Stiffer Penalties on Inside Trades Voted by House
Prompted by massive government charges against a New York investment firm, the House on Wednesday unanimously approved a bill with tough new penalties, including stiff prison terms and million-dollar fines, for those who use confidential inside information to make big profits in the stock market.
The 410-0 vote followed by exactly one week a Securities and Exchange Commission civil suit charging Drexel Burnham Lambert Inc. and Michael Milken, head of its “junk bond” department, with insider trading, manipulating the stock market and defrauding the firm’s clients.
Advocates of the bill hope it can become law in the four weeks remaining in the 100th Congress, but the prospects are uncertain. The full Senate has yet to vote on a bill, approved by the Banking, Housing and Urban Affairs Committee, that addresses corporate takeovers as well as insider trading.
Senate leaders have not decided whether to accept the House bill or pass their own broader measure and try to work out a compromise with the House. Among House leaders, Energy and Commerce Committee Chairman John D. Dingell (D-Mich.) wants the bill restricted to insider trading.
Rep. Edward J. Markey (D-Mass.), author of the House-passed bill, said Wednesday’s vote “sends a clear and powerful message to Wall Street: that the House of Representatives has adopted a new strategy to deal with insider trading--zero tolerance. It is time for the industry to follow the same approach. The policeman is back on the block and the unscrupulous insider traders had better beware.”
It has long been illegal to trade on information about a firm’s financial situation that is not yet available to the general public. However, insider trading was a rarely prosecuted offense until a wave of corporate mergers and takeover battles in recent years.
The House bill would boost the maximum criminal penalty for insider trading from five years to 10 and, according to House aides, increase the likelihood that those found guilty would serve time in prison. At present the actual sentence averages less than a year, and judges sometimes merely order community service work.
The maximum fine for individuals, now $100,000, would jump to $1 million under the House bill. For corporations and partnerships, the top penalty would rise from $500,000 to $2.5 million.
The bill’s penalties would apply only to future criminal cases and would have no impact on the SEC action against Drexel and Milken. Nor is it expected to affect a Justice Department criminal action against Drexel and Milken, because that is likely to be filed before the legislation could become law.
The bill is opposed by the securities industry, which believes it would unfairly penalize firms for the transgressions of employees. Companies that failed to provide adequate supervision of employees found guilty of violating the law would themselves be held responsible and would face fines of three times the profits gained from insider trading.
The legislation also would provide bounties for people who provide information about insider trading violations, just as the Internal Revenue Service rewards informers in tax cases.
The bill approved by the Senate Banking Committee has the same jail penalties and fines as those in the House bill, but it does not offer bounties. That bill calls for a mandatory one-year sentence for obstruction of justice or perjury for those who knew about someone else’s violation but did not cooperate with SEC investigators.
The main provisions of the Senate measure would make it harder to mount quick raids to take control of corporations. A firm or person acquiring 5% of a corporation’s stock would be required to announce the holding immediately; current law allows a 10-day wait.
Buyers of the stock would be forced to disclose the names of anyone with whom they had discussed the planned takeover in the previous 30 days.