Editor's Note: This story is scheduled to appear in the July 2011 issue of Kiplinger's Personal Finance magazine. Kiplinger.com readers are getting a sneak peek.
A billionaire hedge fund manager is found guilty of 14 federal charges stemming from a massive insider trading scheme that prosecutors said netted $63 million. Galleon Group founder Raj Rajaratnam, who will appeal the verdict, was one of 26 criminal defendants in the case, 21 of whom have pleaded guilty.
Not even the Oracle of Omaha can escape the taint of insider dealings. A Berkshire Hathaway exec (who has not been charged with insider trading) resigned after he raised eyebrows by purchasing shares of Lubrizol Corp. right before Warren Buffett bought in.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Investors may be forgiven for feeling outmaneuvered. More than 50 people have faced criminal charges of insider trading since the summer of 2009. The Securities and Exchange Commission, which brings civil-law versions of the cases, has announced 30-plus cases in fiscal 2011, beginning last October, on top of 53 cases in fiscal 2010 and 37 the year before that. But it’s the kinds of cases and how they’re brought that’s significant. Instead of the one-off friends-and-family shenanigans that typify insider-trading cases, the focus is on organized secret-swapping among a new generation of market pros.
A modestly funded SEC, still stinging from criticism that it missed Bernard Madoff’s Ponzi scheme, is swamped with carrying out provisions of the financial reform law. But an overhaul of the enforcement division shows promise, with five new units that have defined areas of expertise.
New technology allows investigators to search and filter vast amounts of data, revealing relationships among traders. “It’s somewhat similar to progress in DNA evidence 20 or 30 years ago,” says Daniel Hawke, chief of the SEC’s Market Abuse unit. “We didn’t have the technology to connect a person to a potential crime then. Now we do.” Collaborations with criminal prosecutors start earlier, and criminal investigations are right out of The Sopranos or Scarface, relying on extensive wiretaps.
Catching crooks is one thing. Convicting them is another, given sometimes murky legal theories on what constitutes insider trading. (Test your understanding of these laws with our quiz Are You Guilty of Insider Trading?)
Compensating -- or even identifying -- victims is another challenge. Buy-and-holders who favor exchange-traded funds or index funds have little to fear from insider trading in any particular stock. The long-term effect on someone’s portfolio would likely be negligible, says law professor Peter Henning at Wayne State University.
The SEC orders inside traders to disgorge profits (or losses avoided), but it’s rare in stock cases that such seizures reach levels at which it’s economical to distribute the money to investors. The biggest threat insider trading poses is to the market overall. Ultimately, investors won’t play if they think the game is rigged.
-
BJ's Wholesale Pops on Membership Fee Hike, Stock BuybacksBJ's stock is rallying Thursday after the warehouse club raised its membership fee for the first time in seven years and unveiled a big stock buyback program. Here's what you need to know.
-
Why Snowflake Stock Is Still a Buy After EarningsSnowflake stock is surging Thursday after cloud company beat expectations for its third quarter and raised its full-year outlook. Here's what you need to know.
-
Best Banks for High-Net-Worth Clients 2024wealth management These banks welcome customers who keep high balances in deposit and investment accounts, showering them with fee breaks and access to financial-planning services.
-
Stock Market Holidays in 2024: NYSE, NASDAQ and Wall Street HolidaysMarkets When are the stock market holidays? Here, we look at which days the NYSE, Nasdaq and bond markets are off in 2024.
-
Stock Market Trading Hours: What Time Is the Stock Market Open Today?Markets When does the market open? While the stock market does have regular hours, trading doesn't necessarily stop when the major exchanges close.
-
Bogleheads Stay the CourseBears and market volatility don’t scare these die-hard Vanguard investors.
-
The Current I-Bond Rate Until May Is Mildly Attractive. Here's Why.Investing for Income The current I-bond rate is active until November 2024 and presents an attractive value, if not as attractive as in the recent past.
-
What Are I-Bonds? Inflation Made Them Popular. What Now?savings bonds Inflation has made Series I savings bonds, known as I-bonds, enormously popular with risk-averse investors. So how do they work?
-
This New Sustainable ETF’s Pitch? Give Back Profits.investing Newday’s ETF partners with UNICEF and other groups.
-
As the Market Falls, New Retirees Need a Planretirement If you’re in the early stages of your retirement, you’re likely in a rough spot watching your portfolio shrink. We have some strategies to make the best of things.
