by Lev Bromberg, George Gilligan, and Ian Ramsay

Insider trading, a form of misconduct criminalized in many countries, was again in the headlines recently with the U.S. Federal Bureau of Investigation’s “Operation Perfect Hedge”, an investigation relating to hedge funds which uncovered interweaving webs of trading networks spanning several industries. Indeed, the operation at one point provided the U.S. authorities with a perfect record of 85 convictions for insider traders. The convictions of those involved – including Galleon founder Raj Rajaratnam and former S.A.C Capital Advisors portfolio manager Mathew Martoma – resulted in record prison sentences and monetary fines for insider trading. But how do these significant insider trading penalties compare with those imposed in other countries?

Our recent article, ‘The Extent and Intensity of Insider Trading Enforcement – an International Comparison’, presents the results of a detailed comparative empirical study of sanctions imposed for insider trading in Australia, Canada (Ontario), Hong Kong, Singapore, the United Kingdom, and the United States over a seven year period to 2015. Our empirical study, which relied on a number of sources, identified nearly 700 individuals and companies, as well as approximately 1400 sanctions imposed for the contravention of insider trading provisions.

We also set out a preliminary empirical model for measuring the severity of sanctions (or a combination of sanctions) imposed on defendants, providing an example for future empirical analysis. Our model suggests that the most severe sanctions imposed for insider trading were in Australia, followed by Hong Kong, while the least severe sanctions were imposed in Singapore. While the frequency of sanctions in the US was substantially higher than in the other jurisdictions, the severity of typical sanctions in the US was also relatively low.

We found that the US, which had the highest number of defendants, also had the widest range of sanctions imposed for insider trading. What characterizes most insider trading cases in the US is the high proportion of pecuniary sanctions. In most cases the sanctions were determined with reference to the size of the profit. For example, the civil penalty was equal to the size of the profit for at least 150 defendants, all of whom settled with the Securities and Exchange Commission (SEC).

Another area where the US appears to be unique is the number and complexity of insider trading proceedings. A number of defendants faced both criminal actions brought by the Department of Justice and civil actions brought by the SEC in relation to the same conduct, and in some cases administrative follow-on proceedings were also brought (for example, to impose a ban).

Our findings also provide important insights into the sanctions most commonly applied by securities regulators and the courts to enforce insider trading laws. We found that even in jurisdictions with similar insider trading laws very different sanctions are used to enforce these laws. A summary of the most commonly imposed sanctions in each of the jurisdictions is provided in the following table.

Table 1: Breakdown of Sanctions Imposed

Here are some of our other key findings on the different enforcement approaches for insider trading.

Custodial sentences

• During the study period, the overall number of custodial sentences imposed on defendants in the US (85) was higher than the other jurisdictions, followed by the UK (27) and Australia (19).
• Australia had the highest proportion of defendants that received a custodial sentence (63%). However, of the countries that imposed custodial sentences for insider trading, Australia also had the highest proportion of sentences that were fully suspended (58% of sentences were fully suspended).

Banning orders

• The proportion of defendants that received banning orders was highest in Ontario, where all but one defendant received a ban.
• The proportion of defendants that received banning orders was lower in Australia and Singapore than in the other jurisdictions.

Pecuniary sanctions

• The highest total amount in pecuniary sanctions was imposed in the US. By far the highest number of punitive pecuniary sanctions was imposed in the US (395), followed by the UK (24), Ontario (21) and Singapore (20).
• Typical pecuniary sanctions were highest in Ontario, followed by the UK. Pecuniary sanctions in Australia were lower than in each of the other jurisdictions. In most insider trading matters in the US civil penalties and fines tended to be reasonably low. However, the US was also characterized by a number of much larger pecuniary sanctions.
• Pecuniary sanctions imposed in Ontario and Singapore were the highest relative to illegal profits, while pecuniary sanctions imposed in Australia and Hong Kong comprised a smaller percentage of illegal profits than in the other jurisdictions. On average, pecuniary sanctions in Australia and Hong Kong were either equal to, or lower than, the profits made from the misconduct, while in other jurisdictions pecuniary sanctions imposed comprised a substantially larger proportion of the illegal profits.

The full article is available for downloading from SSRN here.

Lev Bromberg is a Research Fellow at the Melbourne Law School (University of Melbourne).
Dr. George Gilligan is a Senior Research Fellow in the University of Melbourne’s Centre for Corporate Law and Securities Regulation.  Ian Ramsay is the Harold Ford Professor of Commercial Law at the Melbourne Law School (University of Melbourne). He is also Director of the Law School’s Centre for Corporate Law and Securities Regulation.

Disclaimer

The views, opinions and positions expressed within all posts are those of the author alone and do not represent those of the Program on Corporate Compliance and Enforcement or of New York University School of Law.  The accuracy, completeness and validity of any statements made within this article are not guaranteed.  We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.