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Pics or It Didn't Happen: The Future of Insider Trading Enforcement, Part II

Bruce Carton | December 6, 2012

As I noted here last year, several recent insider trading cases brought by federal prosecutors and the SEC were built on hard, overwhelming evidence that has not historically been available in insider trading cases: wiretaps, cooperating witnesses, seized laptops, Blackberry messages and even building surveillance video. 

In one case, for example, prosecutors were able to present evidence from recorded telephone calls on the defendant's efforts to destroy evidence of the alleged fraud by "chopping up" a USB flash drive. The defendant described how he took 

two pairs of pliers, and then you rip it open. Pulled the external drives apart. … Put 'em into four separate little baggies, and then at 2 a.m. … 2 a.m. on a Friday night, I put this stuff inside my black North Face … jacket, … and leave the apartment and I go on like a 20 block walk around the city … and try to find a, a garbage truck … and threw the sh*t in the back of like random garbage trucks, different garbage trucks … four different garbage trucks.

In that case, prosecutors also had video from a surveillance camera in the defendant's apartment showing the defendant leaving his apartment building at around 2:00 a.m. and returning at approximately 2:30 a.m. wearing the North Face jacket!

In the post last year. I asked:

Given the government's ability to generate this kind of evidence when it chooses to, how far are we from a time when hard, non-circumstantial evidence becomes expected and defendants adopt (and juries accept) the "Pics or It Didn't Happen" defense in insider trading cases? That is, if you allege that I committed insider trading, where is my tape-recorded confession? Where is the surveillance video? Where is the cooperating witness? Where is the mangled USB flash drive? Where is the Smoking Gun tweet?

The defendants and potentially the jurors in the latest case brought by the SEC may ask a similar question. Yesterday, the SEC sued an investment banker and nine others

for their alleged involvement in an insider trading ring that produced more than $11 million in illicit profits. In short, the SEC alleges that the banker learned inside information about four separate merger transactions involving his firm's clients, and then tipped a friend of his who, in turn, routinely tipped numerous other friends or family members.

As Doug Cornelius notes in a post today on his Compliance Building blog, the SEC's complaint relies exclusively on the most old-school of circumstantial evidence: phone records and trading records. In other words, the banker allegedly telephoned someone, and then shortly thereafter that person bought stock in the company about to be acquired.

Phone records and trading records have been sufficient for the SEC to win insider trading cases historically, but is this type of evidence still enough to make a case in the year 2013? Perhaps we will soon find out.