February/March 2009 / Cover Story
Prosecutions Arising from the Credit Crisis
The author predicts that future charges related to bad mortgages will often be based on allegations of insider trading. The author bases this prediction on the difficulty of proving a false or misleading statement regarding company performance, given the complexity of the transactions at the heart of the fiscal crisis. It is easier to obtain convictions by arguing that an executive reaped gains by selling shares based on inside knowledge, while ordinary investors were kept in the dark and suffered losses.
In two of the most noteworthy actions brought thus far, insider trading has figured prominently in the charges. In June 2008, Bear Stearns Hedge Fund Managers Ralph Cioffi and Matthew Tannin were indicted for conspiracy, securities fraud and wire fraud. Cioffi was also charged with insider trading, which according to the author was key to the case. In the second action, the attorney general of New York filed a fraud complaint against UBS. The company settled and agreed to pay $150 million in fines and to purchase or provide liquidity for $22.1 billion of auction rate securities. Insider trading charges against a former legal officer were at the heart of that case.
The author cautions that in this environment it is advisable for executives to exercise even greater care than usual when deciding whether or not to pursue a transaction in company stock. and head off future problems.”
