Of course, there are some who know way more than I do about the stock markets who will probably make the (correct) point that it never really left. And I don’t just mean in a “Martha Stewart” kind of way either.
But after reading a story in today’s NY Times entitled Whispers of Mergers Set Off Suspicious Trading, it looks like a similar pattern to what happened back in the 1980’s when all of the biggest insider trading scandals came to light.
And if that is the case, then what can we expect in terms of the little trust in the stock market, the quite possibly overinflated stock prices and one of the last economic indicators which aren’t yet totally in the toilet?
The article cites a study conducted by a company called Measuredmarkets, Inc. which is an analytical research firm that analyzes trends and suspicious data with respect to companies’ stock prices surrounding specific events (the link has a few of their recent case studies).
To make this a readable and not overly technical diary, I’ll just keep to some of the information uncovered by Measuredmarkets with respect to mergers whose value was over $1 billion, and was over the most recent 12 month period. For starters, according to Christopher Thomas, President of Measuredmarkets:
The firm analyzed the price, the total number of shares traded and the number of individual trades in each stock during the weeks leading up to the announcement and looked for large deviations from trading patterns going back as far as four years.
Although any number of factors can lead to spikes in trading, deviations of the kind observed by Measuredmarkets are among the data used by regulators to spot insider trading. Of the 90 big mergers in the period, shares of 37 target companies exhibited abnormal trading in the days and weeks before the deals were disclosed.
Christopher K. Thomas, a former analyst and stockbroker who founded Measuredmarkets in 1997, said that his company’s analysis led to the conclusion that the aberrant activities most likely involved insider trading.
—snip—
It is always possible that a company’s stock moves because of developments in a particular industry or business sector, or because a prominent newsletter, columnist or blogger has written something that could prompt investors to take action. But in the companies that were analyzed, no such influences seemed to be at work.
—snip—
[I]n a handful of the mergers, significant progress toward a deal was being made on the days unusual trading occurred. For example, the day that four bidders were putting together buyout offers for Amegy Bancorp, a Houston bank company, trading in its stock quadrupled.
One of the biggest problems with insider trading cases is that, while it isn’t as difficult to spot the suspicious trading activity, it is much more difficult to prove that insider trading has occurred. Witness Martha Stewart, who wasn’t actually convicted of insider trading, as one of the latest and more high profile examples. Additionally, while the SEC isn’t exactly turning a blind eye to this activity, it is focusing more on individual cases as opposed to “institutional cases” (of course, this also fits in line with the IRS focusing more on lower income level cases while allowing the ultra wealthy cheat the IRS out of $70 billion per year.
However, there is one case that is going on now, where Congress (even the Republicans) is a bit perturbed at the SEC for the perceived dragging of its feet in a recent case:
Grassley, R-Iowa, said that the SEC hasn’t responded quickly enough to requests for documents and interviews and complained about the agency’s practice of prohibiting employees from disclosing information about ongoing investigations, according to a copy of a letter he sent to SEC Chairman Christopher Cox. The letter was distributed to news organizations.
Gary Aguirre, a former SEC investigator, told a Congressional committee earlier this year that he was fired when he tried to interview John Mack, the current chief executive of Morgan, as part of a probe he was conducting into Pequot.
Aguirre alleged that Mack may have tipped Pequot to a pending deal and claimed that the SEC quashed his inquiry because the Morgan Stanley banker is politically well connected.
Now, to digress just a bit here – as a former Andersen guy, I have said for years now that the large brokerage houses and financial institutions have way more information and pull over the stock prices than an accounting firm ever could, certainly had the ability to artificially pump up prices and has access to more inside information than pretty much anyone. However, the recent investigations by Elliot Spitzer only serve to reinforce that this issue is not going away and seems to be getting worse.
And we do get the typical “stock answer” from the SEC here, which seems to be more of the “move along, nothing to see here” response:
The S.E.C. would not comment on the study but said that it had looked at Measuredmarkets’ system and concluded that surveillance techniques of self-regulatory organizations like the New York Stock Exchange were more sophisticated.
Securities regulators, traders and academics agree that merger waves lead to more illicit trading on nonpublic information. In Britain, regulators have made insider trading a primary focus and have shifted their scrutiny to brokerage firms and institutional investors, rather than individuals, involved in mergers.
Like Measuredmarkets, the Financial Services Authority in British has found a pattern of stock trading ahead of mergers. In 2004, 29 percent of companies involved in mergers experienced abnormal trading before public announcements, according to a March 2006 study of large British companies subject to takeovers. In 2001, the comparable figure was 21 percent.
And even still, the article states that the regulators at the New York Stock Exchange have made more referrals to the SEC this year than last year, and last year there were more referrals than the prior year. While the article cites a number of cases and some detail regarding some specific recent cases, including Koch Insustries (bottom of page 3 and top of page 4), I’ll leave you with a few choice blurbs:
Officials from the nation’s top securities regulators met on Aug. 18 to discuss emerging trends in insider trading, said Joseph J. Cella, chief of the office of market surveillance at the S.E.C. “We are certainly cognizant of the uptick in merger-and-acquisition activity,” he said.
The companies identified by Measuredmarkets represented many industries and received bids not only from corporate rivals, but also from private investor groups and management-led buyout teams.
—snip—
In each of the five cases, the abnormal trading occurred during periods of significant behind-the-scenes progress in the mergers, as outlined by the companies themselves in regulatory filings long after the deals were struck.
—snip—
In a July 7 speech, Hector Sants, managing director of wholesale and institutional markets at the F.S.A., described why his focus was shifting to institutions. “Our spotlight will shine in particular on relationships between investment banks and their clients,” he said, “because we believe the risk of market abuse is highest where a client can be made an insider on a forthcoming deal.”
The fast and furious pace of deals this year is increasing the opportunities for mischief. In each of the last three months, according to Thomson Financial, the value of announced mergers has exceeded $100 billion — the longest stretch of such volume since 2000.
I couldn’t help but notice the contrast in how the UK (witness the comments by Hector Sants) is looking at this as opposed to how the US is looking at this. Seems like one country is serious about doing something to counter the potential for illegalities, while the other is “aware of the situation”.
But not enough to get serious about punishing the corporate and institutional wrongdoing. Because, you know, that would be harmful to the economy, while it is much easier to just go after the individuals. And we know how the “powers that be” here in the US feel about We the People vs. “We Your Corporate Overlords”.
Hopefully, this won’t lead to a repeat of 1987.
