Despite Reforms, Abuses Still Suspected on Wall St.
Ever since stock speculator Ivan F. Boesky pleaded guilty to insider trading and pointed his finger at widespread corruption on Wall Street, the securities industry and regulators watching over it have taken many steps to weed out abuses. Still, the abuses have hardly disappeared and may well be growing in some cases, regulators and some Wall Street officials say.
In the two years since Boesky’s guilty plea, investment firms have buttressed their efforts to comply with the law. Stock exchanges are watching more closely for abuses. Congress has enacted a tough bill cracking down on insider trading. Regulators and prosecutors have uncovered more wrongdoing, culminating in this week’s agreement by brokerage giant Drexel Burnham Lambert Inc. to plead guilty to six felony counts of securities, mail and wire fraud.
But the more things change, the more things seem to stay the same. Illegal insider trading, although apparently subsiding somewhat from the level of several years ago, is believed to occur in numerous takeover deals, professional traders say. Regulators still suspect market manipulation and hidden stock buying in takeover fights--practices similar to those admitted by Drexel Burnham Lambert.
Consumer complaints involving such practices as unauthorized trading and misrepresenting the risk of certain investments are at or near record levels. So is the number of customer disputes taken to arbitration.
Such behavior continues to erode the credibility of Wall Street firms and is a major reason why small individual investors are staying out of the stock market, some industry officials admit.
“We’ve got to clean this up or we will never attract the public back to the marketplace,” said Robert W. Nichols, president of RNC Capital Management, a Los Angeles investment firm. “The public believes the market is rigged, that they can’t get a square shake.”
“The Drexel guilty plea and recently enacted tough insider trading legislation send a clear message to Wall Street: The cop is back on the beat and the ‘anything goes’ mentality will not be tolerated anymore,” said Rep. Edward J. Markey (D-Mass.), chairman of the House subcommittee on telecommunications and finance.
More Regulation Sought
Critics call for even more regulation and supervision, arguing that Congress, the Securities and Exchange Commission and state regulators have not done enough and must commit even greater resources to dealing with securities violators.
Some law enforcement officials, they add, are not aggressive enough in going after lawbreakers, in part because white-collar crime is hard to detect and prosecute.
Critics say firms are failing to adequately police themselves and that unscrupulous brokers are still not carefully supervised or harshly disciplined.
Conflicts of interest, they say, are endemic in the securities business, which makes money by selling financial products to clients. They worry that such abuses could increase in the current lackluster stock market environment because pressure has grown on brokers to generate more trades and commission revenues.
Securities industry officials admit that abuses still exist but say they are isolated and not a widespread industry practice.
“When you consider the scope of what’s going on in the industry, there are not that many cases of abuse,” said William J. Fitzpatrick, general counsel for the Securities Industry Assn., the industry’s chief trade group.
He noted that only 4,000-plus arbitration cases were filed this year by individual investors with the National Assn. of Securities Dealers--up more than a third from the year before--amid “a universe of hundreds and hundreds of millions of transactions in a year. The amount of troublesome cases are really a small percentage.”
Other industry officials contend that recent publicized cases of insider trading and other abuses are partly a result of increased regulatory enforcement efforts--arguably the strongest crackdown on Wall Street corruption since the SEC in the 1930s exposed widespread theft, market manipulation and fraud leading up to the 1929 stock market crash.
Boesky Linked to Most Cases
They add that most insider trading cases made public since 1986--including the Drexel case--involved activities linked directly or indirectly to Boesky.
“It’s not like (insider trading cases) are breaking out independently all over the place,” Fitzpatrick said.
But the public’s perception of widespread greed and abuse on Wall Street has led firms and regulators to step up policing efforts considerably in the last two years.
Securities firms have beefed up their compliance staffs. Merrill Lynch, for example, last year tapped as its director of compliance Donald Malawsky, formerly director of enforcement at the New York Stock Exchange and bureau chief of the SEC’s New York office.
Such compliance officers are charged with looking for abuses within firms. But there have been some notable failures to detect wrongdoing and act on it--fueling charges that compliance officers are not given enough leeway to crack down on employees generating the most revenues.
Firm Fined $25 Million
Kidder, Peabody & Co., for example, was fined $25.3 million last year by the SEC for failing to detect insider trading. And investigators at Morgan Stanley & Co. failed to act on evidence of suspicious trading by Taiwanese businessman Fred C. Lee last year. Lee was charged by the SEC in June of this year with trading on inside information provided to him by a young Morgan Stanley analyst. The analyst, Stephen Wang Jr., later pleaded guilty to insider trading charges.
So as not to rely strictly on Wall Street firms as watchdogs, the New York Stock Exchange has expanded the staff that keeps an eye out for improper trading activities. The exchange and the SEC have increased their computer capability to more quickly detect suspicious trading, Donald Van Weezel, the exchange’s managing director of member firm regulation, said.
The NYSE has also instituted rules requiring member securities firms to file quarterly reports indicating whether they have found wrongdoing. If so, Van Weezel said, they must also verify that they are investigating it.
Bounties for Informers
Congress this fall passed a tough new insider trading law that, among other things, greatly increases monetary penalties and jail terms for the crime. It also requires securities firms to devote more resources to detecting insider trading and provides bounty payments to informers.
There are signs that these and other measures may be working.
Insider trading appears to have subsided considerably since the Boesky case surfaced. Although no exact figures are available, professional traders and others say that heavy trading in some stocks involved in possible takeovers typically might be noticeable one day in advance of a major announcement, rather than three or four days before, indicating fewer people are getting inside information.
“Now it’s quite clear that insider trading isn’t an acceptable practice,” said Robert N. Gordon, president of Twenty-First Securities, a New York trading house often involved in trading of takeover candidates. “People are more attuned and drilled in what can and cannot be said.”
Nonetheless, suspicions abound that illegal insider trading still flourishes.
Examples are numerous of stocks that rose sharply in heavy trading this last year just before announcements of merger bids or other significant news. This last week, Rexene Corp. stock rose on heavy volume before a company announcement Thursday that it is in talks to be acquired. Cummins Engine stock also rose sharply this month just before disclosure that it expects an investor to acquire 5% of its shares.
MGM/UA Communications stock started climbing a few days before the company announced in April that it had received acquisition inquiries. Roper Corp. stock jumped just before a takeover bid by Whirlpool in February. Staley Continental stock rose steadily in the days before an April disclosure of a bid by Tate & Lyle.
The SEC is said to be investigating suspected insider trading in Sterling Drug in January, days before a takeover bid by F. Hoffman-La Roche & Co. The agency is also probing possible illegal insider trading in shares of Burlington Northern before a June announcement that it was splitting in two.
Suspicions About Mergers
Suspicions are also widespread about abuses in the highly profitable mergers and acquisitions field. SEC Chairman David S. Ruder this week testified to Congress that he suspects that Wall Street merger advisers often work with managements to hide information or mislead the public about the true value of companies being taken over. In cases in which managements are trying to take over their own companies, that could result in shareholders getting far less than they should.
The most clear-cut evidence of abuse may be that involving abuse of individual investors. Most of the cases involve rather small amounts, but occasionally huge abuses are disclosed. For example, Charles Schwab & Co., the nation’s largest discount broker, last month reduced its fourth-quarter profits by $2.4 million to cover refunds to customers of money it received through unauthorized use of their stocks.