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Insider trading much more prevalent than suspected especially before mergers and acquisitions

The United States may be facing significant and systemic insider trading

Insider trading is more widespread than many believed, especially before mergers and acquisitions.

A new research project shows that some 25 percent of public company deals could include insider trading, based on the findings of two business professors at New York University and one professor from McGill University.

It shows too there could be what has been described as a “significant and systemic insider trading problem.”

The award-winning study was called “Informed Options Trading prior to M&A Announcements: Insider Trading?” The researchers include: Patrick Augustin of McGill, and Menachem Brenner and Marti G. Subrahmanyam, both of NYU.

“We became intrigued by reports of a number of illegal insider trading cases in options ahead of takeover announcements, in particular the leveraged buyout of Heinz by Warren Buffet and 3G Capital,” Augustin said in a statement. “Hence, we set out to investigate whether instances of informed trading in options occur systematically or whether they were just random bets. The statistical evidence we present is consistent with informed trading strategies, and is too strong to be dismissed as just random speculation. Our findings likely will be highly useful to regulators, firms and investors in understanding where and how informed investors trade.”

“The truth is worse than we imagined,” The New York Times reported about the study. “A quarter of all public company deals may involve some kind of insider trading.”

To come up with the study, the researchers reviewed stock option movements to see if “unusual activity took place in the 30 days before a deal’s announcement,” The Times said. “The results are persuasive and disturbing, suggesting that law enforcement is woefully behind — or perhaps is … overwhelmed.”

In fact, the study said the Securities and Exchange Commission (SEC) litigated only “about 4.7 percent of the 1,859 M.&A. deals included in our sample.”

 

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And in recent months, the SEC lost some of their higher-profile insider trading cases. For instance, a federal court jury in New York City cleared Nelson J. Obus, manager of a hedge fund, and two other men, of insider trading allegations, InsideCounsel reported. In addition, after just a few hours of deliberations, a Santa Ana, Calif., jury cleared Manouchehr Moshayedi, a co-founder and ex-CEO of STEC, in a civil lawsuit stemming from allegations of trading on inside information, InsideCounseladded in another report.

In addition, SAC Capital’s founder Steven Cohen may be able to avoid any criminal charges – as an insider trading case against his hedge fund ended with the approval of a $1.8 billion settlement package.

Yet, SEC Chairman Mary Jo White has made public statements that the commission will take more difficult cases to trial.

Contributing Author

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Ed Silverstein

Ed Silverstein is a veteran writer and editor for magazines, websites and newspapers. A graduate of Harvard's Kennedy School of Government, he has won several...

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