The sudden rise in insider trading cases brought by the SEC prompted the Law Blog to catch up with Harvey Pitt, a former top cop at the SEC. Pitt was chairman of the SEC from 2001 to 2003. Prior to that, he spent almost 25 years at Fried Frank. Before entering private practice, Pitt spent 10 years at the SEC, including three years as general counsel. Pitt is now CEO of Kalorama Partners, a business consulting firm.
Law Blog: Why do you think there has been a sudden increase in insider trading cases?
Pitt: I think there are several reasons: There are just a lot more M&A transactions. . . . Information technology has made it seem easier to some people who are inclined to cut corners to think they won’t get caught. The M&A business is a young person’s business. A lot of the people working there today weren’t around there in the ’80s and ’90s, so they may need to be re-awakened to the issue. . . . Lastly, we have an inflated market. As stock prices range as they can stocks become an unbelievable currency.
Has the SEC stepped up enforcement of insider trading or are the current run of cases a coincidence?
I think the SEC has stepped it up. Look at the Dow Jones case. You will see how quickly the SEC moved. That is a phenomenal achievement. In the old days, it took a while to figure out who knew what, when and where. I would say enforcement is alive and well.
Wasn’t insider trading a priority when you were in charge?
It’s always been a priority. In Brooklyn, where I grew up, we had a word for it: cheating. And fraud. I think it was a concern. But the commission and chairman [Christopher] Cox have rededicated themselves to going after insider trading.
Some argue that with so much information available it is harder to determine who is an insider. Should the rules be changed?
There’s always a possibility you can improve on the regulations. But in my view the law is pretty clear.
Several cases have been traced to traders overseas. Is that a coincidence or is something else at play?
One of the things I learned as a regulator is that coincidences are few and far between. My view is that this [is] a reflection of people who have lost sight of what they should be doing. In the old days, information traveled by telephone but now with email and instant messaging people are talking more all over.
Are the banks doing enough on their end to deter insider trading?
I think in light of all that has happened it may prompt them to revisit [the issues]. I think companies should review their policies yearly. I worry that a certain degree of complacency sets in.
Can you walk us through how the SEC builds a typical insider trading case?
Sure. First they do a retroactive look at trading from the time of a major corporate announcement. When they see spikes in trading they will demand records from the firms that executed the trades. Then they will try to learn the identification of the people who executed the trades. Then they will seek from the companies a chronology of when the discussions occurred and who knew what and when. Then they will see if any of the people with knowledge had any connection with the people who executed the trades. Then they will subpoena the people to talk about their trades. It can be intricate work but technology is helping. At the same time, technology is helping the people who are hell-bent on covering their tracks.
What’s different from the insider trading cases of today compared with the Ivan Boesky and Michael Milken cases of the 1980s?
Today, people are far more sensitive to covering their tracks than in times gone by. But it still remains plain vanilla fraud. The only thing that changes is who is doing it, what tools do they have at their disposal and how good are they at covering their tracks. But I do believe they will get caught.
Thanks. Do you miss being at the SEC?
I enjoyed my time at the SEC but it’s a bit like beating your head against the wall. It feels phenomenal when you stop.