Insider Traders Less Likely to Get Caught if SEC is Far Away

New research from Stanford University and UIC suggests that a firm’s physical location plays a significant role in whether it is investigated for insider trading.

Illustration by Institutional Investor.

Illustration by Institutional Investor.

Insider traders may be able to avoid detection by the Securities and Exchange Commission just by staying far away.

According to researchers at Stanford University and the University of Illinois at Chicago, the SEC is more likely to investigate firms that are physically close to its offices. The regulator’s limited resources mean it “has to rely on soft informational advantages and favor low-cost enforcement activities” like investigating local companies, wrote Stanford PhD scholar Trung Nguyen and UIC professor Quoc Nguyen, in a paper published this month.

“The SEC’s workload grew rapidly during the 1990s and has substantially outpaced the increase in staff,” they wrote, citing data from the U.S. General Accounting Office. While staffing in various departments grew between 9 percent and 166 percent during that period, the workload surged from 60 percent to 264 percent, according to the paper.

“Since the SEC is evaluated by Congress and the public based on the number of cases it brings and the amount in fines it collects, the SEC has to decide which cases to investigate to maximize the number of winning cases while taking resource constraints into consideration,” the researchers wrote.

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By studying data collected from the SEC’s litigation releases on insider trading violations, the researchers determined that firms located within 100 kilometers, “or a little over an hour’s drive,” from the nearest SEC office are 6 percent more likely to be investigated for insider trading. The probability of being investigated decreased by 6 percent for every additional 100 kilometers of distance between a firm and an SEC office.

For firms located within a 300-kilometer radius of an SEC office, the monthly probability of being investigated for insider trading went up 12 percent for every 50 kilometers closer they were to the regulator.

The researchers also found that companies were more likely to engage in insider trading the farther away they were from an SEC office. A 100-kilometer increase in distance between a firm and the nearest SEC office resulted in a 16.5 percent jump in illegal trades at that firm. Meanwhile, firms within 100 kilometers of the SEC were less likely to engage in these types of trades.

“Distance has a significant effect on the SEC’s investigation of illegal insider trading,” the researchers said in the paper.