It is hard to know whether the government’s aggressive enforcement of insider trading laws deters criminals from violating securities laws.

One key factor in this equation is the risk of getting caught. The Obama Administration can certainly point to an increase in enforcement – civil and criminal.  Judges have been handing out stiff sentences for insider trading.

The 1980s were the so-called glory years of insider trading enforcement with the prosecutions of Ivan Boesky and Michael Milken.   The current decade has been another highwater era of enforcement.  Traditionally, most insider trader cases were brought in the Southern District of New York.  That has continued but federal prosecutors in other districts across the country are bringing more criminal insider trading cases than in the past.

Federal prosecutors in New York point to high-profile prosecutions of Raj Rajartnam and his co-conspirators, who were brought down on wiretap evidence.  In all of the other criminal cases, prosecutors are relying on cooperating witnesses, recorded telephone calls and documents to prove the government’s case.  The FBI has been using aggressive investigation techniques to secure cooperating witnesses, relying on “ambush interviews” to convince potential defendants to cooperate and record phone calls.  These techniques have led to successful prosecutions of various private equity and hedge fund executives and traders, including Diamondback Capital Management, Level Global, and SAC Capitol Advisors.

The government recently convicted two executives from Diamondback and Level Global of insider trading; US Attorney Preet Bahara’s press release cited the defendants’ unfortunate calculation of “risk” and “reward” which led to their eventual downfall for millions of illegal profits through insider trading.  The government’s evidence consisted of cooperating witness testimony, emails and some instant messages.

Federal prosecutors are aiming at a lead target, SAC Capitol Advisors and its founder and leader, Steven Cohen.  Many of the government’s cases are aimed at building convictions and additional cooperating witnesses, all with the goal of bringing down Steven Cohen, who they suspect of long-time participating in insider trading schemes.

To put things in perspective, the Rajatnam conspiracy is alleged to have garnered $63 million in illegal profits, while the SAC Capitol Advisors profits are at an alleged minimum of $276 million and growing.

Federal prosecutors all around the country are relying on new sources of evidence – detailed trading data which is being mined for suspicious trade patterns.  Computerized reviews of trading activity help to identify suspects and then traditional investigative techniques may be used such as examining bank records or conducting witness interviews.

The government’s trial record in prosecutions of insider trading defendants is extremely impressive.  It is hard to remember a high profile case they have lost.  Juries can understand the issue of trading on confidential information and the cases are far less complex than typical white collar fraud cases.

Interestingly, as sentences in insider trading cases have increased, insider trading continues, some estimate at even higher rates.  Longer sentences and high-profile prosecutions do not appear to be deterring the criminal conduct.  The potential punishment is not the deterrent but the fact of getting caught.  That depends on federal funding of white collar investigators and law enforcement.