First Boston to Pay Fine, Settle Insider Charges : SEC Claims Firm Sold Off Cigna Stock After Getting Negative Information
Federal securities regulators on Monday charged First Boston Corp., one of the nation’s leading investment firms, with making an illegal insider-trading profit of more than $132,000 on Cigna Corp. stock after Cigna hired the firm to help it manage some financial difficulties.
First Boston agreed to give up that profit and to pay an additional fine of more than $264,000, for a total of $396,414, in settling the case without admitting or denying its guilt.
No employees of First Boston were identified by name in the Securities and Exchange Commission complaint released Monday, and none were identified by the firm. A First Boston spokesman said it is unlikely that any of those involved will be disciplined.
“It’s one thing for a system to break down and quite different for someone to do something intentionally for their own benefit,” said the spokesman, James Hood, vice president for marketing.
Court documents and interviews Monday suggested that the case was an example of a breach of the so-called Chinese wall that is assumed to separate the securities trading staffs of major investment firms from their investment banking arms. The SEC ordered First Boston to review its procedures separating the two functions, and Hood said Monday that the firm had held a “series of meetings to remind people of the crucial importance of adhering to these procedures.”
According to the SEC, Cigna, a major insurance company, approached First Boston’s investment bankers on Jan. 20 and asked for help in raising between $1 billion and $1.5 billion to add to the company’s property-casualty loss reserves. The disclosure was a tip that Cigna’s stock might soon fall and made First Boston a party to inside information.
‘Restricted List’
As is customary, the firm added Cigna stock to its “restricted list,” meaning that First Boston’s traders were to be notified that they could not buy or sell Cigna shares for the firm’s own account.
On Jan. 29, after Cigna hired the firm, Cigna’s chief financial officer told a First Boston executive that the insurer would announce the addition to its loss reserve on the following day. That executive warned a First Boston securities analyst to prepare for the announcement, and the analyst told the firm’s chief equity trader.
Sold Short
The SEC and First Boston’s Hood said the trader began selling Cigna stock without checking to see if it was on the restricted list. First Boston immediately sold short 21,000 shares for its own account and purchased 131 “put” options--the right to sell Cigna stock within a given period at a given price. Those options rise in value as the price of the underlying stock sinks. The firm made $105,875 on the short sale and another $26,263 on the options trade.
“Our own internal procedures were violated,” Hood said. “People who should have known (that) the information they were dealing with was confidential did not know.” He added that the firm considers the failure a one-time occurrence.
