Drive to curb insider trading extends to British merger wave. Surveillance increased; new legislation sought
The wave of deregulation and merger fever sweeping the City, London's financial district, has set off a sharp rise in suspected cases of insider trading - the use of unpublished price-sensitive information to deal in shares. Despite stock exchange efforts to curb the practice, analysts believe unscrupulous dealers continue to make hundreds of millions of pounds annually.
``It has increased over the last year,'' says Bob Wilkinson, director of the stock exchange's surveillance department. ``The big factor is that because there are more bids, there is more likelihood of greater insider dealing.''
Recently, the British-based magazine Acquisitions Monthly completed a study of insider trading here. Its report shows sharp increases in the share prices of target companies ahead of bids during the first half of 1986. This dramatic jump has led to suspicions that confidential information is being leaked.
The magazine examined 78 takeovers in the first half of this year. Its survey reports that three months prior to a bid, the average share price increase was 25 percent, with some companies showing rises of more than 60 percent. This indicates a substantial number of people may have had advance inside information that the company could soon become a target for a takeover bid.
Further evidence along these lines came when the magazine discovered that in 19 of the 78 cases, the average rise the month before the bid was announced was over 20 percent.
``It's always been here,'' says Acquisitions Monthly publisher Philip Healey, ``but it has increased over the last couple of years because of the greater amount of corporate activity.''
To cope with the problem, the stock exchange's surveillance department has beefed up its staff and installed new computers. But with the exchange now open to international as well as British houses, Mr. Wilkinson does not believe the problem will diminish.
``Insider trading is now a national problem,'' he says. ``In the future, it's going to be international.''
Because of the organized rings hiding behind offshore companies in traditional tax havens, hard evidence of insider trading remains difficult to obtain. Most of these firms, Wilkinson says, are based in the Channel Islands, the Isle of Man, the Caribbean, and Switzerland, often out of reach of British investigators.
The kind of complex organizational chain involved in insider trading was illustrated by the widely publicized case of Dennis Levine, an American investment banker who masterminded a massive insider trading scheme in the United States. Earlier this year, he agreed to give up $11.6 million of illegally obtained share profits as part of a plea bargaining agreement to settle charges brought by the Securities and Exchange Commission.
But the ability of the British government to punish such behavior has been hampered by inadequate legislation and a regulatory body far weaker than the SEC.
At the moment, the stock exchange investigates suspicious price movements and recommends cases to the Department of Trade and Industry for prosecution. But the investigative powers of the exchange and DTI are limited. Although able to require members to show their records, the exchange has been unable to compel nonmembers to respond even orally to questions.
This has been a particularly serious problem when seeking to determine the true ownership of shares in foreign nominee companies. The DTI's prosecution record has been poor, with only the most trivial cases taken to court. Of the 93 cases referred by the stock exchange to the department since 1980, only five have led to prosecutions and only three people have been convicted.
The government hopes passage of a financial services bill will improve the situation. Among other things, the legislation will remove the right to silence of suspected inside traders and treat refusal to answer questions as contempt of court. Investigation and prosecution powers will probably be retained by the DTI, although it will be able to appoint inspectors for some insider dealing inquiries.
``If nonmembers say to us now, `Get lost,' then we might get lost,'' Wilkinson says. ``They will not be able to do that after the act is passed.''
To combat insider dealing internationally, the DTI and the US SEC recently signed an agreement for regulators seeking to track down abuses of insider trading to exchange information and also approve trading links between stock exchanges. A fuller treaty is being negotiated.
Similar cooperation elsewhere in Western Europe could prove difficult, as the approach to insider trading varies from country to country. In France, it is a crime that carries a jail sentence, a fine, or both, both determined by the judge.
In Switzerland, legislation to ban insider trading is expected to take effect in 1988. It would punish offenders with up to three years in prison or a fine of up to 40,000 Swiss francs. Insider trading is not currently a crime in Switzerland and is illegal only if an individual in a company passes the information to an outsider.
Insider trading is not illegal in Italy, and there are no immediate plans to ban it. In the Netherlands, authorities are discussing legislation to make it a criminal offense, but no ban has yet been passed. In Belgium, the issue is under review.
In West Germany, there are no laws governing insider trading. The German exchanges have a code of conduct that is accepted by the majority of quoted German companies, but investigative powers exercised by special stock exchange commissions are limited.