Stock-market cops will tell you tippers are their most elusive criminal.
Traders who illegally use insider tips to buy and sell securities are more easily nabbed, thanks to surveillance software that sends off alarms when lucky bets are placed on stocks ahead of momentous corporate news.
The men and women who feed the illicit secrets, however, have been much harder to nail. They seldom invest directly in hot securities and their tipping often takes place in untraceable private conversations.
In the past, regulators didn't seem able or willing to devote much energy to catching tippers. Just wasn't worth the effort. If recent weeks are any indication, however, tipping has become a far more dangerous custom.
Regulators in both Canada and the United States recently brought down two separate insider trading schemes allegedly fuelled by tips from lawyers at respected corporate law firms. In both cases, regulators say the charges reflect increased determination to flush out tippers.
In Canada, regulators got lucky when two lawyers in a $9-million (U.S.) cross-border scheme co-operated with investigators shortly after their illegal trades were spotted by Canadian surveillance officials. In the U.S., regulators borrowed street tactics used by Hollywood detectives to shadow and intercept cellphone calls of two lawyers alleged to be at the centre of a $20-million insider trading ring.
Regulators can draw satisfaction from stories suggesting that diligent police work pays off. But there's disturbing news here as well. Whenever lawyers are accused of being lawbreakers, it is not only their careers that are at stake. Lawyers are trained gatekeepers vested with legal duties to protect the confidences of their clients and firms. When that faith is breached with loose lips, trust in their law firms, clients and broader market security also take hits.
"For a lawyer deliberately to trade on confidential information is of a different order of seriousness because the lawyer's dishonesty and betrayal of the client's trust is unforgivable," said Gavin MacKenzie, former treasurer of the Law Society of Upper Canada and a partner with Heenan Blaikie LLP.
David Rosenfeld, an investigator with the U.S. Securities and Exchange Commission, said it is "extremely troubling" when lawyers are accused in insider trading cases because they are trained to know the boundary between the legal and illegal.
"Clearly lawyers, of all people, should know better … It's shocking that they would risk so much," he said.
Mr. Rosenfeld is part of team that charged 14 people in New York last Friday for their alleged role in an insider trading ring that generated $20-million in illegal profits.
At the centre of the trading ring, the SEC alleged, was Arthur Cutillo, an associate with mergers specialist Ropes & Gray, who is accused of passing takeover secrets to hedge fund traders through his friend and Brooklyn lawyer Jason Goldfarb. According to court documents filed by the SEC, investigators intercepted telephone calls during which Mr. Cutillo allegedly passed takeover tips to Mr. Goldfarb. On another occasion, the documents say, Mr. Goldfarb was seen by Federal Bureau of Investigation agents carrying a bag of cash from the car of a hedge fund official who allegedly traded on the tips.
In Canada, revelations about an insider trading scheme with tragic consequences is prompting soul searching in the legal profession.
Two weeks ago, former Dorsey & Whitney lawyer Gil Cornblum killed himself one day before he was to appear in a Toronto court to plead guilty to Canadian and U.S. charges that, over a 14-year period, he illegally tipped a friend about client takeover secrets gathered from his law firms in New York and Toronto.
His friend and former law school classmate Stan Grmovsek pleaded guilty last Friday in an Ontario court and is to appear before a New York judge next week to plead to similar SEC charges.
The cases are the biggest insider trading scandals to hit the Street since the early 1980s, when arbitrage trader Ivan Boesky had suitcases of cash delivered to bankers who gave him advance notice about lucrative takeover bids and other stock-boosting corporate news. Today, regulators say they have begun to devote more attention to the sources of insider tips that feed illegal trades.
Kathryn Daniels, deputy director enforcement of the Ontario Securities Commission and one of several Canadian and U.S. regulators investigating the case against Messrs. Grmovsek and Cornblum, said the OSC is casting a wider net in its insider trading investigations to take a "closer look" at people who have access to confidential information.
"A tipper who occupies a place of confidence, whether it be a lawyer, an investment banker or accounting professional is a person of very high interest to us," Ms. Daniels said.
Mr. Grmovsek has agreed to a sentence of 39 months - a Canadian record - for his insider trading crimes; his lawyer, Joe Groia, told a Toronto judge on Friday that the jail term sends "a very strong message" that tippers "are going to pay a very heavy price if they are caught."
A more effective message might come from former lawyers who strayed.
"I feel shattered every time I think about these things," Ilan Reich, a former partner at elite Wall Street deal house Wachtell Lipton Rosen & Katz, told a New York judge in 1987.
Mr. Reich made the unfortunate decision in 1982 to share his firm's takeover secrets with a Drexel Burnham Lambert banker named Dennis Levine. Soon Mr. Reich was ensnared in an insider trading case that eventually saw him, Mr. Boesky, junk bond trader Michael Milken and others sentenced to prison.
"In my own arrogant and naive way," Mr. Reich told Fortune magazine two years ago, "I didn't appreciate that (a) there were con artists and (b) my own arrogance was going to be a source of tremendous downfall."