Top Four Insider Trading Scandals
Insider trading occurs when an individual or a group of individuals possessing confidential information about a public company's stock engages in buying or selling that stock. While the SEC has rules to prevent insider trading, it can still be challenging to detect and take legal action against those who engage in it. The media tends to focus on cases of insider trading, especially if the accused is a high-profile individual. There were four prominent cases that received a lot of attention in the U.S. - those of Albert H. Wiggin, Ivan Boesky, R. Foster Winans, and Martha Stewart.
Insider trading, a prohibited practice in the stock market, involves the illicit buying or selling of publicly traded company stocks based on nonpublic material information. Throughout the U.S. stock market's existence, numerous individuals have exploited their privileged access to gain an unfair advantage over other investors. This article explores four significant insider trading cases, ranging from the early 1900s to the present. Despite the Securities and Exchange Commission (SEC) implementing rules to safeguard investments against insider trading, the intricate nature of these investigations often complicates detection and resolution. Consequently, when insider trading comes to light, they frequently stir up controversy and media attention, particularly if the accused party holds a prominent public position, thereby jeopardizing their reputation.
Albert H. Wiggin
During the aftermath of the 1929 Wall Street Crash, a startling revelation shook the financial world as Albert H. Wiggin, the esteemed leader of Chase National Bank, was exposed for engaging in unscrupulous practices. It emerged that Wiggin had shorted over 40,000 shares of his own company, employing his family-owned businesses to conceal these trades. Astonishingly, his vested interest lay in undermining the very success of his company.
At that time, there were no explicit regulations prohibiting the short-selling of one's own company's stocks. Consequently, when multiple investors abandoned their positions in Chase National Bank simultaneously following the crash, Wiggin legally amassed over $4 million in profits. Not only did he profit from these dubious short-selling activities, but he also accepted a lifetime pension of $100,000 annually from the bank. However, due to public outcry and media scrutiny, Wiggin eventually declined the pension.
The exposure of Wiggin's conduct, along with other influential bankers, occurred during the Pecora Investigation. Spearheaded by Ferdinand Pecora, a former New York deputy district attorney, this inquiry utilized subpoenas and hearings to unveil the legal yet morally questionable practices adopted by banks and their top executives in the period leading up to the 1929 crash.
Wiggin's actions were not isolated, prompting the enactment of the Securities and Exchange Act of 1934, a response to the extensive corruption that surfaced following the crash. This legislation aimed to enhance financial market transparency and combat fraudulent activities and market manipulation. Section 16 of the Act, which addresses regulations aimed at preventing and prosecuting insider trading, was even colloquially dubbed the "anti-Wiggin" section, highlighting the impact of his notorious deeds.
Ivan Boesky, an American stock trader, gained notoriety during the 1980s for his involvement in a scandalous insider trading scheme. This scandal implicated several high-ranking corporate officers from major U.S. investment banks who were feeding Boesky confidential information regarding upcoming corporate takeovers. Boesky, who operated his own stock brokerage firm, Ivan F. Boesky & Company, capitalized on this insider knowledge and amassed substantial wealth by speculating on these takeovers since the establishment of his firm in 1975.
The downfall of Boesky began in 1987 when a group of his corporate partners filed lawsuits, accusing him of deceptive legal agreements about their partnership. Consequently, the SEC investigated Boesky's activities. It was later revealed that he had been making investment decisions based on privileged information obtained from corporate insiders, which included Michael Milken, renowned as the "junk bond king," and the investment firm Drexel Burnham Lambert. These revelations prompted the SEC also to initiate investigations into Milken and Drexel Burnham Lambert.
In an unexpected turn, Boesky chose to cooperate with the SEC and became an informant, providing crucial information that would ultimately lead to the case against Milken. However, Boesky's involvement in the scandal came at a heavy cost. In 1986, he was convicted of insider trading and received a prison sentence of 3.5 years, accompanied by a staggering fine of $100 million. Despite being released after serving only two years, the SEC permanently barred Boesky from engaging in any securities-related activities, marking the end of his career in the financial world.
R. Foster Winans
R. Foster Winans, a renowned columnist at the esteemed Wall Street Journal, held a prominent position with his column titled "Heard on the Street." Within each column, Winans would profile specific stocks, and the market often reacted to his opinions, resulting in price fluctuations. However, Winans orchestrated a deceitful scheme by leaking advance knowledge of his upcoming column, specifically the featured stock, to a group of collaborating stockbrokers. These brokers would swiftly acquire positions in the stock before the column's publication, enabling them to profit. Allegedly, some of these gains were then shared with Winans as compensation for his insider intelligence.
The SEC eventually exposed Winans' misconduct. The case posed a challenge as the column primarily reflected Winans' personal opinion rather than material insider information. Nonetheless, the SEC managed to secure a conviction against Winans, arguing that the information concerning the stocks within the column rightfully belonged to The Wall Street Journal and not to Winans himself.
In December 2001, the FDA delivered a crushing blow to pharmaceutical company ImClone by refusing approval for their promising cancer drug, Erbitux. This unexpected decision caused ImClone's stock to plummet, leaving numerous investors with significant losses. Curiously, family and friends of the company's CEO, Samuel Waksal, managed to avoid the financial blow. Subsequent investigations by the SEC unveiled a series of stock sales by executives who had acted on Waksal's instructions, including Waksal's own attempt to sell his shares.
Notably, prominent American businessperson Martha Stewart had sold approximately 4,000 shares of ImClone just days before the FDA announcement. At the time of the sale, the stock was still valued highly, and Stewart reaped a substantial profit of nearly $250,000. However, following the announcement, the stock price sharply declined in the ensuing months.
Stewart asserted that she had a pre-existing sell order with her broker. Nevertheless, she was convicted of insider trading as evidence revealed that she sold her shares after receiving a tip indicating ImClone's impending stock drop. Consequently, Stewart resigned as the CEO of her own company, Martha Stewart Living Omnimedia. Waksal, on the other hand, faced arrest and was sentenced to over seven years in prison, accompanied by hefty penalties exceeding $5 million.
In 2004, Stewart and her broker were also found guilty of insider trading. Stewart received a minimum prison sentence of five months and was fined $30,000, further exacerbating the consequences of her involvement in the ImClone scandal.
In the world of finance, insider trading remains a clandestine practice where individuals exploit confidential information to engage in stock buying or selling. Although this activity is strictly illegal, its detection poses considerable challenges.
Media outlets eagerly cover instances of insider trading, particularly when they involve prominent public figures or renowned companies. Notably, the United States witnessed widespread media attention surrounding four high-profile insider trading cases: Albert H. Wiggin, Ivan Boesky, R. Foster Winans, and Martha Stewart.