Stiffer Penalties Backed to Curb Inside Trading : House Panel Approves Bill Doubling Jail Terms

Aiming at the “greatest fear of white-collar criminals,” a House subcommittee approved Thursday a bill with tough new prison penalties for those who illegally use confidential “inside” information to trade in stocks.

The legislation would double the maximum prison term to 10 years, raise the maximum fine to $1 million from $100,000 and allow the Securities and Exchange Commission to pay bounties to informants, just as the Internal Revenue Service does to help catch tax cheaters.

The bill was approved on a voice vote with unanimous bipartisan support by the finance subcommittee of the House Energy and Commerce Committee.

“It’s an excellent piece of legislation to deter insider trading,” said Rep. Matthew J. Rinaldo (R-N.J.), the ranking Republican on the committee. “It should discourage any would-be lawbreakers.”

Harsher Penalty

Rep. Edward J. Markey (D-Mass.), the subcommittee chairman, said he hopes for action on the bill by the full committee next week and for passage by the House when Congress returns from its summer recess in September. There is no companion bill in the Senate, but Markey hopes to get his measure accepted as part of a final securities law package when the House and Senate meet in conference to reconcile separate pieces of legislation.

The House bill was prompted by recent Wall Street scandals, including the notable case of convicted speculator Ivan F. Boesky, involving millions of dollars in profits illegally generated by the use of inside information about corporations. It is a crime to buy or sell securities on the basis of information from inside a company that has not yet been made available to the general public.

Many members of Congress decided the penalties had to be stiffened to discourage the use of inside information about corporate sales and profits and impending takeover deals.

The insider trading bill was approved quickly Thursday with the addition of a single amendment, Markey’s proposal to raise the maximum prison penalty to 10 years.

Under current law, the maximum prison term is five years and a typical sentence is one to two years, with many of those convicted receiving lesser penalties, such as probation and community service, that do not involve jail time. However, a 10-year prison term, combined with new mandatory sentencing rules, assures that virtually everyone convicted under the proposed law would serve at least a year in prison, according to subcommittee sources.

Discretionary Power

This harsher penalty “strikes at the heart of the greatest fear of white-collar criminals,” which is the fear of spending time behind bars, Markey said. Thursday’s vote on “this strong bipartisan reform measure shows that Congress is putting its foot down--the waiting is over, “ Markey said.

Securities and Exchange Commission Chairman David S. Ruder previously told the subcommittee that he generally supports the bill but is concerned about the use of bounties for informants. Markey said the SEC would be given discretionary authority to use rewards, 10% of the amount recovered from the return of illegally gained profits and from fines.

“It’s another weapon in their arsenal,” he said after the panel’s meeting.

No Road Map

Although the subcommittee bill increases the punishment for illegal use of insider trading, it never defines inside information. A specific description, Markey said, would “provide a road map to evasion. “

The purposefully vague approach is designed to frighten would-be lawbreakers. Inside information could be a corporate earnings report the day before it is publicly issued, a newspaper or magazine story or column before it is published, a conversation between a lawyer engaged in a secret merger deal and his friend in a brokerage office, or a crumpled memorandum picked out of the trash can by a member of a nighttime cleaning crew in the executive suite.