Suspected NYSE Insider Trading Rose in 2008 |
Date: Thursday, January 22, 2009
Author: Jonathan Spicer, Thomson Reuters.com
Suspected insider trading cases reached an
all-time high last year, driven less by hedge funds and more by pillow
talk between relatives and friends, the head of surveillance at the New
York Stock Exchange said on Wednesday [Jan. 21].
In a year when bombshell revelations rocked bank stocks,
governments outlawed short-selling and panicked investors brought on
the worst market rout since the 1930s, there was much to tempt those
with privileged information.
NYSE Regulation, the Big Board's oversight body, referred 146 cases of
suspected insider trading to the U.S. Securities and Exchange
Commission in 2008, five more than in 2007, the previous record year,
and more than twice as many as in 2004.
Hedge funds, often associated with insider trading, contracted amid the
market drop and played a smaller role in suspected insider trading on
the Big Board, said John Malitzis, executive vice president of market
surveillance at NYSE Regulation. He said a corresponding rise in
classic cases of insider trading—where material information about a
public security is exchanged and used in breach of confidence or
fiduciary duty—was behind the overall increase.
"That's where we saw a shift in our referrals—to the relative of a
corporate insider … or a colleague, or a member of a country club, or
somebody in their inner circle," Mr. Malitzis told Reuters.
Slightly more than half of last year's referrals involved one or more
hedge funds, down from 72% in 2007. The drop-off may be the result of
an overall contraction in the hedge fund industry, where investor
redemptions have forced the funds to liquidate positions, compounding
the sell-off that centered on banks and other financial institutions.
"Were there leaks of important information on the profitability of
banks, that insiders were taking advantage of?" Mr. Malitzis said.
"That is absolutely a concern and a priority for us."
NYSE Regulation monitors trading and listing compliance for NYSE
Euronext's U.S. operations. Since September, it has also been
responsible for detecting insider trading in all NYSE-listed
securities, wherever they trade in the United States. Its counterpart
for Nasdaq listings, the Financial Industry Regulatory Authority,
reported a similar rise in August.
Mr. Malitzis said volume spikes in the last minutes of trading, as well
as big midday price swings, emerged as trends in 2008 that tipped off
market police. A study by Credit Suisse showed that 17% of trading
volume on the Standard & Poor's 500 stock index took place in the
final half-hour of trading in November, up from 12% in 2006 and 2007.
Generational Ignorance
Insider trading spiked in the late 1980s, highlighted by the
1989 mass indictment for racketeering and securities fraud of U.S.
financier Michael Milken, who was ultimately charged with lesser
violations.
A sharp regulatory crackdown was followed by a quiet 1990s, but the
number of cases has risen steadily over the last five years. Mr.
Malitzis, 41, said the average trader working today "was probably in
elementary school" during the late 1980s crackdown.
"When a new generation comes up that wasn't front row to the
lessons of the late '80s, they think it's easy to do and no one's going
to catch them," he said. "But the fact is it's very easy for us to
catch these folks. And I think they're learning the hard way."
Most of NYSE Regulation's referrals are fully investigated by
the SEC. It is unclear how many result in convictions. In October, the
SEC said it brought 671 enforcement actions during its 2008 fiscal
year, with insider trading up 25% and market manipulation up 45% from
the previous year.
A sweeping investigation launched last summer into market rumors, as
well as the temporary ban on short selling financial stocks, dominated
much regulatory attention in a year mired in recession.
"Whenever you have major disruptions in price, you're going to have
allegations of manipulation," said James Angel, associate professor of
finance at Georgetown University's McDonough School of Business, who is
currently writing a paper on wide oil market swings. "But manipulation
is hard to prove because one man's manipulation is another man's price
discovery."
By Jonathan Spicer
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