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10 Unbelievable Cases of Insider Trading

·15 min read

The investing public watched in amazement as the stock price of Kodak — the once-giant film manufacturer that saw most of its business vanish in a flash with the advent of the digital camera — spiked drastically. The price soared after news on July 28 of a $765 million loan from the government to help Kodak transition to manufacturing ingredients for pharmaceuticals. The day before, the stock closed at less than $3 per share; a few days later it was trading as high as $60 a share, The Wall Street Journal reported.

However, the good feelings and higher prices were short-lived after President Donald Trump, when asked, said the government would look into reports that the company’s executive chairman and others were granted stock options the day before the announcement of the loan, setting up a potential windfall. Kodak announced Sept. 2 on its website that its loan application to fund Kodak Pharmaceuticals was “currently on hold.” The Securities and Exchange Commission didn’t comment immediately, but the SEC would be the body charged with investigating whether insider trading took place within the walls of the Kodak offices in Rochester, New York. The company has denied any wrongdoing.

But accusing someone of insider trading can get a bit murky. After all, stock trading is all about knowing something that everyone else doesn’t. If you make a mint with timely trades because you’re just that good at analyzing a balance sheet or doing on-the-ground research, you’re a great investor. But, if you’re getting the occasional hot tip from company executives during your weekly round of golf, you could wind up in jail.

So what are some of the most notable examples of when people traded on information that the general public didn’t have? Here’s a look at 10 memorable examples of insider trading, some of which led to corporate downfalls.

Last updated: Sept. 4, 2020

1. Jeffrey Skilling

Of the many crimes Jeffrey Skilling was convicted of during his time as the chief financial officer of Enron, insider trading was the most egregious. That came when he duped the investing public by hiding the company’s serious financial troubles. The insider trading kicked in when he began dumping his stock. As the CFO and one of the architects of the scheme, Skilling knew the company was a paper tiger but investors didn’t. In 2006, a federal jury found Skilling guilty of 19 charges, including one count of insider trading.

Why It Matters

Jeffrey Skilling pulled something of an Al Capone on this one. In much the same way that you still owe taxes on your income even if that income was derived from illegal bootlegging and organized crime, it’s insider trading if the piece of non-public information you’re trading on is that you’re a prominent executive within the company and you’re cooking the books. Had Skilling admitted to the investing public that he was actively defrauding them, he would have been guilty of all the other crimes — but the insider trading charge wouldn’t have stuck.

2. Ivan Boesky/Michael Milken

Michael Milken was known as the “junk bond king” for his role in pioneering the industry for high-yield corporate bonds, which investors used to orchestrate leveraged buyouts or mergers and acquisitions of companies in the 1980s. However, he ran into trouble when it was revealed that he was passing along tips to successful stock picker Ivan Boesky.

Boesky was an investment banker in the arbitrage business, where gold, a security or commodity is bought in one market and traded immediately in another, seeking a gain off a short-term holding. In this case, Boesky made a fortune trading the stocks of corporations that were involved in mergers — tipped off by Milken. Boesky entered a guilty plea to one count of manipulating securities, a felony, and agreed to help the SEC in its investigation, which eventually ensnared Milken.

Why It Matters

One area of investing that’s ripe for exploitation by insider tips is mergers and acquisitions. If a publicly traded company is on the verge of being acquired, the people — or company — doing the buying usually have to offer an amount that represents a pretty significant premium on the current share price to convince the shareholders to sell. So, if you know a company is being targeted for a buyout or merger before it is announced, it’s very easy to make a quick profit by buying just before the news is released and selling just after it is.

If you’re successful in the market by doing your research and making good, educated guesses about which assets are viable targets for acquisition, there’s nothing illegal about that. Until 1986, that’s what everyone assumed Ivan Boesky was doing. But, if you have a buddy who’s actually putting together these deals and then passing along tips about them, that’s insider trading. Boesky and Michael Milken both served time in prison, and Milken has dedicated his life to philanthropy since his release.

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3. R. Foster Winans

R. Foster Winans was a columnist for The Wall Street Journal with a weekly piece called “Heard on the Street.” And while he was ostensibly an outsider, the connections between the financial media in New York and the traders they share their city with are hard to avoid completely. Winans ultimately got caught up in a scheme to share tips with a stockbroker about what would be in his upcoming column. The broker knew he could trade on information prior to everyone in America reading and talking about it, and he gave Winans a cut of the profits. The scheme ultimately was exposed, and Winans — whose cut was about $30,000 — became a clear example of how financial journalism can lend itself to some pretty murky ethics.

Why It Matters

This was an interesting legal case as the “inside” information wasn’t “inside” to the company. Winans didn’t have any real inside knowledge of the companies in question, so it’s not as though he knew a drug wasn’t going to pass muster with the U.S. Food and Drug Administration or that an earnings report was going to be much better than expected.

But it was still insider trading because of the decision to share non-public information. A stock appearing in the pages of a major publication could have a real impact on its price, so knowing ahead of time what companies would be mentioned in Winans’ column still represented an illegal advantage over the rest of the trading public. That said, the case went to the U.S. Supreme Court and continues to be an important one in defining what insider trading really is in a legal sense.

4. Goldman Sachs/BusinessWeek

The case of Eugene Plotkin and David Pajcin is one that seemingly mimics the illegal efforts of others convicted of insider trading. They were engaged in several different cases of insider trading, the most prominent of which probably will sound familiar.

Plotkin was a Goldman Sachs research analyst and Pajcin was a former employee of the investment banking firm. Together, they recruited an employee at Merrill Lynch to tip them to major mergers that investment bank was working on — the most prominent of which was the deal to join Reebok and Adidas. Plotkin and Pajcin turned to buying shares of companies about to get acquired and selling for a quick profit after the news broke — à la Ivan Boesky.

In another one of their maneuvers — this one reminiscent of R. Foster Winansan — they paid someone to get a job at one of BusinessWeek’s printing plants and steal a copy of the magazine before it hit the newsstands.

Why It Matters

Wall Street involves a lot of relationships, frequently involving numerous people who know each other socially but probably can’t discuss their work with each other legally. The fact that people working within major investment banks that handle volumes of protected information also were engaging in these sorts of crimes should raise some serious questions about how effective the current regulatory regime overseeing financial markets really is.

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5. James McDermott Jr.

James McDermott Jr. seemed to be living the high life, earning $4 million a year as chairman and CEO of Wall Street investment bank Keefe, Bruyette & Woods during the day and returning home each evening to his wife and two children. However, McDermott’s buttoned-down banker image masked reality. In 1999, he was arrested, accused of passing along tips on five pending bank mergers — to his mistress — an adult-film actress from Canada. Kathryn Gannon, also known as Marilyn Star, ended up pulling in $80,000 by trading on her advanced knowledge, which in turn led to McDermott’s arrest. He ultimately pleaded guilty to a count of insider trading and spent five months behind bars.

Pictured: Kathryn Gannon

Why It Matters

James McDermott noted that issues with alcohol and depression, as well as family problems, played a role in his poor decision making and led to the loss of his job and prison time. His case showed that suspicious stock trades by your inner circle — including a mistress — are likely to be flagged.


6. Martha Stewart

Martha Stewart amassed her fortune through the sale of products for the home bearing her name, as well as by giving tips for gracious living via her magazine, books and television appearances. But it was a tip that Stewart received that landed her in trouble. In June 2003, the SEC filed securities fraud charges against Stewart and her one-time stockbroker, Peter Bacanovic, that alleged Bacanovic had given her an illegal tip 18 months earlier regarding stock she owned in a biopharmaceutical company called ImClone Systems, Inc.

Bacanovic had let Stewart know that some of his other major clients, including ImClone’s CEO and his daughter, were dumping their shares in advance of bad news from the FDA. Stewart, too, offloaded her stock to avoid a major loss, and she ultimately was convicted of felony charges of conspiracy, making false statements as part of a federal investigation and obstruction. She served five months in a federal facility.


Why It Matters

Biotech is one of the most tailor-made industries for insider trading. For many smaller firms, their only real hope of making even a dollar requires that one of the treatments they’re working on gets FDA approval. As such, when there’s news about the results of clinical trials, it’s usually going to produce a major change for the stock — up or down. If you find out what’s going on even an hour before the general public, you can make a mint.

Stewart eventually resumed her public life but insisted that her experience behind bars had taught her not to accept any suspiciously good stock tips

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7. Raj Rajaratnam

On its face, the story of Raj Rajaratnam’s rise to billionaire status is a pretty marvelous immigrant success story. He grew up in Sri Lanka and moved to the United States in 1981 to study for his MBA. Two years later, after earning his degree, he got a job as a lending officer working with tech companies at Chase Manhattan Bank. By 1991, he was president of investment bank Needham & Company, where he started a hedge fund for investors. He left the firm in 1997, and with investors, bought the hedge fund that he renamed the Galleon Group. Galleon reached $7 billion in assets and Rajartnam himself achieved billionaire status.

However, Rajaratnam lacked some business ethics in his rise to the top. He was convicted of 14 charges, including nine for securities fraud, and sentenced to 11 years in prison in 2011.


Why It Matters

The Rajaratnam case is most prominent for the way federal investigators proved his crimes. For the first time, investigators used wiretaps to try to catch an insider trading suspect, and he was caught on tape repeatedly discussing insider information with friends and colleagues. The case represented a major step forward in enforcing insider trading laws. Wiretaps previously had been used for evidence against organized crime figures or drug dealers, and using the tool for insider trading was a sign that regulators were taking steps to get serious about the issue.

8. Steven A. Cohen

Steven A. Cohen is a Wall Street legend, having built a wildly successful hedge fund — SAC Capital Advisors — named by following his initials. However, as the organization grew and its success soared, keeping everything above board was lost along the way. A massive insider trading case brought by the SEC revealed that some people working for SAC Capital routinely skirted the rules surrounding non-public information and allowed them to bag big profits in the process.

Specifically, the case that really ended up getting SAC in trouble involved a pair of employees who made enormous illegal profits by using leaked knowledge about clinical trials. Cohen ultimately avoided jail time and more severe penalties based on the conclusion that he had failed to conduct appropriate supervision rather than encourage the practice, but the case resulted in nearly $2 billion in fines in 2013 and a two-year ban from managing outside money for Cohen.

Why It Matters

Hedge funds can be difficult for outsiders to understand. In short, they’re like mutual funds set up exclusively for rich people. They use a much wider range of strategies and trade in many more asset types, ultimately taking bigger risks to win bigger rewards. And while many would note that the returns after the hefty fees usually don’t beat that of a good, old-fashioned index fund, hedge funds remain a haven for the rich and influential — and their money. The overwhelming majority of them are well run by honest people with the client’s best interest in mind. A few of the leaders have other ideas.

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9. Scott London/Bryan Shaw

Scott London was a successful executive who was a partner at KPMG, one of the “big four” accounting firms handling major corporate accounts. London, though, had a friend and golfing buddy named Bryan Shaw who operated a struggling jewelry business in Southern California. Seeing a chance to do a favor for his friend — and assuming that the amount of illegal profit would be relatively limited — London started passing along tips his pal could use to make some extra money.

But, no matter how it started, it wound up as a slippery slope. London claimed he had no idea just how much Shaw was making off the deals — $1.27 million was the final tally — but he also accepted cash and expensive gifts from Shaw. In the end, London was convicted in 2013 and eventually sentenced to 14 months behind bars for insider trading. Shaw received a lesser five-month sentence after agreeing to cooperate with authorities.

Why It Matters

The way that non-public information can spread demonstrates just how a person who has it must handle it. While London’s culpability is clear, it’s not uncommon for a careless anecdote on the golf course or a laptop left open at a coffee shop to leave a person exposed. But perhaps more notable is the way this case highlights why laws against insider trading are so important. On the surface, London’s desire to bend the rules a little to help a friend doesn’t seem so bad. However, the simple fact is that Shaw’s gains resulted in losses for others. Helping his friend this one time likely hurt other investors who expected a fair shake from public markets. So while London might have been duped by Shaw, it’s important to keep his actions in the context of trying to establish fair play for everyone involved in the market.

10. Phil Mickelson

Phil Mickelson made his reputation on the golf course, but his name also popped up in an insider trading case — one that immediately landed among the most famous due to his involvement. Mickelson had a friend and golfing companion, Billy Walters, who was something of a legend in his own right for partnering on a computerized betting system that made him a fortune.

However, Walters ultimately wound up in hot water over his relationship with Tom Davis, a board member with Dean Foods. Walters had offered up financial support to Davis in the past, and it apparently led to an arrangement where Davis routinely would pass along insider info in time for Walters to profit on the trading of Dean Foods stock. Walters was also a friend of Mickelson, who shared his love of gambling, and apparently passed along those tips. Mickelson avoided prosecution because no one could prove he knew the source of Walters’ tips. In 2017, Walters ultimately was fined $10 million and sentenced to five years in prison.

Why It Matters

It’s something of a cliché to say that a lot of business happens on the golf course, but whether you’re on the greens or grabbing drinks, informal networks have a way of propagating these sorts of crimes. And they are hard to prosecute. Unless the feds happened to be bugging Mickelson at the time, there’s really no way of knowing whether Walters made it clear to Mickelson what was happening or if he just offered some stock tips that seemed innocent. While it’s not possible to police friendship, it is important to note that those sorts of relationships are often the ones that insider trader schemes rely on.

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This article originally appeared on GOBankingRates.com: 10 Unbelievable Cases of Insider Trading