Remedies for Insider Trading Offered : NYSE Chief, at Boesky Hearing, Urges More Early Information
A lack of early “sunlight” on corporate takeovers is feeding the wave of illegal insider stock trading, a situation that could be remedied by forcing companies to tell the public quickly when a deal is under consideration, the chairman of the New York Stock Exchange said Thursday.
John Phelan Jr., testifying at the first formal hearing into the case of Ivan F. Boesky, said the “window of opportunity” for making money from secret information should be slammed shut.
“We could do it by shortening the time in which important information about a takeover is in the hands of only a few people,” he said. Instead of the standard “no comment” response, corporations could be required by the Securities and Exchange Commission to say yes or no when asked if a takeover or a buyout is in prospect, Phelan said.
The exchange chairman testified before the House Commerce Committee’s oversight and investigations subcommittee, which is reviewing the recent insider trading scandals and considering possible legislation to curb the practice.
Top SEC officials told the panel that they are proud of their work in catching Boesky, who made $50 million trading on inside information before the disclosure of the SEC case against him last month. But they stressed that they depend on informers, rather than sophisticated computers, to catch violators of the securities laws.
“Computers are very important, but nothing is more important than getting a phone call from someone who has helpful information,” Gary Lynch, chief of the SEC enforcement division, said.
Commission officials also defended their decision to allow Boesky to liquidate $440 million in securities before the public announcement of the case.
The subcommittee’s chairman, Rep. John D. Dingell (D-Mich.), said he had received complaints from other investors angered because they lost money when the stock market dropped after the announcement. But Richard Ketchum, director of the SEC’s division of market regulation, said the agency feared a much sharper dip, with greater investor losses, had the announcement and Boesky’s liquidation occurred simultaneously.
There was a “very serious concern for the marketplace,” he said. After the announcement, the market fell and then rebounded.
Dingell praised the SEC’s enforcement staff for its “long and hard” work on the Boesky case. But, he declared: “Ironically, despite all the wonders of modern technology, hundreds of investigators at the firms, the exchanges and the SEC could not make a case” without an informer.
The federal regulatory body and the stock exchanges have elaborate computer networks that analyze every stock trade, scanning for patterns of unusual buying and selling. The system notes any surge in activity just before the announcement of a takeover bid, which commonly pushes up the value of the target company’s stock.
But proving an insider trading case on such circumstantial evidence is difficult, SEC Chairman John S. R. Shad said.
“When it comes to solving a crime, there is no substitute for an informant who can tell you who did it and where he is,” he told the subcommittee.
An informant, angered by the uncanny trading success of a colleague, eventually led the SEC to New York investment banker Dennis B. Levine, who was passing inside information on takeover targets to Boesky.
If Levine “had not been done in by an informant, he might have gone undetected--Lord knows how long,” said another witness, William J. Anderson of Congress’ General Accounting Office, which has been studying the SEC handling of insider trading cases.
Since Boesky was implicated, he has been helping the SEC gather evidence on other Wall Street figures. He has also agreed to repay his illegal profits and to pay another $50 million in fines.
Some subcommittee members appeared unpersuaded by Shad’s assertion that insider trading has been deterred by the SEC’s aggressive moves against Boesky and others. Shad said traders now realize that they are “assuming enormous risks of heavy fines, private damage actions, imprisonment and disgrace.”
“It is increasingly difficult,” he went on, “for inside traders to hide at home or abroad. The illegal profits Levine and Boesky and others (would) take out will now flow through to the investing public. The public ought to be delighted.”
But, asked Rep. Ron Wyden (D-Ore.), “how many rotten apples are there in the barrel? “Is this just a few yuppies who forgot to take ethics when they were in business school?” “We have no idea whether we are getting 10% or 1% or one-tenth of 1% of the problem,” responded Anderson of the GAO.
Earlier in the day, Phelan told reporters at a breakfast meeting that the biggest threat to the stock market’s stability is not insider trading, but such activities as computer-driven trading.
The computer programs used by some institutional investors automatically trigger large buy or sell orders when they identify certain market trends, setting off trading chain reactions that involve enormous numbers of shares.
Phelan said he is worried about that activity, but offered no possible solution for it.
In Chicago, Treasury Secretary James Baker said Thursday night that the Reagan administration would review the nation’s insider trading laws as a result of the Boesky scandal, Reuters news agency reported.
Asked if the laws need to be changed, he said, “You got that right.”
Baker told an audience of 2,000 at a Chicago Economic Club dinner meeting: “We’re taking another look at our insider trading laws.
“Our policies are being reviewed by the Economic Policy Council but it’s a little hard to select policy options when we don’t know what other shoe is going to drop.”
