he does not have enough staff to pursue many promising leads on insider trading cases and called for the creation of permanent federal task forces in major cities to specialize in these criminal investigations.
Giuliani also supported legislation to provide rewards to informants who help with insider trading probes, similar to the rewards the Internal Revenue Service gives tipsters for information in tax fraud investigations.
"A whole host of allegations and cases just don't get the attention they deserve," the U.S. attorney for Manhattan told a hearing of the finance subcommittee of the House Energy and Commerce Committee. Prosecutors should be able to devote the same time and effort to sending white-collar criminals to jail that they do for drug traffickers and organized crime figures, he said to reporters after the hearing.
The testimony came in conjunction with a move by subcommittee Chairman Edward J. Markey (D-Mass.) to prepare new legislation this year to combat insider trading in the wake of the recent scandals that have rocked Wall Street.
Markey has proposed expanding punishment for violation of insider trading statutes beyond the people who actually profit from the trades based on confidential corporate information. His bill would provide penalties for brokerage firms that neglect to "take the proper steps to supervise their employees and prevent the misuse of insider information," he said.
Giuliani, who handled the major cases involving Wall Street figures Dennis B. Levine and Ivan F. Boesky, said that only until recently, people leaking or obtaining valuable proprietary information "could get the sense they were immune" from enforcement.
Wants Specific Entity
No single federal agency has responsibility for criminal prosecution of insider trading violators, and the Securities and Exchange Commission has authority only for civil cases, in which fines, but not jail sentences, can be imposed.
He said the SEC, U.S. attorneys, the Postal Service and FBI have cooperated effectively on criminal probes recently but that there should be a specific entity to manage these cases. He recommended permanent investigation forces be established in New York, Los Angeles, Chicago, Boston, Dallas, Houston, Miami and perhaps other cities.
SEC Chairman David S. Ruder told the subcommittee that he "very vigorously" endorses the idea of giving U.S. attorneys more resources to pursue these criminal investigations, but he did not specifically endorse the task-force approach.
After hearing Giuliani's testimony, Markey said, "It's rather startling that a whole host of cases can't be reached because of a manpower shortage."
The U.S. attorney and the SEC chairman offered the subcommittee qualified support for Markey's legislative efforts to hold brokerage firms responsible for employees who violate the securities laws. The two witnesses said firms should be required to establish tougher systems of supervising their workers but that companies that make a sincere effort yet have a case of abuse in their ranks should not be penalized.
The securities industry is alarmed by Markey's proposal. While "we share your zeal for eliminating insider trading," the new legislation would "create unlimited and unknowable risk for innocent broker/dealers from both penalties and private damages," John W. Bachmann, chairman of the Securities Industry Assn., told the subcommittee.
The proposed legislation would also allow the SEC to award "bounties to individuals who come forward with information leading to the prosecution of insider trading cases," Markey noted. Ruder said he was uncomfortable with the idea of rewards, but Giuliani said they could be an effective tool.
The rewards in tax cases go to people who are not directly involved in the tax fraud, or who play a marginal role in the fraud, Giuliani noted. The informant must come forward voluntarily to be eligible for the money. The government paid $1.3 million in bounties for help in collecting $286 million in previously unpaid taxes in 1986, Markey said.