'80s Redux: Insider Trading on the Rise

March 2, 2007 — -- It's back!

Just as '80s trends like miniskirts and electro music have made a comeback, so has insider trading.

Thursday's arrest of nine individuals and the guilty pleas of four others who were accused of taking part in a massive, five-year scheme that netted more than $15 million in profits were just the beginning.

The number of insider trading cases pursued by federal authorities has increased dramatically in recent years. The New York Stock Exchange's referrals of insider trading to the Securities and Exchange Commission are expected to rise by 105 percent over the past two years, according to NYSE market surveillance vice president Robert Marchman.

And the SEC has punished perpetrators with bigger penalties. In 2005, penalties totaled more than $3.9 million. For the first half of 2006, penalties exceeded $3.2 million.

Certainly, trading has spiked in advance of some of the biggest recent takeovers, including TXU Corp. and Hyperion Solutions Corp. And a study last August by Measuredmarkets Inc. demonstrated that insiders may have traded illegally just days before 41 percent of the previous year's' largest acquisitions.

But this time around, there's a new wrinkle. It's not pinstripe-suited traders like Ivan Boesky and Michael Milken, who used nonpublic information to make trades and reap huge profits during the '80s.

Today, much of the insider trading is fueled by the activity of hedge funds, the loosely regulated investment groups that have proliferated like mushrooms after the rain, according to Marchman. "There's a suspicion that hedge funds are engaged in this type of behavior," says John Coffee Jr., professor of law at Columbia University.

The latest case, notable for the fact that it involved senior officers at some of Wall Street's biggest firms, also involved hedge-fund traders. During a meeting at New York's Oyster Bar in 2001, a few friends allegedly came up with a scheme to help one of them settle a $25,000 debt. The executive director of UBS's equity research department, Mitchel Guttenberg, offered to give analyst ratings in advance to Erik Franklin, a hedge-fund trader at Bear Stearns, sending coded messages over disposable cell phones, the SEC claims.