Trading on Pillow Talk Can Rouse Regulators

In May the SEC filed civil charges against Christopher Balkenhol, a former vice president at Oracle, for trading on the inside information he gleaned from his wife. He agreed to settle the charge and paid nearly $200,000 in penalties.

Doing things together — be it gardening or grocery shopping — is often said to be the secret to a long-lasting and healthy marriage. But as the Balkenhols' case shows — along with a recent spate of other husband-and-wife insider trading cases — when it comes to corporate confidences, too much sharing can have disastrous results.

Terry Leap, professor of management at Clemson University in South Carolina and author of "Dishonest Dollars: The Dynamics of White-Collar Crime," says the wave of so-called pillow talk cases stems at least in part from increased ease of communication. "People can steal information much more easily," he says.

The SEC knows spouses, relatives and friends of highly placed (and sometimes not so highly placed) employees can learn important and confidential information about companies. And married cheats may have a harder time getting away with their crime, since prosecutors can often use one spouse against the other to get a confession.

Just last week the SEC filed civil charges against Shane Bashir Suman, a former employee of Toronto-based medical device maker MDS (MDZ). It alleges Suman stole confidential information about the company's impending offer for Molecular Devices, and that he and his wife traded Molecular shares ahead of the merger's announcement, netting about $1 million. Other recent insider-trading cases include a former compliance officer for Morgan Stanley (MS) who passed inside information about pending mergers to her husband, a lawyer in private practice; and a former vice president, also at Morgan Stanley, who passed information about a potential acquisition of another firm to her husband, a hedge-fund analyst at ING Groep (ING).

Leap says the easy flow of information across borders means regulators must be hyper-vigilant about detecting suspicious trades. The vigilance may have paid off in the case of Hong Kong spouses Kan King Wong and Charlotte Ka On Wong Leung, accused by the SEC of acting on inside information in purchasing $15 million of Dow Jones (DJ) shares prior to the announcement of News Corp.'s (NWS) buyout bid. The SEC is investigating Dow Jones board member and Hong Kong banker David Li, a reported business associate of Charlotte Leung's father. Li has denied wrongdoing. Dow Jones is a co-owner of SmartMoney.

SmartMoney.com: Is it odd that a bunch of these recently reported insider trading cases involved married couples?

Terry Leap: The most recent investigations involved husband and wives who have colluded to engage in insider trading. But the vast majority of insider trading cases don't have to do with spouses; they could be a family member, a close friend, a business associate.... White-collar crimes are crimes of what's called specialized access.... Access could be to sources or information. We're talking about information here. The second part is even if you have access to the information, if I gave you an insider tip and you act on it and buy stock based on my tip, assuming it's nonpublic information, it's material information and significant enough to cause the stock to go up or down.

SM: Is the SEC stepping up efforts to crack down on fraud?

TL: The SEC is just watching it so closely now. They realize if they don't, and if they don't prosecute people, it's going to get out of hand. People can get access to information so quickly now. A couple of the cases involved stolen information. The Canadian guy [Shane Bashir Suman] was not a high-level guy. I think he was doing information technology there, so he could get access to emails, and extract important information, which he did. He passed it on to his wife... And they made about $1 million.

SM: And he wasn't a top manager.

TL: One of the interesting things about insider trading has to do with constructive insiders. These are not top executives, but have some business relationship and they are privy to inside information. One hypothetical of that would be someone who drives a limousine for executives. He eavesdrops on their conversation in the limousine and hears about some premerger activity and buys stocks based on that information. A lot of this husband and wife stuff is where one or the other is a constructive insider, even though they're not a high-ranking person inside the company.

There are three categories of white-collar criminals. A crisis responder is someone in bad financial straits, desperate to get some money. They typically never stole anything before.

An opportunity taker is also someone who's never stolen or embezzled before, but there's an opportunity to make money quickly. Most of these inside traders in these cases are opportunity takers. And opportunity seekers are more like habitual criminals. Opportunity takers normally wouldn't think of doing anything wrong, but there's this golden opportunity, and they're pretty sure no one would find out, and they could make a couple of million dollars.

Of course, what's really hard to explain is what pushes people over the edge to do these things. If you got insider information, you'd probably think you'd never be able to live with yourself if you did anything with it. But they don't think like that. One of the characteristics of white-collar criminals is what they call super-optimistic people: I know I can get away with this, I've done this kind of thing before and I've always been able to emerge unscathed. Also, with white-collar criminals it's important to try to conceal whatever you've done. Once it's detected, it's fairly easy to find out who did it. Street crime is different. If someone burglarizes your home, it's harder to find the perpetrator.

White-collar crime is more traceable. Once they see suspicious patterns of trading before a merger or acquisition — and most of these things occur around the time of a merger or acquisition — once they see these suspicious trading patterns, it's pretty easy to find out who's doing the buying and selling.

SM: The Oracle case was a little unusual in that it was the husband, a former vice president at the company, who heard the inside information from his wife who worked as the executive assistant to the CEO and two co-presidents of Oracle. He settled the charges with the SEC, but why didn't she get in trouble for leaking the information?

TL: Balkenhol traded on the two companies which were subject of the premerger negotiations. I don't think they did anything to his wife; she's not culpable. He knew he had inside information and he traded on the two companies to his advantage. Usually with these cases, you have to think what was the criminal intent? I don't know in what context she told him the information. She may not have had any idea he was going to act.

On other hand, he may have agreed to shoulder all the blame so she wouldn't get in trouble....

SM: Is the SEC increasing the severity of penalties and punishment when going after people who've committed illegal insider trading?

TL: I think so, like with the Martha Stewart case. I think the SEC has become aware of all the potential dangers of insider trading. It seems to be something white-collar criminals want to participate in, and they want to stop before it gets out of hand. Other people think insider trading is not such a bad thing. After all, managers and executives always get an advantage because they have information that others don't. They look at it from a cost-benefit standpoint and say it's not worth it for the government to go after these people. But I say in my book that most people wouldn't play cards if they knew other players were cheating. Usually, the more risk you're willing to take, the higher the potential reward. But with insider trading, you get a higher rate of return with almost no risk.

SM: What do you think has been facilitating this kind of crime?

TL: In recent years the only thing I could think of that facilitates this kind of behavior is information technology and email. People can steal information much more easily. They couldn't do that before. Suman stole the information. [Jennifer] Wang [the Morgan Stanley employee] stole information. It may not have been possible to steal information in the pre-electronic age... People able to tap into other people's emails or databases — that may have elevated it somewhat.

Also, the increase in dual career couples and the fact that more couples are holding increasingly responsible positions where both are likely to have access to proprietary information. Bear in mind, however, we discussed only five spousal insider trading cases, a small subset of a much larger group of cases.