Business Week Probes Possible Stock Tip Leak : Unusual Trading Before Publication Prompts Internal Investigation
Business Week magazine said Thursday that it was conducting an internal investigation to determine whether unusual trading in certain stocks during the past several weeks was based on a leak of what would appear in the weekly magazine’s “Inside Wall Street” column.
Mary McGeachy, a spokeswoman for Business Week, said the magazine’s editors had noticed unusually high volume of purchases of certain stocks recommended in the column shortly before the magazine was released for sale after the stock markets closed on Thursdays.
“We have launched an investigation of how that information could get out before publication,” she said.
Word of the Business Week investigation came shortly after the Dow Jones Professional Investor Report, a specialized wire service, published a lengthy report Thursday detailing an apparent link between stocks recommended in the column duirng the past eight weeks and price rises and unusually high volume hours before the printed magazine was released to readers.
Rises Routine After Release
The Dow Jones dispatch, by the wire service’s reporter Edward A. Wyatt, said that since late May nearly half the stocks mentioned favorably in the widely read Business Week column rose sharply on heavy trading on Thursdays. For example, in the Business Week issue published last week, the column spoke highly of Gradco Systems, an Irvine company whose stock is traded over the counter. On the Thursday the issue came out, Gradco’s stock rose $1 a share to $9.75 on trading volume that was 5.5 times its daily average, the Professional Investor Report said.
The report detailed similar movements in 19 other stocks, including some traded on the New York Stock Exchange and the American Stock Exchange.
Recommendations in the column often cause the price of the stocks mentioned to rise after the magazine is distributed and subscribers have had a chance to read the column. Price rises are routine on Fridays and also again on Mondays after Business Week readers have read the magazine over the weekend. Individuals gaining advance access to the column’s contents therefore could make big profits, although such activity almost certainly would be considered illegal insider trading.
Gene G. Marcial, the author of the Business Week column, couldn’t be reached for comment late Thursday. The spokeswoman said he and other Business Week staff members had been instructed not to answer journalists’ questions while the investigation is under way. However, Marcial was quoted in the Investor Report as saying that “we’ve been very much aware of when it happens.”
McGeachy, the Business Week spokeswoman, said she didn’t know when the investigation was launched. She said she also didn’t know if it was focusing on any particular individuals at Business Week, its parent company, McGraw-Hill Inc., or the three independent printers that print the magazine under contract at four plants around the United States.
The deadline for editing the weekly magazine is midnight Wednesday. Printing continues until mid-morning Thursday, the spokeswoman said. The magazines are then loaded into trucks and taken to various distribution points around the country. The spokeswoman said Business Week maintains control over the distribution system to prevent the magazine from being released before the stock markets close. The earliest issues are distributed by special courier just after 5 p.m., mainly to press agencies, she said.
One Business Week reporter said a number of copies of the magazine are delivered to Business Week’s headquarters in New York on Thursday morning. He said Business Week’s rules require that the early copies don’t leave the building.
The spokeswoman said she thought the magazine’s in-house lawyer had contacted the SEC about the inquiry. However, Gary Lynch, the Securities and Exchange Commission’s enforcement chief, refused to comment Thursday on whether the SEC was aware of the unusual activity or planned to launch an investigation.
Spokesmen for the New York and American stock exchanges also refused to comment. But Richard Torrenzano, spokesman for the New York Stock Exchange, said that as a matter of standard procedure, whenever the exchange notices significant unusual activity in a stock, it conducts an “analysis” that could lead to a formal investigation.
Business Week’s investigation calls to mind a similar inquiry at the Wall Street Journal in 1984 that led to the conviction of Journal reporter R. Foster Winans of fraud and conspiracy. Winans had been accused of leaking the contents of the newspaper’s “Heard on the Street” column--which, like Business Week’s “Inside Wall Street” column, analyzes the prospects for specific stocks.
Timothy M. Andrews, managing editor of the Professional Investor Report, said the wire service has elaborate computer systems designed to pick up any unusual trading activity and report it to subscribers, mainly stock traders and specialized investors. He said the service also routinely monitors columns such as the Business Week column and puts out a summary of their recommendations as soon as the columns are released.
In compiling the summary, Andrews said, the wire service’s staff began to notice that apparently unusual trading had occurred hours before the magazine was released to the public.
