Swiss Insider Trading Case Is a Mystery and a Lesson

It has been called the Loch Ness monster of insider trading, a supposedly giant case that surfaces in court records and rumor mills only to disappear beneath the murky waters of official inaction.

On Wall Street, they know it simply as Ellis AG, the name of a small investment firm in Zurich, the financial capital of Switzerland.

Four years ago, Ellis was sighted in court records that said the U.S. Securities and Exchange Commission was investigating suspicious trading in takeover stocks by the Swiss firm through several U.S. brokerages.

Two years ago, published reports said Ellis would be the largest insider trading case ever, with illegal profits topping $100 million and indictments imminent.

This fall, Ellis resurfaced when congressional investigators turned up the names of 27 U.S. brokerage houses, including Wall Street’s most prominent firms, which had executed trades for Ellis. One firm’s records disclosed that the SEC inquiry began in 1981.

Pattern of Delays

The congressional investigators also compiled a list of the takeover stocks bought by Ellis that hints at a possible--though highly circumstantial--connection to the more famous insider trading case of ex-Wall Street investment banker Dennis B. Levine.

Like Nessie, however, the substance behind these findings remains elusive, and Ellis officials have consistently denied any wrongdoing.

What emerges more clearly from the 7-year-old case is a story of how tough it is for the SEC to obtain information about possible insider trading when the trades are apparently concealed behind a foreign financial institution.

The first recorded SEC request to the Swiss government for information about Ellis came in February, 1984, according to congressional records, but it was not until June, 1987, that the SEC received the Swiss response. Much of the information was not made available until last spring.

The delays, congressional investigators say, create doubts about whether the investigation will ever result in enforcement action.

But such delays are not unusual as the SEC’s enforcement of U.S. securities laws moves the agency into the international arena more frequently.

The agency has enjoyed some success obtaining information from foreign governments in insider cases, most notably persuading the Bahamian government to permit a bank there to disclose Levine’s name.

Contrary to the public image created by the string of headline-grabbing insider trading convictions flowing from the Levine case, however, the SEC’s record in ferreting out trading hidden behind foreign institutions has been spotty, and its victories often have come only after years of court battles.

Not the ‘Same Diligence’

So new questions are being raised in Congress about the ability of the securities watchdogs to catch culprits who use foreign banks and brokerages to conceal their activities.

“The SEC has really gone after domestic brokers on insider trading, and I’m glad that we have,” Rep. Doug Barnard (D-Ga.) said in a telephone interview. “But we have not shown the same diligence in doing the same thing to those who live abroad or trade from abroad.”

The need to enforce U.S. securities laws in foreign-based trading is more urgent than ever because the volume of foreign-originated trading on U.S. exchanges is up sharply--from $25.6 billion in 1977 to $481.9 billion last year.

Most experts believe that the increase in foreign-based trading has led to similar growth in violations of securities laws.

“I think there is a consensus that dramatic changes in the world securities markets have provided new and fertile opportunities for the unscrupulous and the dishonest,” Harvey L. Pitt, a leading securities lawyer in Washington and former general counsel of the SEC, told a congressional hearing last summer. “The globalization of the securities markets and almost continuous introduction of new financial instruments have introduced greater rewards at seemingly less risk.”

Sophisticated traders have learned to conceal their activities behind layers of foreign entities. It has turned out to be relatively simple to create a shell corporation in one country to be the owner of multiple trading accounts at banks or brokerages in another country with strict secrecy laws.

Small Percentage Investigated

Pitt, whose clients have included convicted insider trader Ivan F. Boesky and a Swiss bank, said foreign cases are far tougher for the SEC to crack than domestic ones. The conclusion was echoed in a stinging report issued last month by the House Government Operations Committee’s subcommittee on commerce, consumer and monetary affairs, which Barnard heads.

The report said a 14-month staff investigation “disclosed serious problems with the SEC’s ability to enforce U.S. securities laws in cases involving suspicious foreign originated trades.”

The SEC investigates only a small percentage of suspicious foreign-based trades and rarely pursues trades originating in four countries because of their secrecy laws and refusal to cooperate with U.S. authorities, said the report. The countries were identified as Panama, Luxembourg, Liechtenstein and Monaco.

In one case, a preliminary inquiry disclosed that a Seattle stock broker may have made up to $23.6 million in an apparent stock manipulation scheme. But the report said the SEC did not pursue the case because the trading was done through two accounts in Liechtenstein.

Similar problems apparently exist outside the four countries named.

For instance, the SEC investigated suspicious trading in IBM stock options through three French banks just before an announcement that the computer giant’s foreign orders were below expectations. In July, 1987, the SEC requested assistance from the French government, but the refusal of the French banks to cooperate has stalled the investigation.

A year earlier, the agency investigated suspicious trading by seven Swiss banks in a takeover case. The SEC attorney handling the case told congressional investigators that the Swiss government was never asked for information because the SEC did not want to “wear out its welcome” based on the circumstantial evidence in the inquiry.

Michael D. Mann, the SEC’s associate enforcement director for international affairs, said in an interview that he could not comment on the specific cases mentioned in the report. But Mann said the findings do not paint a fair picture of the progress made by the SEC in securing cooperation from foreign governments and pursuing international cases.

“We’re not where we want to be in 10 years, but we are trying to develop a progress that is steady in achieving more comprehensive agreements with more countries,” he said.

New Legislation

The SEC has formal cooperation agreements with five countries--Brazil, Britain, Canada, Japan and Switzerland--and informal arrangements with about 20 other countries for cooperation on a case-by-case basis.

A model agreement signed last January with Canada covers a full range of U.S. securities laws. The other pacts fall short of the assistance level sought by the SEC in varying degrees.

U.S. efforts to negotiate new agreements got a boost last month when Congress passed legislation toughening penalties for insider trading. A provision empowered the SEC to investigate violations of foreign securities laws on behalf of foreign governments. Mann said that should improve the SEC’s ability to seek similar cooperation from foreign regulators.

But negotiations between nations with divergent laws, customs and interests can be tedious and time-consuming, particularly since the agreements cover a range of securities laws far wider and often more complex than insider trading alone.

“There is no cookie cutter to use when you are creating a system to police international trading and provide credibility to the global markets,” Mann said.

Mann and other SEC enforcement officials declined to comment on what appears to be their longest-running foreign investigation--the Ellis case. But investigators from two House panels said they have been told by SEC personnel that the case is still open.

Claude Dreifuss, one of the principals of Ellis, said in a telephone interview that the firm has done nothing wrong and that he is puzzled by the continuing interest of U.S. authorities.

“For us, it (the inquiry) is over for a long time,” Dreifuss said.

In addition to the Barnard subcommittee, the Ellis case is being scrutinized by the House Energy and Commerce Committee’s Oversight and Investigations Subcommittee headed by Rep. John D. Dingell (D-Mich.). The investigators have turned up substantial new information about the case during a two-year inquiry into the use of foreign entities to escape U.S. securities laws.

What has eluded the congressional staff as well as the SEC is the puzzle’s key piece--who was behind the suspicious trading by Ellis?

Self-Policing Questioned

Records subpoenaed by the subcommittee show that Ellis spread its trades among 27 U.S. brokerages houses and many of the trades involved stock in companies just before takeovers were announced. Such purchases are often viewed as evidence of insider trading.

The Dingell investigators believe that the brokerages failed to detect the insider trading scheme or ignored it, raising questions about the effectiveness of Wall Street’s self-policing that are expected to be aired in a congressional hearing later this year or early in 1989.

Documents obtained by the subcommittee from L. F. Rothschild, a New York brokerage house that handled a heavy volume of Ellis trading, indicate that the New York Stock Exchange and SEC made inquiries in fall 1981 about trading by Ellis.

Internal Rothschild memos show that the broker handling the Ellis account was cautioned by the firm several times about copying the trades for his personal account and the accounts of his other customers because of the possibility of insider trading.

The earliest warning came in 1981, according to the memos, and Rothschild began providing Ellis’ trading records to the SEC as early as 1982.

The broker replied in memos that he had done nothing wrong. He said he had been questioned by the SEC in 1981 and asserted that he knew nothing about any inside information involved in the Ellis trading.

The subcommittee staff also found that Rothschild made quarterly payments of $12,500 to Ellis for stock research during part of the time it handled the company’s trading. The broker also made sizable payments to the Swiss firm for research, the staff said.

Rothschild did not stop doing business with Ellis until June, 1984, and the reason cited then was “the potential exposure to regulatory authority problems,” according to one internal memo. The broker resigned the following month and now works at another New York brokerage. Neither he nor Rothschild has been accused of wrongdoing.

Among the stocks Ellis purchased through its U.S. accounts was Jewel Cos., a Chicago-based supermarket chain. The buying came just before the public announcement of a takeover bid for Jewel by American Stores on June 1, 1984.

The Jewel purchase is one of the circumstantial links between Ellis and Dennis Levine, the investment banker who made $12.6 million trading on inside information before he was arrested in May, 1986. Levine eventually cooperated with the government and led them to Boesky and other insiders.

Maze of Relationships

Levine also bought Jewel stock during his insider spree, which lasted from 1980 until the end of 1985. A comparison of Levine’s purchases with a partial list of Ellis purchases shows 46 other stocks that were purchased by both Levine and Ellis.

Searching for a connection between Ellis and Levine led the congressional investigators to Bank Leu, a Swiss bank based in Zurich, and a tricky maze of relationships.

Levine executed his trades through an account at Bank Leu’s subsidiary in Nassau, Bahamas. Two Swiss nationals who worked at the subsidiary, Bruno Pletscher and Bernhard Meier, regularly copied Levine’s trades for their own accounts.

Meier is married to Helene Sarasin, a distant relative of the Sarasins who control A. Sarasin & Cie, a Swiss bank in Basel. A subsidiary of A. Sarasin owned Ellis until it was sold to Dreifuss and a partner in 1984. Alfred Sarasin, a senior partner at A. Sarasin, is on the Bank Leu board in Zurich.

In addition, when Bank Leu was preparing to turn over information to the SEC about trading by Levine and the bank employees, bank officials agreed secretly to withhold unspecified material concerning Meier’s private business dealings in Europe.

Meier, who left the bank and returned to Zurich in the midst of the Levine investigation, denies knowing anyone connected with Ellis and said he did not pass on tips about Levine’s purchases to anyone in Europe.

“I have no idea whatsoever about this Ellis thing,” Meier said in a telephone interview. “It is coincidental, from my point of view.”

No direct links have emerged between the Levine and Ellis cases. The circumstantial evidence creates a picture no clearer than those fuzzy photographs that purport to show the Loch Ness monster, and the delays and difficulties surrounding the SEC’s investigation of Ellis raise doubts about whether it will ever get any clearer.