In the past several years, legal commentators have consistently written about the increasing emphasis on cross-border regulatory enforcement, and the global crackdown on insider trading in particular. However, it is rare to see the extradition of insider traders, so the December 22, 2012 arrest of Australian national Trent Martin in Hong Kong pursuant to a request from the United States should be noted.
The 33-year-old financial analyst allegedly learned of inside information concerning IBM’s acquisition of a publicly traded Chicago-based software company, SPSS, Inc., in 2009 from a New Zealand corporate lawyer, identified as “Attorney-1” in the indictment. Attorney-1 and Martin were close friends, sharing many common experiences as single male expatriate professionals in New York City from the same region and of about the same age. They had a longstanding history of sharing confidences, and Attorney-1 revealed the inside information over brunch one day while describing personal and professional stresses related to his work on the transaction. Attorney-1 expected that Martin would not share the information or use it to trade.
Of course this story of friendship quickly turns to one of greed, and Martin goes on to buy SPSS common stock based on the information, and shares the tip with his roommate Thomas Conradt, a stock broker, who also shares the information with a colleague, David Weishaus. Conradt and Weishaus go on to tip two additional colleagues.
The SEC began investigating SPSS trading in fall 2010, and found that the five individuals had altogether profited by more than US$1 million from the inside information. In November 2010, Martin returned to Australia, and in September 2011, relocated to Hong Kong. Conradt and Weishaus were arrested by the FBI in Colorado and Maryland, respectively, on November 29, 2012.
On January 4, 2012, Martin appeared in Hong Kong’s Eastern Magistrates Court, where he did not challenge the extradition order and signed the required consent. Martin has been charged with one count of conspiracy to commit securities fraud and one count of securities fraud. The conspiracy charge carries a maximum potential penalty of five years in prison and a fine of $250,000, or twice the gross gain or loss from the offense. The securities fraud charge carries a maximum penalty of 20 years in prison and a maximum fine of $5 million. Both are quite heavy consequences considering that Martin’s trades yielded him less than US$8,000 profit.
Martin’s is just the second successful extradition of an individual accused of insider trading in more than 10 years. The last such extradition took place in 2002 of an Israeli citizen, Michael Akva, who jumped bail and fled to Israel in September 2000 to escape prosecution. Akva was indicted by a Manhattan federal grand jury in 2000 of one count of conspiracy to commit insider trading and 12 counts of insider trading, for conduct that profited him around $140,000.
In related news, Albert K. Hu, an American citizen who was extradited from Hong Kong in 2009 (despite a failed attempt to challenge the order) to face allegations that he cheated investors of at least $6.5 million in a hedge fund fraud scheme, was sentenced to 12 years in prison January 14, 2013.
The bottom line is that global regulatory enforcement trends are on the rise – especially with respect to insider trading.