As sentences in insider trading cases have grown longer, insider trading has continued, apparently at historically high rates, with increasingly longer sentences being meted out. However, the longer sentences do not appear to deter insider trading. What does deter insider trading is the likelihood of getting caught. And the likelihood of getting caught is largely a function of Congressional funding of investigations and prosecutions of white collar crime.
Last Friday, the New York Times published a very interesting article written by James B. Stewart entitled “In a New Era of Insider Trading, It’s Risk vs. Reward Squared.” The article contrasted insider trading cases from the 1980’s with the most recent group of insider trading cases. Quoted in the article were interviews by Mr. Stewart of the current U.S. Attorney for the Southern District of New York (Preet Bharara) and his deputy (Richard Zabel), the current head of enforcement at the SEC (Robert Khusami), and a former SEC Chairman (Harvey Pitt).
Mr. Stewart concludes that “[i]t’s still too soon to measure the deterrent effect of the latest wave of cases, but it’s surely substantial.” It struck me that this conclusion could just as easily have been made in the 1980’s, when high visibility defendants such as Ivan Boesky and Michael Milken ultimately pleaded guilty and served time in prison. Which raises the question: did the high visibility insider white collar cases of the 1980’s have a substantial deterrent effect on those who subsequently might have considered committing white collar crime?
In light of the current wave of insider trading cases, it appears not. Insider trading – like most white collar crime – appears not to be influenced by increasingly harsh sentences. Thus, even though judges routinely state that increasingly harsh sentences are an effective general deterrent to those who contemplate committing a white collar crime, the fact is that white collar crime continues to take place at a substantial rate.
The reason why sentences in white collar cases do not deter potential criminal conduct is that the likelihood of getting caught is so small. Thus, a potential insider trader does not ask himself: if I do this crime, will I go to prison for 2 years or 10 years? Instead, he asks himself: what is the likelihood that I will get caught? Then he might ask himself how much prison time he would get if he got caught – but even that seems far fetched. Is a potential white collar criminal really going to be influenced by a comparison of 2 years versus 10 if, in the unlikely event, he got caught? I think not. Rather, he is going to be influenced by the likelihood of getting caught. Of the two factors – length of potential sentence or likelihood of getting caught – the latter seems to have the greater influence on potential wrongdoers. Harsh sentences make for good headlines, but their deterrent effect on potential wrongdoers is vastly overrated – as evidenced by the fact that insider trading has continued unabated even after white collar sentences have become much harsher.
If the likelihood of getting caught is the greatest deterrent to white collar crime, then Congress should increase the budgets of those agencies whose function is to catch white collar criminals. This would provide the most “bang for the buck.” If enforcement costs are, on a net basis, revenue positive for the government, increasing enforcement dollars will add to the government fisc and provide additional deterrence to those who are contemplating committing white collar crime.
Of course, there are those who would view this as an invitation to inappropriate government intrusion: too many investigators, too many government regulators, etc. And there may be some truth to that point of view. However, there must be a balance. One cannot deter potential criminals if they do not fear getting caught. And if you want to catch white collar criminals, there must be some level of intrusiveness by investigators, prosecutors and regulators. As the level of intrusiveness goes up, the amount of white collar crime should go down. So far, Congress seems to think that it has found the right balance. However, Congress should not be heard to complain if white collar crime remains at what Congress thinks is an unacceptable level, when that level could be reduced through the hiring of more prosecutors and regulators. This is particularly true if the cost of hiring more prosecutors and regulators will result in result in a net positive to the government fisc.