How analysts sniffed options scam

Stock exchange analysts routinely pore over audit trails after major news events, even if their computers have not alerted them to possible insider trading. Last July, options-watchers at the Philadelphia Stock Exchange were reviewing trading in Colt Industries before an announced recapitalization. They spotted buyers placing big option bets on Colt the week before the plan came out.

But the buyers were not scattered around the country. They all came from brokerage firms in Brooklyn, N.Y. The Philadelphia exchange contacted the brokerages and got the names of the customers buying Colt options and their trading records.

``Those customers hadn't been active options traders in the past. And all from the same area - that seemed suspicious,'' recalls Richard Chase, executive vice-president of compliance at the exchange.

He gave the information to the Securities and Exchange Commission. Last month, the government filed insider-trading charges against Israel Grossman, a lawyer at the firm handling Colt's recapitalization plan, and six of his relatives and friends. The SEC alleges that in less than two weeks the group made $1.5 million on a $34,000 investment in options.