Wall Street is just waiting for the other shoe to drop. When it does, the government expects to catch perhaps dozens of people for insider trading and other illegal activities - activities that may have helped fuel the dramatic rise in the stock market over the last couple of years. The investigation by the Securities and Exchange Commission (SEC) stems from the indictment and cooperation of Ivan Boesky, the risk arbitrageur who in November agreed to pay $100 million for engaging in insider trading and other violations. Judging from the flurry of subpoenas and jitters on Wall Street, securities lawyers and others believe the indictments will come down soon, and will involve a broader range of violations that affect the way mergers and acquisitions are carried out.
``Insider trading is bad, but it affects one or two individuals and x number of shares,'' says Paul Fischer, who was the SEC's assistant director of enforcement and is now in private practice.
``If the investigation shifts broadly to takeovers'' as it appears to be doing, ``it affects all shareholders and the future of [individual] companies,'' he says.
Soon after the Boesky indictment, the SEC began issuing subpoenas to people at Drexel Burnham Lambert, the investment bank that has raised money for many of the largest takeover attempts. Drexel had frequent dealings with Mr. Boesky, who admitted he used inside information to buy or sell large blocks of stock in a company, knowing that the stock would soon be involved in a takeover transaction.
The SEC is now looking beyond the relationship between Boesky and Drexel to Drexel's other clients. The SEC is reportedly looking at whether Drexel passed on information to investors about unannounced takeovers to get them to buy high-risk, high-yield ``junk bonds'' to finance the takeover bids.
Last week, for example, the SEC subpoenaed the trading records of officials at the Clarendon Group, one of the largest buyers of Drexel's junk bonds.
In addition, the SEC is looking at broader violations of securities laws, which, if successful, could suggest the SEC is going to use a larger arsenal of weapons in curbing illicit merger and acquisition activities.
One question is whether Drexel and Boesky bought blocks of stock for each other to conceal the true ownership of the stocks, a procedure called ``parking'' or ``warehousing.'' The SEC reportedly suspects that a $5.3 million fee that Boesky's company paid to Drexel is evidence that the two had such an arrangement, perhaps involving more than a dozen different stocks. Drexel denies it had a parking agreement with Boesky.
The government has brought only a handful of parking cases, because they're so difficult to prove.
``It's not the kind of thing you'll be writing letters back and forth about and leaving a paper trail,'' says one securities lawyer, who asked not to be identified.
Boesky's cooperation and reports that he allowed his phone conversations to be recorded for months when he was secretly cooperating with the SEC, however, may be just the evidence the SEC needs, he says. It could lead to further crackdowns on junk-bond financing, which has played a central role in takeovers during the last two years.
The SEC is reported to be looking into another type of disclosure violation, the 13-D rule, which is perhaps more wide-reaching than parking arrangements.
Under disclosure laws, an investor must let it be known when he has acquired 5 percent or more of a company's stock within 10 days.
However, if two parties, say Boesky and Drexel, each own 4.9 percent of the stock and have a tacit agreement that one will eventually sell his shares to the other, it gives an investor far more control than the public is aware of. It could then be easier for someone to acquire a company, or force up the price and reap the benefits of buying the stock at a low price.
``Normally, it has not been thought that people bought so much stock on inside information that they took over as much as 5 percent of the total outstanding shares,'' says Lee Richards, a former assistant US attorney who prosecuted a watershed insider trading case in 1981 and now represents defendants in such cases.
That would be ``an act so bold and perhaps one would say so greedy that it defied the imagination of prosecutors when I was one, but it no longer defies the imagination of SEC attorneys today,'' he adds.
The SEC will not say whether it is investigating this type of violation. However, if Boesky and Drexel were engaging in that kind of activity, Mr. Richards says, ``It suggests much greater market impact is being realized ... because 5 percent of the stock in many of these companies is an extraordinary amount of stock.''