The huge federal insider trading probe is said to be spreading terror in the investment world. But let's get some context here: insider traders rarely spend long stints in prison, even the most extreme offenders. While Michael Milken was indicted on 98 counts of racketeering and securities fraud in 1989, for instance, and was sentenced to 10 years after a pleading guilty to many fewer charges, he ultimately spent less than two years behind bars. Ivan Boesky, another storied figure in that scandal, also spent less two years in prison.
Not much has changed in twenty years. Prison sentences for inside trading tend to be light and many insider traders caught by the feds never go to prison at all. A recent analysis by Bloomberg Businessweek of cases in New York found that: "Almost half of the 43 defendants who were sentenced in Manhattan federal court in the past eight years for insider trading avoided a prison term, with many never seeing the inside of a jail cell because they cooperated with prosecutors."
The average defendent got a term of 18.4 months.
One reason for the light sentences is that many defendents cooperate with prosecutors the moment they are caught. This isn't the Mafia, after all. Educated and savvy criminals see the handwriting on the wall early on and get on board to help further investigations. That counts for a lot at sentencing time. Another factor is the amount of money involved. When inside traders make small profits, their sentences are shorter.
The 2007 case involving UBS banker Mitchel S. Guttenberg shows these patterns at work. The SEC charged 11 individuals in that case, which involved two separate insider trading schemes over a number of years. Besides Guttenberg, the defendents included: Erik Franklin, David Tavdy, Mark Lenowitz, Robert Babcock, Andrew Srebnik, Ken Okada, David Glass, Marc Jurman, Randi Collotta, and Christopher Collotta.
But only two people actually went to prison. Guttenberg, who pleaded guilty, was sentenced to 6.5 years, and David Tavdy -- who didn't cooperate with prosecutors -- got 63 months.
Guttenberg's prison term was one of the longest in recent years, but Credit Suisse Group AG banker Hafiz Muhammad Zubair Naseem got a stiffer sentence: 10 years for leading a fraud that netted nearly $8 million. Joseph Contorinis, a former money manager at Jefferies Paragon Fund who also made big profits -- more than $7 million -- was sentenced last year to six years.
These tough sentences are outliers. Many defendents get probation or home confinement. For instance, in the UBS case, Randi Collotta and Christopher Collotta (a former lawyer for Morgan Stanley and her husband), were both sentenced to home confinement for their role in an insider trading scheme. In that case, the government also went lightly because Mr. Collotta had health issues, a not uncommon occurrance. Prosecutors are allowed to take health isues into account in recommending sentences.
Home confinement sounds tough, doesn't it? Especially in cases involving wealthy defendents with palatial digs.
People on Wall Street like to complain that sentences for insider trading are too high -- that this is an insignificant crime and that the shame of arrest and loss of livelihood is enough of a deterrent. Well, the facts suggest otherwise. Not only are punishments quite light, but there is clearly not enough deterrence judging by how much insider trading goes on. Not only have prosecutors nailed dozens on insider traders in recent years, but experts agree that much insider trading never results in arrests.
Obviously the risk-and-benefit analysis remains favorable enough to draw many people to insider trading. And we're not talking about just anyone. We're talking about individuals who analyze risk for a living.