Far more illegally trade and slip by

May 16, 2007|By Jay Hancock | Jay Hancock,Sun Columnsit

Last week's arrest of a Morgan Stanley analyst and her husband might help to explain why stock in Town & Country Trust weirdly started rising in December 2005. But it doesn't explain everything.

Even if the two alleged inside traders bought 3,000 shares of Town & Country days before the Baltimore apartment landlord announced it was being sold, as federal authorities charge, their activity wouldn't come close to making the stock behave as it did. Nearly 2 million Town & Country shares changed hands one day shortly before the deal was announced - the biggest volume in at least a decade.

Who were all the other buyers? Either investors inexplicably fell in love with Town & Country, or the merger news leaked down Wall Street all the way to the East River.

Despite a surge in high-profile, insider-trading prosecutions, it looks like authorities are still missing many more such violations than they're catching. Barely a big buyout is announced these days that doesn't feature a spike in options trading beforehand.

Research of big mergers in 2005 and 2006 by Measuredmarkets Inc. showed that suspicious trading occurred in the stocks of 41 percent of the takeover targets before the deals were announced. That study was done last year for The New York Times. A similar investigation showed suspicious trading in 61 percent of Canadian takeovers, Measuredmarkets principal Christopher K. Thomas said.

Forty percent or 60 percent - that's a shockingly huge portion of deals that might have been compromised and is far more than those for which prosecutions have been filed.

It's illegal for those in the know - executives, lawyers, bankers or their relatives - to buy stock in takeover candidates before the deals become public.

But it is achingly tempting because takeover shares almost always jump sharply after the announcement is made.

In the case of Town & Country, which became the subject of a bidding war, people piled into the stock for no apparent reason in early December 2005. Shares hit a record $30 on Dec. 7, and there were several days of higher-than-normal volume.

On Dec. 19, the company announced that it had agreed to be acquired by Morgan Stanley Real Estate and a partner for $33.90 a share. Anybody buying at $30 would have made a 13 percent profit within days and a 34 percent profit when the group increased its bid to $40.20 two months later.

Jennifer Wang, 31, worked as a financial analyst for Morgan Stanley in New York and passed word of the Town & Country deal and other impending mergers to Rubin Chen, 34, her husband, according to a complaint filed by the U.S. Attorney for the Southern District of New York. The two bought shares in Town & Country and two other takeover targets in accounts set up in the name of Wang's mother, ultimately reaping $600,000, prosecutors alleged.

The couple's New York lawyer did not return my phone call, but he told The New York Times last week that they were expected to plead not guilty.

You might take the Town & Country case and other recent prosecutions as evidence that U.S. authorities are one step ahead of the alleged insider traders.

"I think the government has had extraordinary success," says John C. Coffee, a law professor and white-collar crime specialist at Columbia University. "There's no other country that successfully enforces insider-trading laws the way the U.S. does."

Maybe so, but this is faint praise. Most countries virtually ignore insider trading, and people being charged in the United States look like small fry who didn't hide their tracks well enough.

Chen and Wang set up what prosecutors called secret accounts in Wang's mother's name. But the accounts were in U.S. firms - Scottrade and Interactive Brokers, the complaint said. One received money from a bank account in Wang and Chen's name, prosecutors alleged. And for the other, somebody sent identifying documents and other information from a fax machine in Wang's Morgan Stanley office, prosecutors said.

This is not how the most respected insider-trading schools train their students to operate. You set up an account in the Cayman Islands. You use fake names and derivatives of derivatives - not stock. Or, if you're one of the thousands of growing and swashbuckling U.S. hedge funds, you bury suspicious trades in a blizzard of transactions related to legitimate quantitative strategies that prosecutors don't understand.

The Securities and Exchange Commission disputes the notion that most insider trading goes unpunished and that Measuredmarkets' study is a good indication of illegal activity.

"We have access to better and more complete information about trading" than Measuredmarkets, including positions on options, futures and hedging that might offer good explanations for otherwise weird-looking activity, says SEC spokesman John Nester. "Not all suspicious trades at the end of the day are insider trading."

No, but not all sleepy real estate trusts suddenly see decade-long volume records broken a week before a juicy buyout deal goes public. Wang and Chen are the only ones to have been charged so far with improper trades relating to Town & Country. I'll start believing prosecutors are having brilliant success after they win a dozen similar cases.

jay.hancock@baltsun.com

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