Besides greed, what motivates insider traders?
Scott London, a senior partner at a Big 4 accounting firm, shared inside secrets to help a buddy in a tight financial spot. After following the rules for 26 years, why would he commit fraud? Insider traders — mostly males — do it for the money, of course, but they’re also influenced by hubris, feelings of conquest, playing seduction games and adrenaline highs.
Scott London seemed to have had it all. A senior partner at a Big 4 accounting firm, he had success, prestige and a big salary. Even so, his career and personal life would come undone when FBI agents showed up at his home in March 2013 investigating his insider trading with his friend, Bryan Shaw.
The story broke in the news along with a surveillance photo of Scott London receiving a bag containing cash from his buddy, Shaw. London had already informed his bosses at KPMG, and they summarily fired him. His wife found out about his crime on her birthday when she got home after the FBI agents had gone.
When London spoke with news reporters after he was charged with securities fraud and insider trading, he was unable to answer why he’d passed tips. He knew better, he said, but he did it anyways. It began when he tried to help Shaw whose business had fallen on tough times.
When I watched the news video of Scott London it was painfully obvious he was ashamed of his behavior and at a loss to fully explain it. He’d betrayed others and caused harm to his firm and its clients, and his loved ones.
I appreciated that he wasn’t attempting to manipulate the press with excuses, and he seemed to be searching for why he’d sabotaged his career and his reputation. As a practicing psychotherapist, I observe a person’s affect, their expressions and whether they match the words they’re saying. I concluded that London was genuine, and more likely than not, he had a conscience.
London received a 14-month sentence, which was reduced by two months for good behavior, and he was out in 2015. Bryan Shaw was sentenced to five months. He was released in November 2014, according to the Bureau of Prisons.
Why did London commit fraud?
After working with criminal elements for more than 30 years, I can usually detect a manipulator quickly enough. As a young correctional officer in California, every day I was exposed to all sorts of them. None were probably more capable of manipulation than Charles Manson, who was a porter assigned to work for me. The wisest answer you can give these types when they come asking for something from you is “NO.”
London contended he only had himself to blame for his actions. But was he entirely correct? He sat for an interview with me after his release from prison for my podcast, “Prison Life” and talked about what led up to his involvement in the insider-trading scheme with Shaw. He reiterated that he was helping a friend.
Several key points struck me in his case. London had worked in the same position at KPMG for nine years overseeing audits. The extended hours and traveling had taken a toll on him. He’d been asking his bosses for a job change for three years, but his pleas had fallen on deaf ears. During our interview, he said he felt betrayed.
Around the same time, Shaw had pieced together bits of information and had already began making trades and profiting without London’s knowledge. He later told London he’d made trades on what he had gleaned and proposed he could make more money with more information.
London told me he at first objected but then went along and rationalized what he and Shaw were doing. He believed that if they kept the trading to small amounts they wouldn’t get caught, and if they were detected they’d be asked to “leave” like card counters at a casino. (Card counting is a skill and isn’t considered cheating; casinos can’t have you arrested, but they’ll tell you to leave and not return.)
The Financial Industry Regulatory Authority (FINRA), an independent industry regulator funded by Wall Street, detected and reported Shaw’s suspicious trades. His brokerage account was suspended, and he and London decided to quit their trading.
What London didn’t know was Shaw soon afterward received a subpoena from the Securities and Exchange Commission (SEC) investigating their trading. Shaw could’ve told London right away that they were headed for big trouble, but instead he hired a lawyer and began cooperating with the FBI, the SEC and the U.S. Department of Justice.
I asked London during my interview, if Shaw had told him about the subpoena, would he have gone together with Shaw and admitted his part in the scheme? He answered he would’ve, just as he’d confessed when the FBI agents first came to talk to him. At the time he didn’t know that Shaw was cooperating with the FBI and the full extent of the investigation.
All told, according to the SEC, Shaw made $1.6 million in illegal gains. Shaw gave London about $50,000 in money and gifts for his help and information.
Dr. Gilman ruins brilliant career with ties to Martoma
I see parallels in London’s case to another highly publicized insider trading case. I sat in U.S. District Judge Gardephe’s Manhattan courtroom two years ago for the sentencing of former SAC Capital portfolio manager Mathew Martoma for his part in the largest insider trading case in U.S. history. Prosecutors urged for a lengthy prison sentence and argued that Martoma had cultivated and corrupted two doctors to provide him illegal inside information. Gardephe cited a “darker side to his character” before sentencing Martoma to nine years in prison.
One of the physicians, Dr. Sidney Gilman, became a principal character in the Martoma case and testified at his trial. He recounted during his testimony that in the beginning he might have carelessly provided secret details to Martoma about the Alzheimer drug tests of pharmaceutical companies Elan and Wyeth. But as his friendship grew with Martoma so did the details of results of the drug tests he gave to him.
After Martoma got what he was after and made his millions, he never again spoke with Gilman. In the end, Gilman was spared prosecution and an almost certain prison sentence. He had a non-prosecution agreement requiring his cooperation. His career and reputation, however, were destroyed. The University of Michigan Medical School forced him to resign his position of 35 years. He now cares for patients in a free clinic.
Rajaratnam seduced victims like Casanova
Raj Rajaratnam’s trading career could be a case study, unfortunately, in how it’s all too easy to corrupt corporate insiders.
Rajaratnam was one of the most prominent and successful investors on Wall Street, founder of the multibillion-dollar hedge fund Galleon Group, until he was arrested in 2009 for insider trading crimes.
Prosecutors at the time declared Rajaratnam “the modern day face of illegal insider trading.”
The case against him was based on wiretapped phone calls that exposed a web of high-ranking executives that had taken two decades to weave, made up largely of South Asian immigrants like himself.
Born in Sri Lanka, Rajaratnam immigrated to the U.S. to attend the University of Pennsylvania’s prestigious Wharton School earning his MBA. At Wharton he began to build his network of contacts that would later spy for him and risk their careers, reputations and freedom by providing corporate secrets.
His penchant was “getting the number” from trusted sources on closely guarded business information before it was announced. How was Rajaratnam able to sway his sources to betray their corporate trust? In the book, “The Billionaire’s Apprentice,” Anita Raghavan described Rajaratnam as an “expert manipulator … [who] knew just the right way to push corporate insiders to pass along confidential financial information long before it was publicly released.”
Because he was a hedge-fund titan, many wanted to know Rajaratnam, and he wanted to know others. Rajaratnam shrewdly spotted people’s weaknesses and vulnerabilities and found clever, and often indirect, ways to control them. Like Casanova he would court and gradually seduce his victims.
For him the conquest and triumph was far more enticing than the money itself. The wiretapped recordings were incriminating, but they also revealed that after big trading scores Rajaratnam relished sharing his exploits and victories to bolster his image with others and his own image of himself.
A case in point are tapped phone conversations Rajaratnam had with close associates bragging he received leaked bank secrets from a Goldman Sachs board member — details that exposed the super bank had an inside mole at the highest level.
Enter the unlikely suspect, Rajat Gupta, the retired head of the elite management consulting firm McKinsey and Company and a board member at Goldman Sachs, Procter & Gamble and American Airlines. Gupta’s storied life took an untoward turn once he befriended and ventured into business with a ruthless opportunist. The man with the spectacular career, known for his selflessness and philanthropic efforts, was tried and convicted of conspiracy and securities fraud for tipping Rajaratnam.
Gupta steadfastly claimed his innocence but the timing of his calls and Rajaratnam’s subsequent Goldman Sachs trades were too much to overcome at trial. The evidence was overwhelming that Gupta tipped Rajaratnam about the Goldman Sachs board’s decision, at the peak of the 2008 financial crisis, to approve Warren Buffet’s $5 billon investment in the bank just hours before the public announcement.
After the fall from grace, many are left wondering why they did it — putting everything on the line with so much to lose. Oddly, Gupta’s central defense might provide the best clue why he chose to cross the line.
Gupta has always maintained that he’d never have helped Rajaratnam because he felt that he had cheated him out of millions of dollars.
Gupta was “furious” and contemplated but never took legal action to recover his lost money. With his ego badly bruised, Gupta chose the path of least resistance — if he couldn’t beat Rajaratnam, then he’d join him. Pride and arrogance go before the fall.
Insider trading is similar to espionage
The most common narrative for the nature and cause of white-collar crime is simple, overpowering greed. Moreover, this one-dimensional explanation sells well in the courtroom and appeals to a scornful public. Greed can indeed be a principal factor, but I’ve found other psychological forces at play when examining the motives of those committing such crimes.
Insider trading is strikingly similar to espionage: stealing information for personal gain or spying for the benefit of another entity. The magnitude of a tipper passing confidential company information and a government insider such as Edward Snowden who hands over national classified secrets are incomparable, but what’s similar is who’s doing the lying, cheating, stealing and why they’re doing it.
Spying and insider trading are male-dominated avocations with women accounting for less than 10 percent of the prevalence. In a recent study by Kenneth Ahern, associate professor of finance and business economics at the University of Southern California, he examined 183 insider-trading networks between the years 1996 to 2013.
Ahern’s analysis rendered a profile of the typical insider trader: 43-year-old, married, male who has strong social relationships whom he often pairs with in illegal trading. This study concentrates on information networks and how information flows through family and social ties. However, it doesn’t speak to how, or whether, relationships are leveraged in the process.
In 1985, dubbed the Year of the Spy, among the many spies caught for espionage against the U.S., John A. Walker Jr. stood out as the mastermind and ringleader who’d sold the Navy’s most prized secrets to the Soviets for almost two decades. Walker used manipulation to successfully recruit his older brother, son and best friend. Their only real purpose for spying was to please the treasonous Walker.
In a 60 Minutes/CBS News interview given a few years into his life sentence, Walker fortuitously associated his espionage to an insider trader who “betrays his corporation.”
Dr. David Charney, a Virginia-based psychiatrist and a consultant to the U.S. intelligence community, is an expert on the mind of the spy following his work for the defense of captured insider spies — most notably FBI moles, special agents Robert Hanssen and Earl Pitts.
In his white paper, “True Psychology of the Insider Spy”, Charney writes that most cases of insider spying originate from injuries to male pride and ego. Hence, he puts forward that the core psychology of the insider spy is an intolerable sense of personal failure as privately defined by that person.
Life’s adversities and major stressors (personal, professional, financial) pile on and become insurmountable for the potential insider spy during a decisive period usually in the six to 12 months before he crosses over the line into espionage. What’s pivotal, according to Charney, is how the potential insider spy manages the intolerable sense of personal failure.
Breaches of trust
Who can be trusted? It wouldn’t be unexpected for Scott London to ask himself that routinely these days. Perhaps he also directs the question to himself in light of his uncertainty of why he violated the trust his firm placed in him.
In work relationships, and to an extent between friends, a psychological contract exists with a set of mutual expectations and obligations, including “procedural and interactional fairness and the right to be treated with respect.”
John Veihmeyer, chairman of KPMG International, told employees after London’s breach was exposed, “This is a teaching moment in our firm.”
Last year KPMG International published “Fraud & Ethics at the Workplace in Switzerland”, a study of how often and under which circumstances unethical behavior occurs in the workplace.
The report included analysis that found employees’ work relations have an impact on deviant workplace behavior, concluding, “Employees’ who perceive their psychological contract as fulfilled and place high trust in their employer are less likely to engage in dysfunctional behavior.”
In the end, Scott London misplaced his loyalty and made a very bad career move, for which he will be paying for a long time to come. This likely would’ve been a nonevent had he felt secure at work and been true to himself.
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Andrew Snyder is a marriage and family therapist, prison advisor and executive coach. He is the host of the popular “Prison Life” podcast focusing on crime, punishment and family. His email address is: firstname.lastname@example.org.
This article first appeared in the March/April 2017 issue of Fraud Magazine, a publication of the Association of Certified Fraud Examiners, Austin, TX © 2017.