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A Decade of Greed: Insider Trading Never Went Away

September 18, 1996

WASHINGTON (AP) _ Insider trading, one of the most infamous acts in the financial fraudster’s playbook, remains at record levels despite a decade of steady crackdowns by regulators.

``You hear the observation that insider trading is back. Well, from the regulatory perspective, it never went away,″ said Paul Gerlach, associate enforcement director for the Securities and Exchange Commission who handles some of the agency’s major cases.

In 1994 and 1995, the SEC brought 45 cases involving inside trading each year, and Gerlach estimates the activity is about the same so far this year. The SEC brought one of its more unusual insider trading cases on Monday, when it sued the unnamed holders of Swiss and Bahamian accounts for alleged insider trading ahead of The Gillette Co.’s merger proposal for Duracell International.

Insider trading _ made famous by Dennis Levine and Ivan Boesky in the mid-1980s _ refers to buying or selling stock with ``material″ non-public information that would send the stock soaring or crashing if disclosed.

Traditional insider trading usually occurs as someone leaks the details of a pending merger agreement. SEC officials say the high volume of merger deals throughout the economy provides fertile ground for the illegal trading, since people stand to reap enormous profits from the jump in stock prices caused by such deals.

Another unusual insider trading case was filed in May. Intuit Inc.’s former chief financial officer confided in his wife that his software company was about to be purchased by Microsoft. But the wife, Kathleen Lane, shared the information with her son and daughter, who with three friends traded Intuit stock on the news. In May, all six settled the SEC’s federal civil suit, without admitting or denying wrongdoing, by paying $472,000.

One disturbing development for regulators is a recent decision by the 8th U.S. Circuit Court of Appeals that struck down one of the SEC’s main enforcement tools in insider trading cases. The court, which covers several Midwestern states, rejected the so-called misappropriation theory in insider trading cases, which is used to nab people trading on inside information who don’t owe a fiduciary duty to the company’s shareholders. The court also rejected an SEC rule used to snare insider trading in tender offers.

The 8th Circuit decision came in August in a Justice Department case against Minneapolis attorney James H. O’Hagan, who was charged with insider trading during the 1988 takeover bid of Pillsbury Co. by Grand Metropolitan PLC. SEC General Counsel Richard Walker has asked the appeals court for a rehearing on the matter.

Regulators say these enforcement tools are important because insider trading follows few patterns. In an analysis of 35 cases brought in 1995 that solely dealt with insider trading, Gerlach said 20 involved trading ahead of mergers, three ahead of other positive corporate announcements and six ahead of bad corporate news.

He described 16 of the cases as ``classic insider trading″ involving an executive, company director or employee who traded on confidential, market sensitive information or tipped friends about it.

Investigators at the Nasdaq Stock Market’s market surveillance unit refer a significant number of insider trading cases to the SEC. Halley Milligan, who heads a team of nine insider trading investigators at Nasdaq, said the market has made 73 referrals on suspected insider trading to the SEC so far in 1996, which is on par with last year, when 107 cases were referred to the agency.

Regulators said they couldn’t explain why people continue to run the risk of insider trading.

``We’re just as mystified as you are,″ said Lynn Nellius, a member of Nasdaq’s market surveillance team. ``It’s not like we’re seeing repeat offenders. It’s new traffic.″

Gerlach was equally puzzled.

``The only thing you can suppose is the greed overwhelms someone’s better judgement.″

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