Insider charges hit the `in' crowd, with a bigger blow at trust
The arrests of a clutch of prominent executives associated with two prestigious brokerages indicate that insider trading may indeed have been rife on Wall Street. ``It's opened a lot of naive eyes outside as well as inside the industry,'' says Stephen Monheim, director of financial services at Butcher & Singer, a Philadelphia-based brokerage. ``If it happens to quality firms, it can happen anywhere.''
For weeks, executives had been listening for aftershocks from the Ivan Boesky scandal. Rumors of indictments multiplied in the past two weeks.
Late last week, federal marshals swept into the headquarters of Kidder, Peabody & Co. and Goldman, Sachs & Co. - two of the leading lights on the Street. By Friday, four executives, some no longer with either firm, had been charged with conspiracy in an alleged insider-trading scheme.
Other big names are bound to get caught up in this scandal, Wall Street-watchers say, since Mr. Boesky has been cooperating with investigators and each person implicated is likely to point fingers, too.
``This one is different,'' says William LeFevre, who has worked on Wall Street for 37 years and is now senior vice-president of Advest Inc., a Hartford, Conn., brokerage. ``It's gone from an individual to the firms. I'm convinced that there's more to come.''
But unlike the days after the announcement of the Boesky case late last year, this time the financial market itself appears to be fairly blas'e about its impact on stock values. The Dow Jones industrial average closed a rather average week Friday at 2,183.35, down 3.52 points.
To many people, says James Scott Jr., professor of finance at Columbia University, this is just the real-life ``playing out of `Dynasty' or `Dallas.' It's riveting, exciting, but I don't think the fact that they made a lot of money significantly undermines the fairness of the market among the general public.''
Messrs. Scott, LeFevre, and Monheim agree that the insider-trading crackdown is likely to bolster the confidence of innocent investors that, as Monheim puts it, ``the bad guys are getting caught.''
``The SEC [Securities and Exchange Commission] is playing hardball,'' says LeFevre. ``It's putting fear into the miscreants. Those tempted to do things now will think twice, and so I think it is reinforcing the integrity of the market.''
Besides insider trading, another Wall Street phenomenon may be curtailed as well: the tidal wave of mergers and acquisitions.
Last year, a record 3,356 mergers took place, according to W.T. Grimm & Co., a Chicago merger specialist. Grimm said there were 353 mergers last year with price tags of at least $100 million.
Mergers have already slowed down somewhat because of new, more restrictive tax laws that took effect this year. But since the latest arrests involve important mergermakers, a chilling effect is likely to be felt.
``These latest indictments,'' says Professor Scott, who specializes in the study of financial corporations, ``move closer to the heart of the merger-and-acquisition departments.''
Boesky, he says, ``was really an outsider. But these involve Kidder, Peabody and Goldman, Sachs, and are going to make businesses wonder if they can trust their investment banker.''
Nor is Congress likely to let the shame of scandal do all the cleaning up on Wall Street.
Sen. William Proxmire (D) of Wisconsin, chairman of the Senate Banking Committee, will begin hearings in two weeks on ways to rein in the merger mania.
Rep. John Dingell (D) of Michigan, chairman of the House Energy and Commerce Committee, is backing legislation aimed at shortening the 10 days allowed between the time an investor acquires 5 percent or more of a company and the time he discloses that information to the SEC. That time lag has allowed corporate raiders to buy more chunks of the company before investors know their intent.
Other congressional efforts are likely to look at whether the SEC has sufficient funds and staff to keep the heat on the cheaters - and whether inside trading needs to be more clearly defined.
