Tom Hardin was with a hedge fund analyst who went from making millions to becoming a government informant in one of the most well-known crackdowns on insider trading, “Operation Perfect Hedge.”
Tom now uses his own cautionary tale to assist investment firms in their insider trading compliance efforts. As a complement to existing legal and regulatory compliance, Tom shares his story as both a cautionary tale and as a way for compliance leadership to get increased buy-in from the investment team for their compliance initiatives.
Leveraging its new analytics tools, 78 insider trading enforcement actions were brought by the Securities and Exchange Commission in fiscal year 2016, up 100% from the prior year’s 39. Regulators need no longer wait for a referral from FINRA or a whistleblower when they now have a growing database of trading information. Just a whiff of an insider trading scandal can be enough to cause investors to flee. Additionally, with the Supreme Court upholding the Salman conviction and the current U.S. attorney for SDNY remaining in office, prosecuting insider trading will once again be a top priority for the Justice Department in 2017. In fact, the FBI’s NYC office alone has undisclosed probes into about 30 suspected insider trading schemes. Regulators can now bring an enforcement action for the failure to have an adequate insider trading prevention program—even if no insider trading has occurred. With the increase in regulatory scrutiny, investment firms today must make compliance their top priority, even above performance. It is just as much an asset for attracting investors as it is attracting talent. Lack of adequate compliance can result in failure of the firm. In-house technology solutions allow for sophisticated “MNPI mouse traps” as information comes into firms, but what happens when an analyst is conducting research in an emerging market where insider trading laws are either non-existent or not up to the highest standard? In a recent survey of the financial services industry, 32% of employees with less than a decade of work experience said they would likely engage in insider trading to net $10 million if there was no chance of being caught. We must encourage an honest dialogue among the industry’s most junior employees who are demonstrating a surprising and disturbing cynicism regarding corporate ethics.
Tom is extremely grateful for the opportunity to share his experience and perspectives concerning MNPI compliance challenges from his view as a former investment professional. His hope is that by sharing his journey, the next crop of investment professionals will avoid the slippery slope into unethical behavior which can produce criminal activity. There is no better way in a training session to drive home the sobering reality of reputation and career decimation than hearing it first-hand from someone who once sat in the analyst’s seat.
Tom has a B.S. from The University of Pennsylvania’s Wharton School of Business.