SEC Enforcement Chief Certain of More Insider Cases

Gary Lynch, enforcement chief for the Securities and Exchange Commission, said Thursday that “there’s no question in my mind” that the U.S. agency will soon expose more co-conspirators in the biggest insider trading case in history.

Lynch, testifying alongside SEC Chairman John S. R. Shad before a House subcommittee investigating securities law abuses, said he would not “go so far as to characterize” recent SEC settlements with confessed inside traders Ivan F. Boesky, Dennis B. Levine and Martin A. Siegel as only “the tip of the iceberg” in insider trading.

But he did say that the agency has so many investigations under way based on tips from those men that the law of averages alone promises that “certainly there will be more; there’s no question in my mind about that.”

Pattern of Discovery

Until his arrest last spring on charges of running a huge insider trading ring, Levine was a star investment banker with the Wall Street firm of Drexel Burnham Lambert. He implicated Boesky, the nation’s best-known stock speculator, who in turn fingered Siegel, one of the most respected architects of corporate anti-takeover defenses.

There were no startling new disclosures at Thursday’s hearing, but Lynch did disclose some tidbits about the SEC’s inside trading case.

Before the commission learned Levine’s identity, Lynch said, its investigators code-named the unknown stock trader whose trail they were following “Moby Dick,” after the whale in Herman Melville’s novel.

“We knew we were after a very big fish,” he explained.

He also took issue with an assertion by several members of the House Energy and Commerce Committee’s telecommunications and finance subcommittee that the SEC would never have caught Levine but for an anonymous tip to the investment firm of Merrill Lynch, which was later relayed to the commission.

Actually, the “major coup for us” in nabbing Levine was not as much the Merrill Lynch tip, Lynch said, as it was a subsequent tip that an official from the Bahamian branch of Bank Leu had taken a room at the Waldorf-Astoria Hotel in New York. Lynch dispatched an investigator to New York to subpoena the bank official, whose testimony helped crack the case.

The SEC investigation had bogged down because the Bahamian office of the Swiss-based Bank Leu was where Levine’s trading was initiated and his illegal profits hidden. However, the SEC does not have subpoena power outside the United States.

On other securities law matters, Shad renewed his call for earlier disclosure of impending corporate takeovers, and he questioned the wisdom of outlawing so-called “junk bond” financing of takeovers.

“I don’t favor disenfranchising access to the marketplace” by the estimated 11,300 companies that cannot qualify for investment-grade ratings of their debt, he said. Junk bonds are high-yield securities that are rated lower than investment grade.

Shad also used the occasion to lobby for more funds, principally for the SEC’s new electronic disclosure system. He said the agency received several bids last Friday to set up the system, which is known as Edgar.

He bemoaned the disparity between the salaries of his lawyers and people the SEC investigates, estimating that SEC attorneys can expect pay raises of 200% to 300% if they go into private practice.

“My daughter graduated from law school a year ago,” he said, using himself as an example. “She makes more than I do.”