Bloomberg Hedge Fund Summit 2012, panel up now is legal, and a focus on insider trading. Speakers are Gerald L. Shargel, Attorney, Law Offices of Gerald L. Shargel, Ira Lee Sorkin, Member, Lowenstein Sandler PC (who defended Bernie Maddoff and Jonathan R. Streeter, Partner, Dechert LLP; Former Assistant U.S. Attorney, Southern District of New York, U.S. Department of Justice.
11:05: The penalties have only gone up in the past 20 years, and fraud and insider trading has not stopped. This is not deterring anyone. You can spend more time in jail for stock fraud than manslaughter.
11:07: Gerald says that there is no way to know how much deterrence exists, because it is all secret. If an investor is about to act on it and sees that someone is sentenced he may not execute the trade. So there probably is deterrence but it is hard to tell.
11:09: Jonathan says that insider trading is much harder to bring than cases involving the financial crisis. The panel mostly agrees that there is no evidence that people committed fraud during the financial crisis, and acting stupid is not a crime.
11:11: Some panellists think that the US wants to find a villain. The first insider trading case was in 1978, the cases were much easier to bring, fraud IPOs, boiler-rooms etc. However, as the capital markets industry has evolved, the cases are harder to bring.
11:13: About SAC Capital case, the panellists will not get into specifics, but state that the Government likes to get people on complaints and then try to get them to co-operate.
11:16: Today, there are many more parallel investigations, with AGs, SEC, FINRA etc. Everyone is looking for ‘a pound of flesh’. which makes it harder to prosecute fairly.
11:18: On expert networks- You can talk to an expert like a doctor about a drug, but you cannot talk to the doctor if he will be advising on that drug to the SEC.
11:20: What keeps lawyers in business is that the SEC has never given a definition of what is material. If someone is a consultant and tips someone, it might be public and material, that is the same theory.
11:19: Rumors are available to the public, but talking to an expert involved is illegal.
11:21: There is great confusion in the hedge fund industry over what is and what is not legal, because the law does not provide any bright lines.
11:23: Funds that can establish rigorous compliance departments, if one employee commits inaction, it should protect other employees at the firm. As long as it is reasonable compliance, hedge funds should be secure. They are not responsible for things which are not red flags.
11:26: Even if people at SAC did nothing wrong, there is big representational risks. There are now many redemptions taking place, which shows that the hedge fund’s reputation is suffering.
11:29: Investigations take a very long period of time, and it should not give people being investigated any comfort. The SEC has a total of 1,400 employees, there are thousands of brokers, hedge funds, guys peddling garbage stock etc. They are in a deterence business, they cannot possibly police all insider trading.