New Haven Independent: Insider Trading Cases Easier to Prosecute

The government will always prioritize going after insider traders over subprime mortgage lenders. Even if the latter precipitate a nationwide financial crisis.Why? Because one kind of case is sexy to prosecute. And the other is difficult.

Law professor and New York Times columnist Peter Henning offered that insider insight on the most recent episode of WNHH’s “Criminal Justice Insider with Babz Rawls-Ivy and Jeff Grant.”

Henning teaches courses on white collar crime, corporations, and legal ethics at at Wayne State University Law School in Michigan. He also writes a regular column for the New York Times called White Collar Watch, in which he discusses the latest in nonviolent, financially-motivated legal misconduct.

He was asked to reflect on why only one U.S. banker to date has gone to jail for participating in the subprime mortgage lending and securitization that led to the 2008 worldwide recession. Henning said the answer is relatively simple: prosecuting those kinds of cases is really, really difficult.

“Essentially you’ve got to dig through hundreds, maybe thousands of loans,” he said about the work required of Securities and Exchange Commission (SEC) and Federal Bureau of Investigation (FBI) officials in going after subprime lenders.

On the other hand, he said, he thinks of insider trader cases, where financial players trade on the stock exchange using confidential information, as “the low-hanging fruit of the securities world.”

“They’re fun cases,” he said, “they’re not very difficult.” And, most importantly, “they make headlines.

“Insider trading is, if you will, sexy.”

A four-year investigation of a mid- or upper-level banker will draw a shrug from most media outlets and members of the public, he observed. Arresting billionaire hedge fund managers like Raj Rajaratnam and tax-scheming celebrities like Martha Stewart will land a story on the front page of The New York Times or Washington Post.

Furthermore, he said, the federal Internal Revenue Service (IRS) deliberately pursues wealthy, well-known individuals for alleged financial misdeeds as a strategy for discouraging financial crimes among the broader public.

“Their view is that you get deterrence through publicity,” he said.

After working for the SEC during the late 1980s and the FBI in the early 1990s before joining Wayne State’s faculty in 1994, Henning knows well that the government will always have a more difficult time securing convictions of the heads of banks rather than overworked middle managers. That’s because the former often insulate themselves from the day-to-day fraud that employees at their institutions permit often because of intense corporate pressure rather than direct orders from above.

He drew a parallel to the special counsel Robert Mueller’s early pursuit of relatively low-level Donald Trump associates like George Papadopoulos and Paul Manafort in his office’s investigation into whether or not the Trump presidential campaign colluded with Russia during the 2016 election. The goal in both investigatory scenarios, he said, is to put pressure on low-level players to reveal information about crimes committed by those higher up the food chain.

“Getting to the CEO is very difficult,” he said. “Getting to Donald Trump is very difficult. Because those top level people don’t get their hands dirty.”

That leaves prosecutors with the onerous, and often subjective, task of getting inside the mind of someone who may have intended to break the law even if there is no direct evidence tying the illegal doings of underlings to explicit orders from the top.

“These cases are really about intent and knowledge and involvement,” he said.

“Criminal Justice Insider” is sponsored by The Community Foundation for Greater New Haven.

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