At a time when CSI is the top-rated TV show in the country and a rerun of Law & Order is always airing somewhere, you'd think most smart folks would know how easy it is to get busted for committing a crime. That's obviously not the case. Witness Sam Waksal. He founded ImClone ( IMCLE), a biotechnology company that developed a drug to treat cancer. Bright guy. Unfortunately, he didn't exercise any of that brainpower before he tried to dump his own company's stock after finding out that the Food and Drug Administration would reject ImClone's Erbitux application. Waksal was just sentenced to more than seven years in federal prison for insider trading and related crimes. If only he'd thought about how simple it is for regulators to track every trade and uncover every phone call someone makes. The stock and options exchanges in this country have computer systems that monitor price and volume movements of securities in real time. These programs track the price and volume histories of all securities and flag any aberrations that would suggest something unusual. A stock might go up too much in one day. Or there might be a few big trades ahead of a corporate news event. If an exchange's surveillance team spots any odd movements, they will try to make sense of them, maybe calling a company to find out if there's news that's about to break. Or the investigators might check out big rises or falls in a stock around corporate news that's already public.
The exchanges can track down every share that traded in a company's stock any day of the week, any time of the day. Investigators can contact the brokerage firms that were involved in any heavy trading, asking the firms to cough up information on any accounts that were active in the stock over a certain period of time. They can get their hands on an individual's account history and monthly statements -- even a person's address. One red flag might be trades by several investors in one stock that all went through the same broker. Investigators can access a database of information on corporate insiders to match details with investors who were trading that stock. Someone's college alma mater might be the link between an executive and someone who was buying a company's stock just a few days before a takeover was announced. Ultimately, exchange personnel have to decide whether to send a case on to the Securities and Exchange Commission. (The SEC can only bring civil charges. Waksal was charged with criminal insider trading.) And a case usually has to involve enough money to make it worth pursuing. While it's easy to track someone's trading, phone calls and credit card purchases, the SEC ultimately has to prove why someone was buying and selling. And putting together a case can start with a single phone call. Two staff lawyers will call the person in question, with one attorney asking the questions and the other taking notes. And if human nature is any guide, the individual will agree to talk and then make up a story -- a dumb one.
And lying to government officials, like SEC investigators, is a crime. Ask Martha Stewart. Last week, the former head of Martha Stewart Living Omnimedia ( MSO) was indicted for obstruction of justice, conspiracy and securities fraud related to the sale of her ImClone stock about a year-and-a-half ago. The SEC did also file a civil insider trading case against her, but some attorneys think those charges will be hard to prove. So it's possible that Martha Stewart winds up only getting nailed for lying to government agents. And according to her accusers in the indictment, those pesky phone records were one sign that she wasn't telling the whole truth.