The latest insider-trading scandal - involving Business Week magazine and at least six and possibly nine or more Wall Street firms - is sending ripples throughout the financial community. ``What is so disturbing about this case is that so many firms, and possibly employees, seem to be involved,'' says Joel Seligman, a securities expert at the University of Michigan.
The Business Week scandal is but the latest in what has become an increasing pattern of securities fraud, often lumped together in the press as ``insider trading.''
This case grew out of disclosures that suspicious trading activity took place prior to publication of ``Inside Wall Street,'' a prominent market-related column appearing in Business Week, which is published by McGraw-Hill Inc. in New York. To date, none of its employees, including writers or editors of the magazine, have been linked to the probe.
But unusual trading activity in issues mentioned in forthcoming columns of the magazine was traced to employees of a number of Wall Street firms, including Advest Inc., Shearson Lehman Hutton Inc., Prudential-Bache Securities Inc., Merrill Lynch & Co., Quick & Reilly Inc., and Charles Schwab & Co. The latter two firms are discount brokerage houses.
In addition, accounts are under investigation, as of this writing, at Smith Barney, Harris Upham & Co., PaineWebber Group Inc., and Integrated Resources Inc.
The leaks to brokers or other employees of the investment houses apparently came from employees of printing plants owned by R.R. Donnelley & Sons, based in Chicago. Donnelley says it has fired a printer at its plant in Old Saybrook, Conn., for allegedly selling copies of the ``Inside Wall Street'' column to a broker before the column was published. In addition, a technician at the printing company's plant in Torrance, Calif., has been suspended.
The Business Week case, like a recent securities-fraud case involving top officials of the GAF Corporation, shows how increasingly difficult it is to hide securities fraud, experts say.
``There's just too big a computer tape trail these days,'' says Robert Comment, a visiting professor at the University of Rochester's managerial economic research center.
Professor Comment, who is on leave from New York University, notes that one of the earliest securities-fraud cases in the post-World War II era - the Chiarella case in 1980 - also involved the alleged misappropriation of stock information by a printer. In that case, however, the accused party was finally cleared by the court system.
In a more recent case, R. Foster Winans, a reporter who wrote a market column for the Wall Street Journal, was convicted of providing information to others before publication.
In the Business Week situation, however, the alleged tip-offs took place downstream from the editing and writing process - at the plants where the magazine was actually printed and put together. The upshot, suggests one market analyst, is that ``anyone, virtually anyone, privy to confidential advance information could seek personal gain through the right leaks.''
Although the Business Week case is important, Mr. Comment says, he sees the situation, at least for now, as more of an example of ``human frailty'' than as a breakdown of the Wall Street trading system.
Among the legal issues involved, he says, beyond the matter of the alleged leaks themselves, is the reduction in the ``value'' of each issue of Business Week magazine in which the misappropriated material ran. In other words, Comment says, by allegedly misappropriating information from the magazine, the tipsters and other parties along the way reduced the value of that issue to readers and potential investors.
Did federal regulatory agencies, particularly the Securities and Exchange Commission, fail investors in this case? Comment doesn't think so.
``The SEC just doesn't have the staff to do a lot of monitoring of this type of activity,'' he says. ``It must rely on the private sector. It is just not good at detecting'' such situations.
Business Week, analysts here say, was quick to seek a full SEC review of the situation once the suspicious trading pattern became apparent.
This case should remind publishers ``to have contractual agreements with printers'' that stories and other text be kept confidential until their actual release, Mr. Seligman says. It is imperative, he says, that downstream printers know of their legal obligation to protect materials entrusted to them.
He adds that the case emphasizes a need to close ``the most glaring loophole in the whole securities fraud area, involving overseas'' trading. He cites a recent case in which a young securities trader was allegedly sending tips to a Taiwanese businessman in Hong Kong.