New study confirms rampant corruption which puts Main Street at a disadvantage.
By Deepak Chitnis
WASHINGTON, DC: A newly released report seems to confirm a fear that those on Wall Street and in the American business sphere have held for years now: insider trading is not an uncommon practice, and happens far more often than the media reports and the general public knows.
The report was conducted by two professors from New York University’s Stern School of Business, and one professor from McGill University in Montreal: Menachem Brenner and Marti G. Subrahmanyam from the former, and Patrick Augustin from the latter. Together, the three men spent the last two years analyzing public transactions, acquisitions, and sales between 1996 and 2012 – what they found was alarming, to say the least.
According to their findings, at least 25% of all deals between public companies involve some sort of insider trading. That means that one out of every four public company dealings involves someone telling someone else about it ahead of time, which is a clear violation of the law. The professors were able to determine this by analyzing the 30 days prior to each transaction, and looked at whether any unusual behavior – purchasing or unloading of a certain stock, for instance – was noted anywhere.
Their findings indicate that the problem of insider trading is more pervasive than anyone initially thought, and there’s a very good chance that there’s other insider trading that takes place which the study was unable to find out about.
Furthermore, the professors behind the study allege that the problem may be so widespread that law enforcement is simply unable to keep up with it, and therefore only chooses to pursue the cases it knows are either too big to ignore, or involve individuals that they know will grab headlines and get them good press.
Despite repeated promises by the US Department of Justice and the Securities and Exchange Commission (SEC) to prosecute insider trading as much as they can, less than 5% of the 1,859 instances analyzed in the study’s sample size were ever pursued by the criminal justice system. On top of that, the study found that the SEC takes an average of 756 days to publicly announce any kind of investigation or legal action into a case – that’s more than two years.
On average, the report finds that each of these “rogue trades” is worth somewhere in the neighborhood of $1.6 million of profit to the person who makes the illegal transaction.
The report is significant to the Indian American community because of the fact that several high-profile desis on Wall Street have found themselves in the crosshairs of the SEC and Justice Department. Most famously, hedge fund honchos Raj Rajaratnam and Rajat Gupta have landed jail terms and huge fines for their insider trading convictions, the latter of whom just started his sentence today.
And at the helm of the efforts to curtail insider trading in New York’s leading financial district is the Sheriff of Wall Street himself: Preet Bharara, who has never shied away from letting people know that he has put more people in jail for insider trading and will not tolerate criminality in the banking industry.
The study’s co-author, Subrahmanyam, is the Charles E. Merrill Professor of Economics and Finance at NYU’s Stern School of Business. He holds a B.Tech in Mechanical Engineering from IIT Madras, a post-graduate diploma in Business Administration, Finance and Accounting from the Indian Institute of Management, and a Ph.D. in Finance and Economics from MIT. He has been affiliated with NYU since 1974.