Only 11% of Suspicious Insider Transactions Are Prosecuted

Iowa Senator Chuck Grassley has been vocal about suspicious trading at Steve Cohen’s SAC Capital. He sent a letter to SEC asking about what has been done about the 20 referrals FINRA sent to the Commission. Dealbook published SEC’s letter to Senator Grassley explaining what SEC does in general about these suspicious insider transactions. In the letter SEC discloses that since the beginning of 2010 they received 721 “SRO referrals related to potential insider trading violations”. So SEC receives 40 potential insider cases per month. How many of these cases lead to insider trading charges?

In 2010 SEC brought 53 insider trading cases. That’s 4.5 cases per month. This means only 1 out of 9 suspicious transactions are brought to justice. These aren’t your usual suspicious transactions. These are suspicious transactions that already jumped through a couple of hoops. Forty suspicious transactions per month is not a very large number. This means SEC is really ineffective in making the illegal insider trading cases. It isn’t easy to “identify the source and materiality of the inside information and evidence that the trader knew or should have known the information was obtained by deception or in violation of a fiduciary or other duty”. A big chunk of the 53 cases brought last year were related to the Rajaratnam/wiretap investigations. Without the wiretap evidence, the number of cases would have been much smaller.

It is clear that SEC isn’t doing a great job bringing cases to justice because it’s really not that easy to gather evidence. They can’t gather enough evidence in 90% of the cases. That’s why illegal insider trading is still rampant and imitating “legal” insider transactions yield above market returns.