>Well, the gov't hired a fancy lawyer, David Boies, to argue their case.
>He's not a civil servant. But the #2 lawyer at Salomon Bros. once told me
>that the SEC lawyers are very very sharp folks. Of course, they're looking
>to put in a few years in gov't work so they can go practice in the private
>sector and make bundles more money. Ditto the Justice Dept. As with the
>Fed, it's clear the gov't can work well in areas that capital cares about.
>When it comes to DMVs and welfare offices, though, underinvestment and
>undertraining reign.
Today's " Heard On The Street" column in the Wall St. Journal, is about suspicions of insider trading in recent M&A activity and the turnover at the SEC:
----------------
February 23, 1999 <Picture: [The Wall Street Journal Interactive Edition]>
------------------------------------------------------------------------
Heard on the Street Frenzy of Trading Activity Precedes Three Mergers
By SUSAN PULLIAM, STEVEN LIPIN and MICHAEL SCHROEDER Staff Reporters of THE WALL STREET JOURNAL
Merger Monday got a head start on Friday.
On Friday, shares of aerospace company Sundstrand jumped 12%. Among utilities, shares of KN Energy bounced up 11%, and Consolidated Natural Gas marched ahead 6.6%.
Lo and behold, Monday all three turned out to be takeover targets, leading to many raised eyebrows. "It certainly makes you wonder if someone knew something," says Barry Cohen, head of takeover-stock trading at Bear Stearns. "But it's a very hard thing to prove. Everyone just heard the 'rumor.' "
But don't hold your breath for a big new batch of enforcement actions soon. With an increase in takeover activity and a decrease in experienced Securities and Exchange Commission staffers to investigate questionable trading, the SEC has its hands more than full.
<Picture: [Did someone get early word?]>
Of course, it all could be coincidence. No one at any of the three companies let on last week that anything was afoot. CNG officials declined to comment on Friday when contacted by the New York Stock Exchange for an explanation of unusual trading activity in CNG stock and declined to comment to The Wall Street Journal Monday. Sundstrand and KN Energy officials declined to comment Monday when contacted by the Journal about the surge in their share prices last week.
But the action in the three stocks grabbed the attention of traders on Friday, who noticed not only a surge in volume, three and four times what is normal for Sundstrand and Consolidated Gas, but also the type of frenzied buying that suggests news is on the way. For instance, shares of Sundstrand shot up four points, from 54 to 58, between 1:45 p.m. and 4 p.m. EST, while shares of KNE spurted 5% between noon and 12:30 p.m. Traders also picked up unusual options activity in Sundstrand and Consolidated Gas as well, both of which showed high volatility in bullish "call" options on Friday.
It is enough to make some Wall Streeters wonder if 1980s-style leaks are back in fashion, traders say. The Securities and Exchange Commission says unusual trading appears to be on the rise, although it traditionally doesn't comment on investigations.
<Picture: [Go]>Electricity and Natural-Gas Companies Are Again Looking for Merger Partners
<Picture: [Go]>Southern Union Bid for Southwest Gas of $970 Million Tops Offer by Oneok
"Merger-and-acquisition activity has increased, and we're seeing a lot of cases involving buying in advance of good news. What's different is we are not seeing the kingpins. We are seeing the junior lawyers and analysts and staff members who didn't learn the lessons of the past," says Richard Walker, SEC director of enforcement.
Asked if the New York Stock Exchange was investigating the unusual trading, a spokesman said the exchange doesn't comment on investigations.
Even though insider activity appears to be up, the number of insider-trading cases brought by the SEC dropped slightly in 1998 to 49 from year-earlier levels. In part, the SEC says, this results from the fact that its enforcement division, which has the job of making sure insider trading rules are followed, has seen big upheavals among its staff. What's more, its budget for tracking down violators has stayed even, while the opportunities to trade on insider information have multiplied during the merger frenzy of the past couple of years.
"There seem to be more opportunities, given that there are more takeovers these days," notes Lisa Meulbroek, associate professor at Harvard Business School, who has studied insider trading. "And the extent to which people will capitalize on that depends on whether they think they will get caught."
Lately, there haven't been too many high-profile insider trading cases, and those there have been usually have involved little guys trying to make a quick profit on a snippet of information.
The SEC's Mr. Walker says insider-trading "buying patterns have changed" in the past few years. For the most part, rather than big run-ups in stock prices several days in advance of a significant corporate event, the SEC is seeing "suspicious trading within hours of events." Mr. Walker adds that the agency is seeing much more illegal trading done with options, as opposed to equity buys.
Even before the flurry of pre-deal runups, investors have noticed some big jumps in deal stocks before the deal was announced. Indeed, in one of the biggest industrial merger accords ever, shares of Mobil soared over the three days before Exxon announced its over-$70 billion acquisition agreement to buy Mobil last November.
"We're back to the good old days," says one big hedge-fund manager, "where everything is leaked."
Buying in Sundstrand in particular caught the attention of some big investors. Notes the same hedge-fund manager, "My trader came in at 3 p.m. and asked me if I'd seen Sundstrand. People were buying aggressively," he says. "It was the kind of buying that looked panicked, and it's the type you see when there is news."
The environment may not change soon, however, if the shortage of experienced SEC staffers is any indication. In the last two years, the SEC's New York office has seen 54% of its 137-member enforcement staff leave, including 57 of 88 attorneys, many to big law firms and brokerage firms. With a shortage of veteran cops to police the beat, the SEC's strategy has been to target high- profile cases, hoping others will get the message. With limited staff, however, there is much that may go undetected.
The SEC had 469 total enforcement cases, of which the 49 insider-trading cases were part, for the fiscal year ended Sept. 30, down slightly from the prior year's 489. The SEC has received only modest budget increases the past few years, putting even more of a strain on the enforcement staff. Furthermore, an SEC plan to use $7 million in salary savings from the high turnover to help retain experienced staff was rejected by Congress.
In addition to developing its own cases, the SEC also depends on help from the National Association of Securities Dealers, the self-regulatory organization for the securities industry, to present possible cases. That means the SEC will have a few hundred cases in the pipeline during any given year. The NASD, which has a sophisticated surveillance group that monitors unusual trading, referred 99 cases in 1998 for SEC action, down from 120 for each of the previous two years. That doesn't mean that insider trading was less of a problem. The NASD said its own investigations last year were actually higher than the previous few years, but that it lacked enough evidence to recommend more cases to the SEC.