Brokers sweeping clean or under the rug?
STILL reeling from scandal and bracing for more, Wall Street is trying to clean itself up. On the outside, investment banks are keeping a low profile, professing the integrity of their employees and insisting that they have sufficient safeguards against illegal activities like insider trading.Skip to next paragraph
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Internally, private investigators and industry sources say they are trying to plug leaks of information in a variety of ways, including sweeping their trading rooms and executive suites for electronic bugs and hiring private investigators to look into employees' backgrounds.
With Congress considering legislation to curb insider trading - and potentially the whole merger-and-acquisition business - Wall Street needs to show it runs an honest shop.
But hard evidence is elusive.
In fact, according to an analysis by the Monitor of takeover attempts since the indictment of Ivan Boesky in November, there is no statistical evidence that the market is operating any differently from the way it did before the Boesky scandal.
Wall Street-watchers insist that information flowing between investment bankers, takeover artists, arbitrageurs, and others has slowed to a trickle.
It was such information-swapping that felled some of the brightest stars on Wall Street in the last year, including executives at Goldman, Sachs & Co. and Kidder, Peabody & Co. earlier this month.
``The SEC has scared the heck out of the arb community,'' says Gregg Jarrell, chief economist at the Securities and Exchange Commission until last month. ``They're not taking any chances.'' Trading patterns examined
And traders are being more cautious about trading on rumors, worried that they might have come from an inside source.
``Nobody wants to expose himself to future subpoenas,'' says Perrin Long, a veteran brokerage analyst at Lipper Analytical Services in New York.
If Wall Street has in fact rooted out illegal activity, how can it prove it before Congress clamps on regulations?
One common way is to look at the price of stocks before, say, a takeover attempt. It is in the bidder's interest (and that of his investment banking advisers) to get the stock into ``friendly hands.''
Properly tipped off, a risk arbitrageur would buy a block of the stock, fairly confident that the price would rise when the bidder made his intentions known. Thus, leaking information, which may or may not constitute insider trading, tends to make the stock price rise before the announcement.
If investment banks have really plugged the leaks, or at least the illegal ones, in the last three months, one would expect less price ``run-up'' before a takeover is officially launched.
In fact, that has not happened. In an analysis of price movements before takeover attempts since late November, the Monitor has found little change in the pattern of run-up. The analysis, modeled after an unreleased study by the SEC, found that if anything, there has been a greater stock price run-up since the Boesky affair.
In its analysis, the SEC looked at the stock prices of 172 companies that were the target of takeovers between 1981 and '85.
It found that the stock prices increased significantly, and 40 percent of the increase occurred before there was any public announcement or rumor that a takeover attempt was about to be launched. Prices rose even more within the two days after the announcement. Data cause little alarm
The Monitor made the same calculations for 19 takeover attempts since late November. The prices of target stocks, fueled in part by the general bull market, jumped an average of 42 percent, with 46 percent of the increase occurring before the announcement or rumor, and 54 percent occurring after.
Does this mean that insider trading is even more rampant than before the indictments?
Former SEC economist Jarrell, who conducted the SEC study and is now an AT&T fellow at the University of Rochester's business school, doesn't think so. He says there will be stock price run-ups in any situation, crooked or straight.
``There's tremendous incentive to learn information'' before other people, he says, ``and most of the ways are not illegal.''
Just watching the ticker tape, a sharp trader would notice an increase in volume and price as the bidder quietly bid up stock. The trader might then jump on the bandwagon, and soon the run-up is gaining momentum - even though no illegal information has been passed.
Mr. Jarrell says that since 1962, well before anyone thought about rampant abuses in insider trading, stock prices on average increased between 40 and 50 percent before a takeover bid.
This poses a terrible dilemma for the investment banking community. It cannot statistically prove that it has uprooted illegal activity, which undermines confidence in the market and brings down the wrath of Congress.