How many Baltimore Orioles infielders does it take to trade on inside information? The answer apparently is two, after the Hall of Fame first baseman Eddie Murray settled insider trading charges filed by the Securities and Exchange Commission that he profited from information provided by his former teammate, Doug DeCinces.
The real test, however, will come for the man accused of tipping Mr. DeCinces about an impending sale of Advanced Medical Optics: James V. Mazzo, the company's former chief executive. Mr. Mazzo denies the S.E.C's allegations, and his lawyer has said he plans to fight the charges.
The torrent of insider trading cases filed in the last three years has put a spotlight on how defendants can resist the government's charges.
The first line of defense in an insider trading case can be a straightforward denial: I never had the information. This is almost like an alibi defense to a street crime, putting the government to the test of showing th e person actually received the information.
Sometimes it is easy to show the link to the information, like the recent prosecution of a Bristol-Myers Squibb executive who bought shares in companies he was vetting for possible takeovers by trading in accounts in his own name. Other cases have proved to be more difficult, like the corporate lawyer who leaked information over a number of years by using disposable cell phones and cash payments to hide his identity.
Showing that Mr. Mazzo had information about the impending acquisition should be easy for the S.E.C. As chief executive, he could hardly deny knowing about the deal, and indeed was integral in negotiating it.
The next defense can be that there was no contact between a tipper and tippee during the period when the trading took place, so that the information could not have been passed.
In its complaint in the Advanced Medical Optics case, the S.E.C. sketches out a number of telephone calls and s ocial contacts between Mr. Mazzo and Mr. DeCinces.
Just showing the opportunity to pass inside information is not enough. The government also has to prove that the information was actually disclosed to an outsider, which can be the most difficult step in the process. The S.E.C. may have to rely on Mr. DeCinces to make its case against Mr. Mazzo, otherwise its evidence of tipping could fall short.
The prosecution of the hedge fund manager Raj Rajaratnam for insider trading was helped immeasurably by wiretap evidence showing the actual passing of confidential information from various sources. He was left to argue to the jury that the information he received was not of any importance, something the jury rejected when he was found guilty.
Mr. Rajaratnam was a rare case, and the government usually relies on circumstantial evidence based on the timing of the trades and the contacts between the tipper and recipient.
The case against Rajat Gupta, convicted of tipping Mr. Rajaratnam about developments at Goldman Sachs, is a good example of how a prosecution built largely on telephone records showing calls shortly after he received information and then trading by Mr. Rajaratnam. To fight the circumstantial evidence, Mr. Gupta's lawyer sought to introduce evidence of other potential sources of the information about Goldman, but was largely prevented from doing so at trial. This is sure to be an issue on the appeal of his convictions.
In Mr. Mazzo's case, there are two possible defenses regarding his conversations with Mr. DeCinces. First, he can claim to have never spoken about the impeding transaction, although that may be difficult given the subsequent trading and tipping. Or Mr. Mazzo can assert that he revealed the information about the impending acquisition in confidence, never expecting Mr. DeCinces would trade on it, and so there was no tipping.
Mr. Mazzo's lawyer has made it clear that his client maintains his innocence. “Mr. Mazzo has a spotless reputation for professionalism, integrity and service to his community, built up over a career of 30 years,†his lawyer said in a statement. “The notion that he would put all that at risk to give a single friend inside information is absurd.â€
To prove insider trading, the S.E.C. will have to show that there was a quid pro quo between Mr. Mazzo and Mr. DeCinces - or that at least Mr. Mazzo knew he was giving information that would be used for trading.
Mr. Mazzo can argue that Mr. DeCinces misused their friendship to enrich himself and tip others, including Mr. Murray.
A recent S.E.C. case presents this approach to insider trading. The agency has accused one defendant, Ladislas Schvacho, of receiving confidential information from a close friend who was chief executive of a company about to be taken over. The executive was not accused of tipping, so the S.E.C.'s theory is that Mr. Schvacho breached a duty of trust owed to his friend by essentially stealing the information entrusted to him.
Accusing Mr. Mazzo of being a tipper rather than an innocent source means the S.E.C. will have to show that his disclosure of the impending transaction was not an accident or based on a misguided belief about the trustworthiness of a longtime friend. There are no wiretaps or other recordings to bolster the case, so proving a violation is likely to depend on whom the jury chooses to believe: Mr. Mazzo or Mr. DeCinces.
With the chief executive of a public company accused of tipping inside information, one might also expect to see criminal charges. But the fact that the case will ride on the credibility of Mr. DeCinces, who tipped four others in addition to using the information for his personal trading, means he may not be a strong enough witness for the Justice Department to pursue its own case.
Peter J. Henning, who writes White Collar Watch for DealBo ok, is a professor at Wayne State University Law School.
