(The views and opinions expressed here are the author’s own and not those of Reuters.)
Anyone who thinks insider trading is victimless need look no further than the painful story of John Kinnucan. Approached at his Oregon home late one afternoon in October 2010 by two FBI agents looking to get him to cooperate in cases against some of his hedge fund clients, he refused and instead went public, loudly, in a battle against what he called the “criminal activities” of federal agents pursuing him. Last month he pleaded guilty to one count of conspiracy and two counts of securities fraud. He will be sentenced in January and faces from 46 to 57 months under his plea arrangement. He has been in jail since February, unable to make $5 million bail.
“There isn’t a single part of our life that hasn’t been affected by this,” his wife told reporters after the trial. “I was trying to help him, but it was tough.”
An expansion of the usual definition of “victim” in insider trading is worth articulating. Insider-trading apologists often call it a victimless crime, but that’s sophistry. There are very real, identifiable losers on the other side of a crook’s trades. Lawmakers worldwide understand it, even if few enforce their laws as muscularly as the U.S. In 1990, 34 countries with stock markets had laws against insider trading. Today, practically all do.
But another group of victims exists beyond the capital markets, victims whose suffering is rarely articulated: The families of newly minted insider-trading felons. The toll on their lives is often tragic. John Kinnucan’s case is the most recent, but it’s hardly unique.
With Maeen Shaban of the University of Malaysia, I have been studying insider trading and many of the characters involved in it since the 1980s. The family stories are heartbreaking. Most inside traders aren’t people who have to scrape together livings, whose childhoods doomed or dimmed their futures in some way. They’re typically intelligent, well-educated and motivated. Many have had a privileged run in life. Think honor students who go to the elite colleges and business schools. Coming out, they feel as if they have the whole world in front of them. They’re likely to make more money in finance than they ever thought possible, if that’s their path. And they don’t equate themselves with a guy who robs a 7-Eleven.
But then they steal.
In the scandals of the 1980s, the list of those convicted was filled with alumni of Harvard, Wharton and Columbia, working in high positions at places like Goldman, Shearson and Drexel. This time around it’s no different.
It would be tempting to suggest that if some of these guys had only asked their wives before deciding to break the law, they might not have done it, but some of them are wives. In the ‘80s, one of the last to be prosecuted was a woman who worked for Fidelity, a Harvard-Radcliffe alumna, who accepted some cheap warrants from Drexel that were meant for her clients. In a UK insider-trading case this year, which might be the most heartbreaking of all, James Sanders and his wife Miranda were sentenced to jail concurrently - he for four years, she for 10 months, leaving their two young children behind. Sanders’s father was taped on a phone call asking him if what he was doing wasn’t insider trading. Sanders said no - and laughed.
During the 1980s, judges went light on sentences. It was a newly prosecuted crime, and the people in the dock were Ivy Leaguers. The first to plead guilty, in September 1986, was an M&A specialist with a Harvard MBA. He was called back into court to be released after eight months by a judge who thought when sentencing him that he would only have to serve four. Simply putting these guys in jail, even for a few months, was thought to be a powerful enough deterrent. One of his colleagues said at the time: “They really mean business. He seemed the least heinous of the gang; his career is already ruined, his life is already ruined and then they throw him in the can.” I corresponded with him recently. He was resilient. His career isn’t what it was, but he has one. He paid a heavy price, but he picked himself up. Good for him.
If his penalty, and those of others sentenced during that period, was a deterrent to future would-be inside traders, it didn’t last long. Since the first wave of arrests in the U.S. in 2009, American prosecutors have won 66 convictions or guilty pleas on 71 indictments. In February, the FBI disclosed it was investigating about 240 more cases and expected to file charges in about half of them. Now that number has “increased significantly,” according to a report in the Wall Street Journal. That’s a lot of money managers today who might not be giving 100 percent of their attention to their work. And it’s too late for many of them who have been, or will be, sentenced to years in prison. But it’s not too late for others who may be thinking about the lure of easy insider-trading money. The odds of getting caught may seem small, but if you lose, life as you know it ends. If thinking about the people on the other side of an illegal trade is too abstract and the thought of a prison sentence seems too remote to be a deterrent, try thinking about those sitting on the other side of your family dinner table.
One of the most poignant moments of the Rajat Gupta trial was when his daughter testified in his behalf and talked about Thanksgiving dinner with “Baba” - Daddy - in 2008. It’s hard not to feel for the people he’ll soon leave behind. It’s also hard to figure which was worse: Gupta’s family accompanying him to court every day and breaking down in tears upon hearing his guilty verdict; or Raj Rajaratnam’s family not stepping foot inside the courthouse. Either way, they’re both real and tangible.
Every case has a back story of human wreckage. A best-man-to-be secretly taping his own best man for the government to reduce his sentence. Divorces. Families left behind. Matthew Kluger, who received a record 12-year term in June, is raising three adopted children with his gay partner.
The world’s capital markets are a mess right now, to use a technical term. It’s imperative that regulators and the courts excise the rot. Clean markets have long been the pride of the U.S. and the foundation of our economy and society. Inside traders know that cheating is not acceptable but may not have thought through the cost of getting caught. They should.
A story from Fortune 20 years ago might help. Robert Freeman was a Goldman Sachs arbitrageur implicated in the Ivan Boesky scandal by Martin Siegel. His case was perhaps the most controversial of the period, with many saying Siegel lied to reduce his own sentence. Freeman’s partners stood by him as he fought the charges for more than three years, but he finally pleaded guilty to one count of insider trading on the takeover of Beatrice Cos by KKR. He was sentenced to four months in prison.
When he learned the date he was to begin his sentence, he decided to tell his youngest, a 9-year-old son, while playing catch in the backyard. “‘Ned, I‘m going to be able to go away earlier,’ I said, ‘and that means I’ll be home sooner, actually by the end of the summer, and we can go to New Hampshire and have some fun.’ And then Ned just collapsed.” He called it the worst moment of his departure. “I don’t want to sound histrionic, but when you go through the big-time prosecutors and the liars and all the rest, it finally comes down to telling your child that you have to go away. That’s what it’s all about.”
The morning his sentence was to begin, he kissed his wife goodbye at LaGuardia, flew to Pensacola, got into a taxi and asked the driver to take him to prison. He was 48, Dartmouth College, Columbia Business School, and a father of three.
That’s what it’s all about.
Robert Boxwell is director of Opera Advisors, the consultancy, based in Kuala Lumpur.