The latest insider trading case on Wall Street, involving an alleged $19 million in illegal profits flowing to an overseas source, may be merely the tip of the iceberg, securities analysts and legal experts believe. The case is troubling ``because of the link between an insider in a major investment house and an overseas trader,'' says Joel Seligman, a law professor at the University of Michigan in Ann Arbor.
``The key in this particular case is that the Securities and Exchange Commission [SEC] was able to trace the transactions because of the large amounts involved,'' says Mr. Seligman, who is an expert in securities law. ``But what if the amounts had been much smaller - and undertaken on a more sophisticated basis?''
On Monday, Stephen Wang Jr. of New York, a 24-year-old junior securities analyst in the mergers and acquisitions division of Morgan Stanley & Co. was accused of providing insider information to a Hong Kong businessman.
The young trader allegedly gave tips on a number of pending takeovers and mergers to Fred Lee, a Taiwanese citizen who is a businessman in Hong Kong, and who also has a home in McLean, Va. According to Gary Lynch, the SEC's enforcement chief, the transactions involved 25 securities and occurred between July 1987 and April of this year.
Mr. Wang was allegedly paid at least $200,000 for his information, Mr. Lynch says. Should the government's allegations be proven, this would be the second-largest insider case on record, surpassed only by the one involving financier Ivan Boesky, who eventually was required to return $100 million in illegal profits following charges brought by the SEC in 1986.
Clearly, Washington is concerned about the possibility that the Wang/Lee case may not be an isolated incident. A House subcommittee heard testimony on the possibility of such overseas transactions June 8, and a Senate hearing is scheduled for July 22. Among other issues, the Senate banking, housing, and urban affairs subcommittee on securities will consider a new enforcement plan proposed by the SEC.
At present, the government's main enforcement effort encompasses bilateral agreements reached with a number of overseas nations, where those nations will provide information - usually shielded by local laws - pertaining to allegedly illegal securities transactions. But some nations, such as France, have what are called ``blocking statutes,'' that in effect bar the sharing of securities or other financial information and make it difficult for Washington to prosecute overseas traders in these countries.
``What you have in many of these cases is a sort of layering factor,'' says Gary Mountjoy, a securities expert with the House subcommittee on commerce, consumer, and monetary affairs.
Congress is expected to consider a number of alternatives to prevent future illicit transactions involving overseas trading. Among the proposals:
Provide for so-called ``waivers by conduct,'' as urged by former SEC chairman John Fedders. Under such an approach, parties to a transaction would in effect give immediate consent to allowing federal agents to obtain overseas information where wrongdoing is suspected in a securities agreement.
Expand and tighten existing bilateral agreements between the US and other nations so that Washington can move more quickly on prosecuting individuals suspected of committing securities fraud.
Use, where appropriate, government sanctions against those nations refusing to cooperate in securities cases. In the case of Caribbean nations, for example, deny funds or other special arrangements worked out under the Caribbean Basin Agreement.
``The SEC thinks it's doing a good job in the area of securities transactions. But folks who watch these situations on a daily basis say the [enforcement] glass is only half full,'' says Mr. Mountjoy.
In the current case involving Wang and Mr. Lee, some 25 insider transactions were allegedly involved, according to the SEC. They are said to include Stop & Shop, E.F. Hutton & Co., and Utah Power & Light, among others. A federal agent, pursuing the pattern of transactions, was able to obtain Lee's home and business phone records. They showed numerous calls to Wang.
The government's complaint, filed in federal court here, called for the return of $19 million in alleged profits and triple that amount in damages.