Insider trading and regulatory reform – US and EU compared

Posted on June 13th 2011, by Max Cawdron

As discussed in previous contributions to “The Discreet Science”, as part of the ongoing shake-up of financial regulation there has been increased attention given to the fight against financial crime, and insider trading in particular. It is interesting to compare the different approaches by the relevant authorities in the US, UK and Spain.

In the UK, efforts at reform and enforcement have been distracted by political wrangling surrounding the seemingly never-ending changes to the multiple agencies responsible for fighting financial crime (a veritable morass of acronyms, SOCA, FSA, SFO, and the City of London Police). Last week it was announced that SOCA (Serious and Organized Crime Agency) would effectively be replaced by the NCA (National Crime Agency), while the SFO (Serious Fraud Office) has survived. Whether this is a stay of execution or a new lease of life remains to be seen.

A feature of the SFO is its ability to both investigate and prosecute. Whatever the future brings, this ability to quickly transform an investigation into a prosecution is key to providing a rapid and effective response to fast evolving and sophisticated crimes.

In the US, greater institutional clarity has allowed the SEC (Securities & Exchange Commission) to forge ahead with some recent successful insider trading investigations. The highest profile case has been the much discussed prosecution and conviction in May 2011 of Raj Rajaratnam, former head of the Galleon Group hedge fund.

Recent SEC activity has not been limited to such high-profile cases, with a number of actions against illegal trading on a smaller scale. There have been more than 40 individuals prosecuted in the recent wave of insider trading cases, and not limited to US soil. Last year the SEC investigated and prosecuted two Spanish residents in Madrid who had made suspect trades in a five-day period in August 2010. It took the SEC just three days to file a formal complaint against the two traders, and only a further 8 months for one of the accused to make a settlement payment to the SEC of over 500,000 Euros.

This compares with the somewhat tardy responses to similar issues affecting the Spanish securities market. It took over five years for accusations of insider trading in Metrovacesa shares in 2005 to be converted into sentences and fines. In a separate case, Enrique Bañuelos, then president of Astroc (subsequently re-named Afirma), was accused of having illegally traded in the real estate company’s shares in 2006. Five years went by before the case was eventually shelved by Spain’s highest criminal court, the Audiencia Nacional.

There are compelling arguments, therefore, for broadening the scope and responsibilities of the relatively toothless Spanish financial regulator, the CNMV (Comisión Nacional del Mercado de Valores), to relieve pressure on the state prosecutor’s anti corruption unit (Fiscalía anticorrupción) whose resources are already heavily stretched by its efforts to combat corruption in local and regional government.

However, there are few signs of any forthcoming changes in the CNMV’s remit from that of supervision, monitoring and detection, to a more active role in investigating and prosecuting insider trading.

In any case, companies and executives in Spain’s financial sector, especially those with close links to the US and UK markets, can expect to face increasing regulatory scrutiny from agencies in these countries, and will need to be more aware and proactive in addressing the potential damage that a rogue trader can do to their organization’s reputation and operations.