Psst! Insider Trading’s Back and Spreading

Insider trading is back with a vengeance.

More than 10 years after the Securities and Exchange Commission’s blockbuster case against Wall Street’s most notorious insider traders--Dennis Levine, Ivan Boesky and Martin Siegel--the illicit practice of using tips from company insiders to make money on stocks is more popular than ever.

“We have more insider trading investigations underway now than we ever had,” said Thomas C. Newkirk, associate director of the SEC’s division of enforcement.

Newkirk and an army of SEC attorneys are juggling about 350 insider-trading investigations, up from a high of 339 in 1996. Ten years ago, the agency handled 169 cases.

Experts say insider trading usually increases during heavy merger and acquisition activity. And corporate marriages have been widespread in banking, brokerage, insurance, defense and health care in recent years.

Not all insider trading is bad. It occurs when executives buy and sell stock in their own company. There is nothing illegal about it. In fact, their trades are often closely watched by investors as signals to gauge which way a stock may be heading.

But executives cross the line when they know of an event that will affect the company’s stock price, such as a merger or a large loss, and buy or sell the stock before an announcement is made.

In the middle and late 1980s, Wall Street was a breeding ground for illegal insider trading. But now, some experts are worried that the problem is infecting Main Street America.

“We have brought cases against lawyers, we have had a couple of cases in the last year or so involving public relations professionals, we have had a fair number of people who aren’t very high up in the company,” Newkirk said.

Take the case of Kansas City advertising executive William M. Fromm, who was the outside public relations and advertising specialist for Dayco Products Inc., a subsidiary of Amherst, N.Y.-based Mark IV Industries Inc., according to an SEC document.

Fromm picked up confidential information that Mark IV was about to acquire Purolator Products Co. from conversations with top Dayco and Mark IV executives, the SEC alleged. The information led him to believe that Mark IV was about to make the acquisition, so he bought 2,000 shares of Purolator before the announcement, according to the SEC. He also passed the tip to two others.

After Mark IV’s acquisition of Purolator, Fromm sold his shares, making a $13,750 profit.

The SEC claimed Fromm used “nonpublic” information and breached his fiduciary duty to Mark IV by making the trades. Fromm neither admitted nor denied wrongdoing, but he was ordered by the agency to pay about $230,000 in forfeited profit and penalties.

Whether it happens on Wall Street or Main Street, the pattern of insider trading is often the same.

“Individual ‘A’ works for a public company, figures out that something is going on, talks to a friend or a neighbor that something is going on. The friend or neighbor buys the stock and the price goes up,” said John H. Sturc, a lawyer who specializes in securities law at the firm Gibson, Dunn & Crutcher in Washington.

That was how Drexel Burnham Lambert’s merger and acquisitions specialist, Levine, made millions. He built a network of people who fed him information about takeover deals in the works.

Levine traded for years without being caught because it is often difficult to prove cases of insider trading. Sophisticated insider traders can cover their tracks and conceal their identities by placing trades through offshore banks.

“The hardest thing about insider-trading cases is connecting the people with the trading to people who have the information,” Newkirk said.

It took the government years to catch Levine. He concealed his trades by placing them through a bank in the Bahamas. His account at the bank was opened under a fictitious name, “Mr. Diamond.”

After a painstaking investigation by the SEC, Levine was caught and sent to prison. He paid millions in fines and cooperated with enforcement officials to catch others.

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Mounting Mergers

The enormous jump in the dollar value of merger and acquisition activity since 1978 has, in part, prompted an increase in insider trading investigations. Annual dollar value, in billions:

‘97: $657.1

Source: Mergerstat