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Business Week Leak Scandal Raises Questions About Market Policing

August 7, 1988

NEW YORK (AP) _ Insider trading on stolen stock columns from Business Week issues has raised troubling questions that go to the heart of the relationship between financial markets and influential news reports.

The Business Week scandal also has focused attention on widespread ignorance of what insider trading is, despite the wave of publicity about Wall Street felons such as Ivan Boesky.

In addition, the scandal illustrates the securities industry’s own problems in detecting and policing suspicious trades, despite its array of sophisticated surveillance gear.

Although Business Week has been faulted by some for not disclosing longtime suspicions of insider trading on the market-sensitive ″Inside Wall Street″ columns, lawyers agree the biggest U.S. business weekly bears no legal liability for what happened and took sincere action to stop the thefts.

But the magazine’s policy of reporting on little-known, thinly traded stocks, a key element of the scandal, has aroused concern that Business Week may have been an unwitting accomplice of the insider traders.

″It does make the situation more troubling,″ said Sam Scott Miller, a securities lawyer in New York. ″But it’s always easy to judge what the right thing to do was after it’s clear what was going on.″

John Dierdorff, Business Week’s managing editor, said in an interview that the magazine is acutely aware of the potential impact on prices of offbeat stocks described in ″Inside Wall Street,″ but has to balance that concern against the news value of telling readers about interesting situations.

″We do not tip stocks,″ Dierdorff said. ″If you actually make recommendations, you’d have to get yourself a license from one of the regulatory bodies.″

The magazine’s aim in the column, Dierdorff said, has been and will be ″to report what some smart guys on Wall Street are doing.″

Trades in at least two dozen securities firms are under investigation because of the scandal, in which some employees of R.R. Donnelley & Sons Co., a company that prints Business Week, peddled issues to brokers before the magazine reached the public.

The brokers then bought stocks described in ″Inside Wall Street,″ and sold them later for profit, after other investors had read the column and purchased the stocks, thereby inflating the prices.

At least seven people have lost their jobs because of alleged roles in the scandal. Although no charges had been filed by the weekend, the Securities and Exchange Commission and criminal-law enforcers in at least two states were known to be involved in probes of the purloined magazines.

The use of confidential information to buy and sell stocks is commonly described as insider trading and is considered a felony under federal securities laws.

Two weeks after Business Week revealed the problem, which editors had suspected in early 1987, the magazine gave the first detailed accounting of what happened.

In the latest issue, distributed Friday, Business Week said it first tried to plug suspected leaks by tightening security procedures, restricting access to ″Inside Wall Street″ during the editing process, and reminding printers of the need for confidentiality. The problem appeared to abate until this spring.

Editor-In-Chief Stephen Shepard defended the magazine’s decision not to alert the SEC, saying regulators may have demanded disclosure of confidential news sources as part of any investigation.

Moreover, Business Week had no obligation to notify the commission, in the opinion of its general counsel, Robert N. Landes. Other lawyers agreed with that opinion, especially since the magazine had determined none of its staff was implicated.

″When you go talk to the cops, the first thing the cops do is chase the people who reported the incident,″ said Stephen R. Miller, a securities lawyer at the Philadelphia law firm of Dechert Price & Rhoads. ″So you’re a little wary and want to be sure you know the guy who did it.″

As in many insider trading cases, the key to finding the culprits is abnormal trading of the stocks in question. But even the most sophisticated technology used to track stock activity does not reveal more than simple hints.

Market surveillance computers at the major exchanges are designed to sound alarms when a stock breaks its historical price or volume pattern, an aberration called a ″kickout.″

In the Business Week case, more than two dozen stocks kicked out over a period of many months and were noticed by surveillance officials at the New York Stock Exchange, American Stock Exchange and National Association of Securities Dealers, which monitors over-the-counter trading.

But these officials said in interviews that patterns of trading can be extremely difficult to detect, especially if the stocks have no apparent relationship or the kickouts occur irregularly.

″When you see 10 different stocks kicking out at any point in time, it’s not necessarily going to click immediately,″ said Agnes Gautier, vice president of market surveillance at the NYSE. ″What you’re looking for is a common theme.″

Even if kickouts are traceable to a column in Business Week or some other publication, she said, ″Of necessity, you’re talking about time and a number of issues. You have to see that before you say there’s a problem here.″

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