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I joined the Enforcement Division of the U.S. Securities and Exchange Commission (SEC) during the days of Ivan Boesky, Michael Milken, and Dennis Levine.  Insider trading was rampant.  Michael Douglas was only a couple years off his Academy Award winning performance as Gordon Gekko in Wall Street.  Boskey, Milken, and Levine all spent time in federal prison.  But the SEC has found recently that some have forgotten the lessons of the eighties.Yesterday, the SEC filed insider trading charges against nine defendants in connection with an insider trading ring that, while not worthy of the exploits of Boskey, Milken, and Levine, comes close.  The SEC’s litigation release reads, in part:

The Securities and Exchange Commission today announced insider trading charges against nine defendants in a case involving serial insider trading by a ring of Wall Street traders and hedge funds who made over $20 million trading ahead of corporate acquisition announcements using inside information tipped by an attorney at the international law firm of Ropes & Gray LLP, in exchange for kickbacks. The SEC alleges that Arthur J. Cutillo, an attorney in the New York office of Ropes & Gray, misappropriated from his law firm material, nonpublic information concerning at least four corporate acquisitions or bids involving Ropes & Gray clients — the 2007 acquisitions of Alliance Data Systems Corp. (“ADS”), Avaya Inc. (“Avaya”), 3Com Corp. (“3Com”), and Axcan Pharma Inc. (“Axcan”).The complaint alleges that Cutillo, through his friend and fellow attorney Jason Goldfarb, tipped inside information concerning these acquisitions to Zvi Goffer, a proprietary trader at the broker-dealer Schottenfeld Group, LLC (“Schottenfeld”). The complaint further alleges that Zvi traded on this information for Schottenfeld, and had numerous downstream tippees who also traded on the information, including other professional traders and portfolio managers at two hedge fund advisers.

Take a look at the entire litigation release.  It gives more information about each of the nine defendants, all of whom either worked in the securities industry or were licensed attorneys.  If the SEC proves its allegations, the defendants will have to pay what we have described as a “stupidity tax,” the civil penalties (as much as three times the profits made or losses avoided) that come along with being found guilty of insider trading.  ”Stupidity tax” is an accurate description because the SEC always catches insider traders.  The SEC has resources and investigative techniques in such cases that you cannot imagine.  The harder you try to get away with it, the easier it is for the SEC to prove its case.Of course, beyond the stupidity tax, insider traders often earn time in the Gray Bar Hotel.  These nine defendants may learn soon how much time they will be spending there.  The U.S. Attorney’s Office for the Southern District of New York has filed criminal charges against each of them.