Himes bill aims at legal definition of ‘insider trading’ to protect prosecutions – CTPost

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WASHINGTON – As part of the Wall Street family, Connecticut’s burgeoning financial services industry has gone through its share of nail-biting over insider trading _ a crime whose parameters are defined more in court decisions than actual law.

But now, Rep. Jim Himes, himself a veteran of 12 years at Goldman Sachs, is seeking to change all that.

His “Insider Trading Protection Act” is an effort to clear up the ambiguity over when a “tipper” (a person with inside business information) and a “tippee” (the person receiving and acting on it) cross the line from workaday banter to a criminal conspiracy.

“It is unfair to Americans and harmful to the markets when individuals trade on material, non-public information,” Himes said. “But, inexplicably, to this point there has not been legislation codifying the law in this area.”

Himes is a member of the House Financial Services Committee, which last week voted to approve the bill and send it to the House floor. It won the support of key Republicans on the committee, many of whom have sided with Wall Street in efforts to water down or even overturn the Dodd-Frank law of 2010 _ which sought to rein in the financial world after the Great Recession of 2007-2008. Himes is among the law’s architects.

“We all agree there’s no place for insider trading,” said the committee’s senior Republican, Rep. Patrick McHenry, R-N.C.

Insider trading exploded in the 1980s, when Wall Street titans like Michael Milken and Ivan Boesky went to jail for eye-popping returns gained through buying and selling based on non-public tips.

It was a practice the financial services world deplored publicly. But privately, it seemed almost as if it couldn’t get enough of it

“It’s a conquest,” said Danielle Chiesi, a former beauty queen who prided herself in wheedling information out of business-world contacts. “It’s mentally fabulous for me.” Chiesi had unwittingly been recorded by federal investigators, and ultimately was sentenced to 30 months in prison in 2011.

Connecticut’s prime case of insider trading involved Steven Cohen of Greenwich and his Stamford-based SAC Capital Advisors. Federal investigators never charged Cohen with a crime, but SAC paid a $1.8 billion fine and ceased to exist in 2016. Cohen settled civil charges with the Securities and Exchange Commission, withdrawing from management of other people’s money until 2018.

The Connecticut Hedge Fund Association, with 3,000 members, says the state is home to

over 400 private investment funds that manage over $750 billion in assets. It is the third largest domicile for hedge funds globally, and ranks No. 2 in the world for funds managing $1 billion or more.

“I don’t have any specific objections to the bill,” said Bruce McGuire, founder and president of the association. “The Hedge Fund industry, like many other industries, has a small minority of bad actors that knowingly break the law.”

Nevertheless, McGuire said, “we do wish that Mr. Himes would take more time to truly understand our industry.” Notwithstanding Himes’ years at Goldman Sachs, the lawmaker in his fifth term representing most of Fairfield County “could do a better job of educating his constituents as to the value that this vibrant sector of the financial services industry,” McGuire said.

The U.S. attorney’s office in Manhattan has long been Ground Zero for energetic prosecutions of inside traders, with the city’s tabloids scooping up details of the rich getting richer through tips that led to timely investments or sales that netted millions.

The pace picked up under Preet Bharara, who was U.S. attorney under President Obama from 2009 to 2017. He rang up 80 convictions but suffered what seemed at the time to be a disastrous courtroom defeat in 2014.

The Manhattan-based U.S. Court of Appeals for the Second Circuit ruled that showing simple quid pro quo is not enough. Prosecutors have to prove that the tipper _ the person passing along the inside information _ expected to receive a reward “of some consequence” _ and that the tippee was aware of it.

A Supreme Court decision in 2016 and a subsequent Second Circuit ruling in 2017 cast doubt on the Second Circuit’s 2014 ruling.

The 2017 case involved a SAC Capital Partners trader, Mathew Martoma, who learned that tests of a promising drug for treating Alzheimer’s Disease were not successful. SAC Capital traded on the information and reaped a $250 million benefit.

But these cases did little to change the need for prosecutors to meet the higher standard of proof outlined in the 2014 case.

Enter Himes and his “Insider Trading Protection Act.”

If signed into law, the act would redefine the prosecutorial standard for insider trading cases. Prosecutors would not have to prove that those trading on information have to know exactly what kind of benefit the tipper received. Instead prosecutors would have a lighter burden of showing that “the tippee was aware, or recklessly disregarded, that the information was wrongfully obtained or communicated.”

The act stresses inside information passed along in a “wrongful” manner. It defines “wrongful” as information obtained through “theft, bribery, misrepresentation or espionage, a violation of any federal law protecting computer data …or a breach of any fiduciary duty or any other personal or other relationship of trust and confidence.”

With bipartisan support, Himes said he believes his measure stands a good chance of becoming law. And the lack of tangible opposition also helps.

“There’s not much of a pro-insider-trading caucus,” Himes said.