Magazine article The CPA Journal

An Accountant's Guide to the SEC's New Insider Trading Regulations

Magazine article The CPA Journal

An Accountant's Guide to the SEC's New Insider Trading Regulations

Article excerpt

Although accountants are supposed to be purer than Caesar's wife, they have not escaped the insider trading onslaught by the SEC. Both accountants in public practice and in industry have succumbed to temptation in the face of insider information. Because of the unique situations public accountants face, it may be advisable for them to adopt programs to minimize their potential exposure as employers.


In the recent insider trading case of SEC v. Katz, et al., Barry N. Katz and Steven Wold, partners in the accounting firm of Vogel, Katz and Wold, Ltd., consented to surrender to the SEC several thousand dollars in alleged illegal profits, interest and penalties, and agreed to a Federal court order permanently enjoining them from future violations of the Federal securities laws. The basis of the SEC complaint against the accountants was that while performing accounting services for Atcor, an Atcor director disclosed to Katz certain confidential information about the impending acquisition of Atcor by Tyco Laboratories, Inc. Katz allegedly told Wold about the possible takeover and on June 30, 1987, both subsequently purchased Atcor stock before the takeover announcement. The two sold their stock nine days later on July 8,1987, making a joint profit of $4,625 on the increase in the price of Atcor shares after the public announcement of Tyco's tender offer. The SEC investigation and Federal court proceedings against Katz and Wold and their accounting firm are not atypical of the types of cases brought by the SEC against accountants and auditors.


Despite the recent decline in hostile takeover and merger activity that so characterized the roaring 1980s, illegal insider trading in today's market is still a key focus of SEC enforcement efforts, as well as private damage claims by issuers and shareholders. Unfortunately, as one commentator aptly described it, insider trading law is exceedingly "murky." Nevertheless, violators continue to be subject to Federal, criminal, and civil prosecution, face destruction of their careers, and public disgrace. Since 1984, Federal laws have increased the potential sanctions for trading-related violations by several orders of magnitude.


Although the restrictions on insider trading have been fashioned largely by the courts, three Federal statutes give judge-made law significantly more deterrent effect. Under The Insider Trading Sanctions Act of 1984 (ITSA) the SEC was empowered for the first time to seek court-imposed penalties of up to three times a trader's profits (or avoided losses). Those who intentionally communicate or tip private market-sensitive information to a third person who then profits by trading securities are subject to the same sanctions.

The breadth and persistence of the 1980s Wall Street abuses, despite ITSA, so outraged Congress that in 1988, it unanimously passed The Insider Trading and Securities Fraud Enforcement Act (ITSFEA). The act extended the reach of penalties to employers who, as "controlling persons," do not take steps to attempt to prevent illegal employee trading. Controlling persons are subject to civil penalties of up to the greater of $1 million or three times the amount of illicit trading profit (or loss avoided).

Washington's latest move to bolster market integrity is the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. While Remedies Act's thrust is directed at areas other than insider trading, the SEC's Director of Enforcement, William McLucas, has noted that the act authorizes the SEC to directly impose civil penalties in administrative proceedings involving "willful" insider trading violations.

In addition to criminal prosecution by the U.S. Justice Department and SEC Federal injunctive enforcement actions, the SEC may suspend or bar professionals practicing before it, such as accountants and attorneys, in Rule 2(e) proceedings. …

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