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Protect Your Investments from Insider Trading

Seth Jentner08/27/2013

According to the Wall Street Journal, people convicted of insider trading are facing considerably harsher sentences than they did in the past. Those found guilty are spending significant time behind bars.

In 2009 and 2010, defendants sent to prison on insider-trading charges in New York federal courts have received a median sentence of about 2.5 years. This compares to a median sentence of 11.5 months from 1993 to 1999.

Not only that, but a higher percentage of guilty insider-trading defendants have been incarcerated in recent years. In the past two years, 79% of defendants in New York have been sent to prison, compared to less than half from 1993 to 1999.

In 2011, hedge-fund titan Raj Rajaratnam received a prison sentence of 11 years in one of the biggest U.S. insider-trading cases ever. The then-54 year-old founder of Galleon Group was convicted of what prosecutors call a “brazen,” “arrogant” and “pervasive” insider-trading scheme.

According to the Wall Street Journal, this case “is the culmination of a broad government effort to root out improper sharing of nonpublic information among corrupt corporate insiders and Wall Street professionals. Of the 54 hedge-fund managers and others charged with insider trading since 2009, 50 have pleaded guilty or been convicted of criminal charges.”

It appears that recent, lengthier sentences are intended as an additional deterrent. Even so, protect yourself. Work with an advisor that does not take custody of your investments. Insist on total transparency of your investment portfolio. Require independently prepared investment statements in addition to any statements prepared by your investment advisor so you can easily audit and verify values.

If an investment proposal sounds too good to be true, it probably is too good to be true. Work with a firm that fully discloses their investment philosophy, their trades and their expenses. Don’t settle for a “secret-formula, black-box” investment strategy that no one understands. It’s not worth the risk.

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