Drive for Wall St. Regulation Gains : ‘Insider’ Charges Lead to Demand for Stiffer Laws
The latest round of insider trading charges has added new momentum to demands for tougher regulation of Wall Street and may bring particular focus on the mysterious and complex field of risk arbitrage, lawmakers and regulators agreed Friday.
“Right now, it is far too easy for market manipulators to make a quick killing by putting a company into play and cashing in on the rise of the price of its stock,” said Sen. William Proxmire (D-Wis.), chairman of the Senate Banking Committee. “When all the dust is settled, I will push for a comprehensive overhaul of our laws regulating insider trading and corporate takeovers.”
‘Public Is Fed Up’
“Yesterday’s arrests only accelerate the push for serious legislation,” said an aide to Rep. Edward J. Markey (D-Mass.), another lawmaker expected to lead an investigation of the issue on Capitol Hill. “There is no doubt the public is fed up with the profits people are able to reap under existing law.”
Even before the U.S. attorney’s office in New York filed complaints against three executives of prominent Wall Street firms Thursday, Proxmire’s committee had begun hearings on insider trading. The Energy and Commerce finance subcommittee, which is headed by Markey, is expected to announce a tentative hearing schedule within the next week.
Robert M. Freeman, a partner at Goldman Sachs & Co.; Richard Wigton, a vice president at Kidder Peabody & Co., and Timothy L. Tabor, a former vice president at Kidder Peabody, were named Thursday.
Lawmakers had seized on the scandal surrounding speculator Ivan F. Boesky, which came to light three months ago, to demand tougher rules on hostile takeovers and the exotic securities that finance these mergers. Current and former Securities and Exchange Commission officials, however, say that the latest charges against some of Wall Street’s most blue-blooded investment firms are likely to shift attention to risk arbitrage--speculation in the stocks of firms that are takeover targets.
“It may sharpen congressional focus on arbitrage and how it works. Now they’ve got a lot of evidence to suggest something ought to be done,” said James Treadway, a former SEC commissioner who is now a Washington lawyer.
The result may be new restrictions on a field that has been at the heart of hostile takeovers.
Stimulants to Market
Arbitrageurs make their fortunes by gambling on how various developments will affect stock prices. As they buy and sell huge quantities of stocks, arbitrageurs stimulate a market for those securities, assuming risks that otherwise would be borne by smaller investors and institutions such as pension funds. But arbitrage has been controversial because traders only buy stock for short-term gains and are eager to sell it to anyone who will pay a higher price.
Boesky, the most prominent member of the arbitrage community, was fined a record $100 million last year after admitting that he gave bribes for inside stock tips. The scandal widened Thursday with the arrest of three more prominent arbitrageurs.
Until now, the arbitrage business has operated in relative obscurity. “People find it mysterious,” SEC Commissioner Charles Cox said. “I’m not sure how well the activities are understood by the public.”
The recent developments, however, are expected to bring calls for more scrutiny of where and how arbitrageurs get the information they use in making trades.
“There’s a lot you can do if you sit down and try to be creative about these issues,” Treadway said.
One possibility worth studying, he said, is requiring arbitrageurs to file reports detailing their trading decisions, the information on which they were based and the names of those who approved their dealings. To avoid jeopardizing their profits, he said, the reports could be kept confidential for several weeks.
Cox agreed that “questions will be asked” about the arbitrage business in coming months but noted that, with tens of thousands of shares being traded on the Big Board every hour, more detailed record-keeping “sounds like a lot of paper work.”
Costs vs. Benefits
Before making any move, he said, regulators must weigh two questions: “What would the increased costs be and what are the benefits?”
The latest arrests have also re-ignited debate over whether the SEC needs tougher laws against inside trading.
Cox insisted that current law is quite effective and that the fines and arrests of the last few months are clear evidence that the commission is “playing hardball.”
“The law has plenty of teeth in it,” Cox said. “Those people (who have been caught trading on inside information) are basically wiped out. Their assets have been scooped up. Their careers are ruined.”
However, critics contend that, with millions to be reaped in profits from insider trading, the penalties the government has imposed have not been stiff enough.
Boesky Case Cited
Even though it fined Boesky $100 million, the government “let Ivan Boesky come out smelling like a rose,” said Sen. Howard M. Metzenbaum (D-Ohio), one of Congress’ most dogged critics of the takeover fever that has gripped Wall Street in the last decade.
Metzenbaum added that he believes the scandal uncovered thus far by the SEC is “still only the tip of the iceberg.”
Proxmire agreed: “It reveals a systematic pattern of abuse that is at the heart of the merger mania. As the SEC continues its investigations over the next few months, I expect to see more arrests and, ultimately, criminal indictments.”
Staff writers Karen Tumulty reported from Washington and Paul Richter reported from New York.
