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Insider Trading Gets More Sophisticated, So Regulators Must Follow Suit, Panel Says

Friday, January 17, 2014
Jan. 15 --As insider trading techniques become more complex, enforcement officials have to step up their game with better surveillance and analysis to detect and punish it, a panel said Jan. 14 at a D.C. bar gathering.

The “new frontier of insider trading” involves non-equity based securities, Daniel M. Hawke, chief of the market abuse unit in the Securities and Exchange Commission's enforcement division, said.

Real-time electronic surveillance has improved the effectiveness of federal investigations into insider trading, he said.

Also on the panel were Samuel J. Draddy, head of the Financial Industry Regulatory Authority's insider trading surveillance unit, Larry P. Ellsworth, a partner at Jenner & Block LLP in Washington, Russell G. Ryan, a partner at King & Spalding LLP in Washington, and Donald C. Langevoort, a professor at Georgetown University Law Center.

'Cat and Mouse Game.'
The method used to prosecute cases “has to become more sophisticated as well,” Hawke said. It's “a cat and mouse game.”

Developments in real-time surveillance allow the agency to investigate cases without “surfacing” to the people being investigated. “The first time they learn there is an investigation is when agents are taking them into custody,” Hawke said.

Draddy said that FINRA also uses “highly sophisticated electronic surveillance system that tracks the markets” and sends the agency alerts on potential insider trading.

From there, regulators will “triage” the cases, he said, and many get forwarded to the SEC for further investigation.

Big data
More data than ever are available to regulators via surveillance and the SEC's challenge has not been collecting data, but developing the capability to analyze it, Hawke said, adding that his unit at the SEC was created to handle just that.

Electronic means can “slice and dice” trading data and parse it, but ultimately human analysis is required to determine whether conduct is suspicious, Draddy said.

The broader data collection allows regulators to look at how particular traders have acted over time, Hawke said, rather than merely looking at individual transactions.

Litigation
The panel also addressed the SEC's track record in litigating insider trading cases. Hawke estimated the success rate of such cases as “50-50,” because of the circumstantial nature of many “close call cases” that get brought.

“In those close call cases,” he said, “our willingness to lose says much more about us than how many cases we win.”

It's “not a record I'm ashamed of,” he added.

To contact the reporter on this story: Rob Tricchinelli in Washington at rtricchinelli@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

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