Insider Trading and the Trial of Raj Rajaratnam: Implications and Predictions (Part 2)

What are the implications of this case, irrespective of the outcome?  There are no doubt plenty but two immediately come to mind.

First, this is, as far as I know, the first major insider trading trial where wiretaps played a significant role.  The government's closing could be dubbed the wiretap chronicles since Reed Brodsky played seven excerpts and relentlessly referred to or quoted from many others.  In part this is because the law with respect to the use of wiretaps in insider trading cases required clarification, something that more or less occurred last year (for a nice discussion of the evolution of the law, see the memorandum by Morrison Foerster).  But it seems as if wiretaps are likely to make regular appearances in future cases.

The SEC, of course, lacks the authority to obtain wiretaps.  As in the Rajaratnam case, the agency may be able to get the conversations though civil discovery so long as they have been turned over to defendants by the US Attorneys Office.  In most cases, where there is no parrallel criminal investigation, the SEC will not have the beneif of wiretaps and will have to prove its case in the usual manner. 

The use of wiretaps won't eliminate insider trading but it will likely force it further underground.  The case against Matthew Kluger (the lawyer who allegedly tipped information to an intermediary) and Garrett Bauer (the trader who allegedly obtained and traded on the information from the intermediary) involved tips transmitted, according to the allegations of the SEC, through "public telephones or prepaid disposable mobile telephones".  This sort of thing or, alternatively, talking in code, will become more common.  Of course, the safest approach would be to avoid the phone altogether but non-public information often has a short shelf life and may not wait for a more personal form of delivery.

The other consequence is that issuers will need to look more seriously at their own internal procedures.  Much of the insider trading currently under discussion allegedly arose out of contacts with both high level corporate officers  (the Rajaratnam case) and mid-level officials (the expert network cases).  Either way, persons employed at the companies were apparently distributing highly important non-public information to persons trading in the market.  This may mean tighter procedures, tighter enforcement, and perhaps more restricted access.