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The “Socialization” of Crime: How the “Facebook Generation” Approaches Insider Trading

by M&Co. Staff

Montieth & Company Study Reveals the Impact of Social Networking

New York/London, January 16, 2013—Montieth & Company, a specialist communications consultancy, announced today the preliminary findings and recommendations from its first annual Litigation & Communications Series study, “The Socialization of Crime: Insider Trading in America.”

This first study in the series looks at the current generation of insider trading cases, including those involving Raj Rajaratnam of the Galleon Group and Steven A. Cohen’s SAC Capital Advisors, and compares and contrasts each with major prior investigations and prosecutions going back to the 1980s.

The core finding: insider trading has become “socialized.”

The core recommendation: social networking tools can be used by companies to educate employees, and the business partners they interact with, about the securities laws and raise the level of ethical behaviors and compliance.

“Every generation commits crimes in its own, unique way, and when you look at the people who engaged in insider trading today, you can see the patterns of what we term intra-social networking,” says Montieth M. Illingworth, CEO and Global Managing Partner. “This is insider trading in the age of the ‘Facebook Generation.’”

This stands in marked contrast to the structure and patterns of interaction engaged in by prior generations, most notably what the study refers to as the “Mastermind Model” of the major cases in the 1980s. For example, the study contrasts the “Galleon Cohort” as the most symbolic of the intra-socially networked groups among the current cases, with the example of Dennis Levine, the former Drexel Burnham Lambert executive who ran an insider trading scheme in the 1980s.

Comments Illingworth, “Social networking, whether seen as a way of interacting with others, as its own set of individual behaviors, or a technology-based tool set, or all of the above, didn’t cause people to engage in insider trading, but it can be part of the solution for ensuring compliance with the securities laws.”

The solution Montieth & Company proposes will be developed in partnership with EchoDitto, a leading digital consultancy that focuses on using innovative opensource technologies to build and empower communities and is known for its work using technology to create transparency and accountability.

“Social platforms are here to stay, and the culture of sharing and connecting is now the status quo. While investment firms will never be able to control where their portfolio managers and traders talk to one another, they can create an environment that fosters ethical behavior through active and passive functionality,” says Nicco Mele, founder of EchoDitto.

While there have been hundreds of criminal and civil prosecutions of insider trading in recent years, the Montieth & Company study focuses primarily on the 76 individuals that have been charged since August 2009, when Preet Bharara was sworn in as U.S. Attorney for the Southern District of New York. Of those 76 individuals, U.S. Attorney Bharara has succeeded in convicting, so far, 71. There is every indication that he will continue to bring additional insider trading charges, which the study concludes will result in the possible expansion of existing cohort groups and new ones being revealed.

Highlights from “The Socialization of Crime: Insider Trading in America” include:

  • All of U.S. Attorney Bharara’s 76 cases can be divided into eight separate intra-socially networked groups, the largest involving Galleon with 33 individuals. “The Galleon Cohort is the paradigm for all the others,” says the report.
  • There are at least six other intra-socially networked groups of defendants that were prosecuted by U.S. Attorney Bharara’s predecessors or by other U.S. Attorneys in other jurisdictions in a similar timeframe.
  • Those individuals connected to Steve Cohen’s SAC Capital Advisors signify a new cohort that could emerge pending further investigation by U.S. Attorney Bharara. “As it stands, there are already nine defendants associated with SAC.”
  • With each group there is no one individual, no “mastermind,” a Dennis Levine, Ivan Boesky, or Martin Siegel, orchestrating the scheme from the top of a hierarchal power structure. In today’s intra-socially networking model, the power and influence are distributed more “democratically” across a complexly interconnected network.
  • Over 50% of the people charged by U.S. Attorney Bharara were between the ages of 31 and 40. The average age of all people charged is 42. “A number of these people were just coming out of graduate school when Facebook launched,” says the study. “They grew up in their professional lives with social networking as a model for interacting with others, creating bonds, and exchanging information.”
  • Looking across all cases, there were different types of organizations involved (i.e., hedge funds, banks, corporations, expert networks, etc.). This represents a greater diversity of the types of companies than in any prior generation of insider trading cases. In the 1980s, the cases were focused on investment bankers, especially those involved in M&A.
  • Expert networks are a specific expression of the new model. “An expert network is by definition a variation of a social networking model,” says the study.
  • The study will also address the question of what the emergence of intra-social networks in insider trading means about the state of corporate compliance. “Social networking can have the force of nature. It is imperative that organizations take a closer look at how to make social platforms more of a central part of their compliance systems and a reflection of a corporate culture being held to the highest standards of ethical conduct,” argues the study.

The completed study, which includes recommendations and social media solutions, developed in partnership with EchoDitto, was issued in 2013.