The serious nature of insider trading is reflected in the sentences that courts impose in criminal cases and the monetary and non-monetary penalties that courts assess in enforcement actions by the U.S. Securities and Exchange Commission (“SEC”). But there is an additional premise that underlies courts’ willingness to impose substantial sanctions in insider trading matters—namely, that because insider trading is particularly difficult to detect (compared with other types of fraud), judges must impose particularly punitive sanctions in order to deter future would-be inside traders.
This concept is widely referred to as general deterrence. In the aftermath of the high-profile insider trading cases of the 1980s, courts have embraced the view—at the behest of the government—that insider trading is uniquely difficult to detect, and have incorporated that perspective into sentencing jurisprudence. As a result, many defendants are penalized more harshly than a court would be inclined to punish them based on the other more individualized sentencing considerations.
Nearly forty years later, the U.S. Department of Justice (“DOJ”) and the SEC continue to routinely argue for enhanced penalties against insider trading defendants in light of the supposed difficulty in detecting illicit trading. In this article, we argue that, in light of the government’s current market surveillance and data analytics capabilities, the government’s legacy general deterrence arguments in insider trading cases are outmoded, and that courts should adjust their sentencing calculations in recognition of this new paradigm.
Source: The Declining Need for General Deterrence in Insider Trading Sentencing
