Insider Trading Case Reveals an Unsophisticated Scheme

“Stupid Pet Tricks” has always been a favorite David Letterman sketch. The criminal insider trading charges filed against a Bristol-Myers Squibb executive, Robert D. Ramnarine, may well qualify for “Stupid Insider Trading Tricks.”

Federal prosecutors charged Mr. Ramnarine with three counts of securities fraud for trading in takeover targets of Bristol-Myers, and the Securities and Exchange Commission also sued him. According to the complaint, the trading generated over $300,000 in profits.

The profits shows that even an unsophisticated scheme can produce a nice return â€" at least until it you are caught, which seems almost inevitable in this case.

Mr. Ramnarine is accused of buying options in three companies, Pharmasset, Amylin Pharmaceuticals and ZymoGenetics, while Bristol-Myers was negotiating potential transactions with them.

Most insider trading schemes try to hide the source of the information by using accounts registered in the names of others, and sometimes use overseas brokerage firms so that it will be more difficult to ferret out the identity of the traders. Nothing quite so sophisticated for Mr. Ramnarine, however, who bought options in his personal stock accounts at firms like Fidelity, E*Trade, and Scottrade, according to prosecutors.

About the only step to hide his affiliation with Bristol-Myers appears to be on a form submitted to Scottrade stating that his employer was Merck, not Bristol-Myers. That is hardly enough to throw even Inspector Clouseau off track, particularly when an earlier account application listed his employer as “BMS.”

When there is suspicious trading related to an acquisition, it is standard procedure for the S.E.C. to ask the companies for a list of those involved in the transaction. Mr. Ramnarine worked in the Bristol-Myers capital markets department, and likely had at least some role in conducting the due diligence on behalf of the company. Thus, his na me would have come to the attention of investigators at the S.E.C. once they decided to look into any suspicious trades.

According to the criminal complaint, Mr. Ramnarine also did a little research to try to avoid detection, conducting an Internet search for “”can stock option be traced to purchase inside trading.” Of course, there is an easy answer to that question â€" “Yes!” â€" when you trade in an account in your own name based on information taken from your employer.

He also entered a trade order on his company-issued BlackBerry, the complaint said. This is not exactly how an insider trader who hoped to avoid arousing suspicion should act.

According to records from his office computer, he accessed three articles on the subject: “Ways to Avoid Insider Trading,” “Types of Insider Trading” and “The Purpose of Insider Trading Laws.” The first article, from the Web site ehow.com, says, “Do not be afraid to forgo an illegal opportun ity.”

Mr. Ramnarine showed at least a bit of understanding about how to engage in insider trading by using options, which can be far more lucrative because they require a much smaller up-front investment and can generate fat returns. His transactions, according to the complaint, involved out-of-the-money calls and puts that were set to expire in a fairly short time frame, so the upfront costs were not significant compared with buying stock in the companies. But using options for insider trading is also dangerous because there are far fewer traders in the market, so it is easier for the S.E.C. to single out well-timed transactions that can trigger a full-scale investigation.

Greed is often the downfall of an inside trader, not surprisingly. It is hard to resist going for a bigger score because making the money seems so easy and there is no “real” victim of the conduct.

That appears to have been the case with Mr. Ramnarine. In his first options trade s in ZymoGenetics, prosecutors said he made about $30,000, an amount that might well have avoided triggering any scrutiny from market regulators. Indeed, if he had stopped right then, there is a good chance he would have gone undetected.

But inside information can be addictive, and the lure of greater profits is hard to resist. Mr. Ramnarine's second set of trades, made more than a year later, earned approximately $225,000 in less than two weeks, the complaint said. That is more than enough to raise the interest of the S.E.C.

If Mr. Ramnarine, who did not enter a plea on Thursday, decides to fight the charges, it will be difficult to claim ignorance. For one, the complaint alleges that he searched the S.E.C. Web site from his office computer and accessed a release about another pending insider trading case. So proof of intent should be easy for prosecutors to establish.

Mr. Ramnarine's trading raises the question whether anyone is actually deterred by the Justice Department's recent crackdown on insider trading. Many of his options transactions involving Amylin took place in June 2012, when the high-profile prosecution of Rajat K. Gupta was playing out in the Federal District Court in Manhattan. The week after the conviction, Mr. Ramnarine made the largest trades, so the case did not appear to have any impact on him.

It would be hard to miss the message that federal prosecutors are focusing on insider trading, yet Mr. Ramnarine appears to have blithely gone ahead, if the allegations are true. Under the Federal Sentencing Guidelines, the recommended prison term will be two to three years, so if he is convicted he will pay a heavy price for some pretty unsophisticated insider trading.

Peter J. Henning, who writes White Collar Watch for DealBook, is a professor at Wayne State University Law School.