These 10 biggest insider trading scandals ever to rock companies on Wall Street are among the most responsible culprits for lack of public trust in the stock markets. Despite being the main facilitator in creating the strongest economy the world has ever seen, the New York Stock Exchange (NYSE) is today one of the most hated institutions in America.
Considering that the US Congress is also competing, and very successfully we might add, for that title, it is a very impressive (or rather dubious) accomplishment. Most of the hate Wall Street and its brethren in other financial institutions receive today is due to the 2008 financial collapse and subsequent crisis. But part of it, and often the most despised part, is insider trading.
These are trades executed by people that use privileged information, accessible only within company’s inner circles, to gain fortunes, often at the expense of small shareholders. This is the most frowned-upon action among the regulatory bodies that oversee Wall Street, and yet is so easily committed. All it takes is a careless (or well-timed) whisper and information is ready to be acted upon, for illicit gain. While you’d be hard-pressed to find anyone convicted for the 2008 meltdown, there are plenty of people doing time for insider trading, as the SEC usually goes full monty when these cases are discovered. All 10 of the biggest insider trading scandals ever to rock companies ended with the people responsible serving prison sentences.
Luis Louro / shutterstock.com
Sometimes the punishment doesn’t appear to fit the crime, like in the case of Australian investor and stockbroker Rene Rivkin. In 2001, Mr. Rivkin received insider information about the merger of Qantas and Impulse Airlines. He immediately purchased 50,000 shares of Qantas, hoping to make a killing once the merger went public. Unfortunately for him, his actions were discovered and he was sentenced to prison in 2003. To add insult to injury, the shares he bought only netted him $2,660. The combined shame of conviction over such a bad deal drove him to suicide (not that we feel sorry for him).
The insider trading scandals on our list of biggest insider trading scandals ever to rock companies were far more profitable for their perpetrators, earning them millions, like one of the most recent ones involving former Dean Foods Co (NYSE:DF) Chairman Thomas Davis. In the process, they rocked the companies involved to such a degree that some of them never recovered. On the following pages you will find the biggest insider trading scandals both in terms of the money involved and the publicity that they received.
10. Martha Stewart / ImClone Scandal
We are continuing our list of biggest insider trading scandals ever to rock companies with the scandal number 10 — when ImClone CEO Samuel D. Waksal learned that his company wouldn’t be getting FDA approval for its new cancer drug Erbitux, he saw the writing on the wall. His immediate reaction was to sell his ImClone shares, advising his friends and family to do the same, which they did just before the news was published and the company’s stock plummeted. The news of the impending catastrophe reached Merrill Lynch broker Peter Bacanovic, who, among others, managed Martha Stewart’s account. He tipped her off and she sold $230,000 worth of ImClone shares the day before the FDA announced its ruling. Waksal was sentenced to more than seven years in prison. Martha fared better, serving only five months of prison time, along with another five months of home confinement.
9. George Soros
It seems that even the greatest can’t resist the lure of easy money obtained through insider trading. George Soros of Soros Fund Management, often described as one of the greatest investment gurus of our time, learned the hard way just how strict French laws against insider trading are. In 1988, Soros obtained a large quantity of Société Générale bank shares, acting on information received from Georges Pébereau that a large group of investors was preparing an ambitious takeover of the company. The plan failed and Soros was not charged with any crime at the time, but years later, the investigation was reopened and he was found guilty of insider trading and ordered to pay a fine of €940,000 ($1.02 million). His appeal to the European Court of Human Rights failed, as judges ruled against his appeal in a 4:3 decision.
8. Ivan Boesky
Ivan Boesky, he of the now infamous “Greed is healthy” quote, was at one time one of the most respected (and richest) stock market players in America. Unfortunately, his success was based on purchasing insider information that allowed him to make a killing. He was eventually caught and sentenced to three years in Lompoc on several accounts of insider trading and ordered to pay a $100 million fine. The reason his sentence was so light is the fact that he collaborated with the investigators and provided information that led to several other convictions of his former associates. He is currently living on alimony paid to him by his ex-wife.
7. Enron
The Enron scandal was at the time the biggest corporate bankruptcy in the history of the United States and its collapse sent shockwaves throughout the American economy. Mainly, it was an accounting fraud, but several of Enron’s high ranking officials were sentenced for insider trading as well. Both Kenneth Lay and Jeffrey Skilling, as well as several others, sold large quantities of Enron’s shares just before their value hit rock bottom. Other shareholders, without access to insider information, lost about $74 billion when the value of their shares evaporated.
6. Galleon Group Scandal
In 2009 Galleon Group was one of the biggest hedge funds in the world, with over $7 billion in assets under management. Then it all came crashing down, when its founder and CEO Raj Rajaratnam was arrested on insider trading charges. He was accused, together with two of his friends from McKinsey & Company, Anil Kumar and Rajat Gupta, in one of the biggest insider trading scandals ever to rock companies. The total value of their illicit profits was estimated to be over $60 million by U.S. Attorney Preet Bharara. During the investigation, Kumar quickly turned on his friends and delivered devastating testimony that sealed the case. Gupta was sentenced to two years in prison, while Rajaratnam got 11 years, the longest sentence ever delivered for insider trading.
5. Dean Foods Scandal
We are continuing our list of biggest insider trading scandals ever to rock companies with the scandal number 5 – William Walters, a successful Las Vegas professional gambler, appeared on the SEC’s radar when their monitors discovered his large volume trading of Dean Foods Co (NYSE:DF)’s and Darden Restaurants, Inc. (NYSE:DRI)‘s shares. These trades looked highly suspicious and SEC investigators decided to dig deeper into them, quickly discovering that Walters was receiving information from none other than Thomas Davis, Dean Foods’ Chairman. Not only did Williams make a handsome profit from insider trading, he also used the information to tip off golfer Phil Mickelson, who owed him money at the time. Mickelson pocketed $931,000 by buying Dean Foods’ stock shortly before its spin-off of WhiteWave Foods Co (NYSE:WWAV), which sent its shares soaring. Mickelson then used the funds to repay Walters. While no criminal charges were brought against Mickelson, he did have to pay the gains back, with interest. Both Walters and Davis are currently on trial.
Dean Foods Co (NYSE:DF) recently announced that Ralph Scozzafava will take over as CEO beginning on January 1, 2017, replacing Gregg Tanner. Shares of the company are off by 10% since the beginning of August following disappointing second quarter results. However, Wells Fargo noted that those results were impacted by the company cutting several low-margin private label units. The investment bank is encouraged by the company’s third quarter guidance and likes it long-term. Dean Foods completed the acquisition of Friendly’s Ice Cream towards the end of June, which should help boost the company’s third quarter results. Dean Foods expected the purchase to be immediately accretive to EPS and margins. And now, let’s see what else we have in our list of biggest insider trading scandals ever to rock companies.
4. Joseph Nacchio
Up next in our list of biggest insider trading scandals ever to rock companies is Joseph Nacchio’s trial which was highly controversial due to his defense that the charges against him were a retaliation of the federal government for his refusal to participate in a surveillance program initiated by the NSA without a court order. He was accused of fraud and using privileged information to make a profit of some $52 million while being the CEO of Qwest. Unfortunately for Nacchio, the court rejected his defense and he was forced to forfeit all of his profits, plus pay a $19 million fine and serve six years in jail. He was released in 2013.
3. Yoshiaki Murakami / Livedoor scandal
Often described as the Enron of Japan, the Livedoor scandal ranks 3rd in our list of biggest insider trading scandals ever to rock companies. It managed to singlehandedly bring the Tokyo Stock Exchange to a halt due to overloaded trading systems for the first time in its history. Just a few months later, Yoshiaki Murakami was arrested on charges of insider trading. Prosecutors claimed that Murakami used the information he obtained illegally from Livedoor executives to profit from their attempted takeover of Nippon Broadcasting. Murakami was sentenced to two years in jail, hit with a 3 million yen ($28,781) fine, and a record 1.15 billion yen ($11.03 million) surcharge.
2. Yves Benhamou / Joseph F. Skowron III
We are continuing our list of biggest insider trading scandals ever to rock companies with the scandal number two – Dr. Yves Benhamou is proof that business schools aren’t the sole breeding places for people who like to skim a bit off the top. Even medical professionals aren’t immune to this. The good doctor was working for Human Genome Sciences, Inc. (HGSI) as an advisor during the trials for the company’s new drug Albuferon. In exchange for cash gifts and paid trips, he divulged sensitive information to his acquaintance Joseph F. Skowron III, manager at the FrontPoint hedge fund, who also holds a medical degree from Yale. Skowron traded HGSI stock according to Benhamou’s information, culminating with the company’s decision to terminate the Albuferon trials. Acting on the tip, Skowron sold some 6 million shares of HGSI, avoiding a $30 million loss for the hedge fund. He was sentenced to five years in prison and more than $10 million in restitution and fines. Benhamou was given a far lighter sentence though, due to his extensive collaboration with the prosecutors.
1. Mathew Martoma
And we top the list of the 10 biggest insider trading scandals ever to rock companies with another pharmaceutical scandal. Mathew Martoma was a portfolio manager at S.A.C. Capital Advisors when he obtained non-public information regarding two pharmaceutical companies, Wyeth and Elan Corporation. Based on that information, he advised S.A.C. founder Steven A. Cohen to sell the companies’ shares, making a tidy profit of $276 million, which makes this possibly the largest insider trading scandal in history. For his “outstanding business acumen”, Martoma was awarded $9.38 million by Cohen. After the SEC investigation, he was awarded a nine year prison term and forfeited said bonus. Prosecutors failed to prove that Cohen was aware of how Martoma obtained his information and thus no criminal charges were brought against him, though he was barred from managing outside money. Cohen now manages the family office Point72 Asset Management, and has stated that he would like to manage outside money again once his ban comes to an end in 2018.
