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.
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.
At the same time, Jarrell says, the SEC is setting itself up for criticism and creating unrealistic expectations for the small investor. If ``the average man on the street equates run-up with illegal activity,'' he says, the SEC ``will never create the impression that the market has been cleaned up.''
The next few months are critical for Wall Street. The Senate Banking Committee will be holding hearings on mergers and acquisitions early next month, and soon afterward the House Commerce Committee will begin hearings on insider trading that could last for months.
Some ideas being bandied around include closing the window of time during which a bidder can secretly buy up a target company's stock from 10 days to two; requiring bidders to have 100 percent of their financing lined up before launching an attack; and imposing stricter margin requirements to reduce a bidder's leverage.
The latter two moves take aim especially at junk bond financing.
There is even talk of restructuring investment banks to fortify the ``Chinese wall'' that separates the investment bankers, who as advisers have inside information, from a company's arbitrage unit.
People inside and outside of Wall Street worry that Congress will do more harm than good.
Michael Bradley, an associate professor of finance at the University of Michigan business school, thinks some legislators have a ``hidden agenda to use anything possible to cool down mergers and acquisitions.''
That, he and others say, would be a ``real detriment'' for the smaller players: Innovations in financing, such as junk bonds, have leveled the playing field and shaken Fortune 500 managers out of complacency.
``We don't need more governmental regulations,'' says Mr. Long, the Lipper Analytical Services veteran; ``we need more internal policing.'' A few ``5- to 10- to 15-year prison terms'' would help clean things up as well, he adds.
Last week the New York Stock Exchange said it would step up its surveillance of member firms and stiffen penalties for brokerage houses that do not quickly cooperate with the exchange's investigations into suspicious trading.
It also tightened filing requirements for member firms so it can follow up on customer complaints and potentially illegal trading practices by brokers. The Street changed forever?
For their part, investment banks say they have no intention of restructuring or setting up new procedures.
``When you use a pay phone, set up a bank account in the Bahamas, meet someone in Grand Central Station with a suitcase of money - there's no procedure that's going to protect against that,'' observes a legal counsel at one investment bank, referring to some of the tactics used by recently indicted inside traders.
Instead, he says, his company is ``drilling it into people's heads that they're going to ruin their careers and their lives'' if they break the law. He also notes that ``when people look like they're living beyond their means, you keep an eye on them.''
A private eye, in some cases.
``We've had a big increase in the number of inquiries'' about running background checks on employees, says Thomas Norton, president of Fidelifacts, a New York investigative agency. He believes these are ``directly related to the scandal on Wall Street.''
Mostly these checks are being done for new employees, he says, but firms are increasingly interested in running checks on current employees to see if they are living beyond their salary.
Generally, employees are notified, or sign a release, when they accept a job that someone may do a credit check on them.
Even unauthorized checks, however - from public records on an employee's property, mortgages, liens, or from ``trash covers'' (reading through the trash can sitting on the curb) - can ``build a financial picture,'' says Paul Bowling at National Investigative Service Inc. in Arlington, Va.
Given that a company can be liable for an employee's actions if it has not conducted a proper background check, he says, ``Wall Street firms are very concerned'' about knowing the past and present history of their employees.
A new twist in the government's case against Kidder, Peabody supports his point. Until recently, investment banks have not been held accountable for insider-trading violations, since the Insider Trading Act of 1984 is aimed chiefly at individuals.
The SEC, however, alleges that Kidder's risk arbitrage unit profited from swapping information with Goldman, Sachs. If true, some lawyers think Kidder could be liable for millions of dollars of illegal profits, and probably for treble damages.
Whether these and measures such as sweeping trading rooms and executive offices for electronic bugs will eventually restore the confidence of the public and of brokerage-house clients is unclear.
What is clear, Jarrell says, is that in the wake of the inside-trading scandals Wall Street will never be the same.
``This,'' he says, ``is going to burn into the soul of the industry.''