The Congressional insider trading flap as a sign of the times

Insider trading has long been a serious federal offense if you are a private citizen—but less so if you happened to be a member of Congress. For years, members of Congress were legally permitted to use non-public information for personal gain, such as through the purchase of stocks. They suffered no legal consequences as a result of their actions, even though they fit the definition of insider trading, a crime that could land private-sector financial professionals in prison.

In fact, penalties for insider trading have increased substantially in the last several years. A Reuters article on the arrest of Garrett Bauer is a case in point. Bauer pled guilty in December to an insider trading ring worth $37 million over 15 years. He will be sentenced on May 1. In the meantime, Bauer has given talks, such as a lecture for students at Manhattan’s Baruch College, in which he warns professionals to avoid the temptation to commit securities fraud.

Bauer’s attorney, Michael F. Bachner, remarked on the changes in policy that have recently occurred. “If Garrett was indicted in 1987 he would have been looking at a three-year sentence,” he told Reuters—a relatively light punishment compared to the 11-year prison term assigned to Raj Rajaratnam last year. “We are in an era where things that were often treated as a civil wrong are being referred very quickly for criminal prosecution. If you are somebody that has a fiduciary duty to a client and you break it you are getting indicted. It doesn’t matter if you make money or lose money.”

The article goes on to report that major technological advances have made it easier than ever to detect potential cases of insider trading. According to Bachner, “The SEC looks for blips in the market. It’s fairly easy to catch.”

After a surge in media attention and public outrage over Congress’s loophole, the government has agreed to abide by its own rules. The STOCK Act recently signed into law applies the same standards to lawmakers and members of Congressional staff. According to a Reuters report, President Barack Obama hailed the bill as a victory for the American public. “The powerful shouldn’t get to create one set of rules for themselves and another set of rules for everybody else,” he said. “If we expect that to apply to our biggest corporations and to our most successful citizens, it certainly should apply to our elected officials, especially at a time when there is a deficit of trust between this city and the rest of the country.”

A “deficit of trust”—the same could be said for the relationship between the financial industry and the rest of the public. It seems that confidence in the ethical condition of American financial institutions has rarely been so low, as reflected in the rhetoric of accountability—not to say vengeance—directed at those suspected of securities fraud or other white-collar crimes. Matters are not helped by the perceived association between government officials and financial industry insiders. In the court of public opinion, it seems, the burden of proof lies with the defense, not the prosecution.

It is surely no coincidence that the public’s strong reaction to Congress’s insider trading loophole follows one of the worst recessions in the nation’s history. What was once perceived as a relatively minor offense in better economic times has become a much more serious crime in the eyes of the public, and of government prosecutors. As the outcry over Congressional insider trading demonstrates, the rhetoric will only become more formidable. The crucial point, all too often missed, is that government probes, accusations, and innuendo do not mean guilt. A sound defense constructed by a proven attorney can cut through the layers of rumor and hearsay so that the case is decided on the basis of the facts, not rhetoric.

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