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Insider Trading : Wall Street Discipline Under Fire

March 17, 1987|MICHAEL A. HILTZIK | Times Staff Writer

NEW YORK — Even today, after six years of court proceedings, people wonder how Dennis E. Greenman managed to pull off one of the largest investment frauds in history under the noses of his superiors at three major Wall Street firms.

At each one--Merrill Lynch, Paine Webber and A. G. Becker--Greenman rose rapidly to become a star stockbroker. What his superiors at the firms did not know, but government regulators say they should have been able to detect routinely, was that Greenman was operating a massive con game based on trading in stock options.

By the time he was exposed, almost by chance during an unrelated FBI investigation of organized crime in 1981, Greenman had taken about 400 investors in South Florida--including a branch of the Boy Scouts of America, several churches and many prominent individuals--for nearly $100 million.

Paine Webber's View

Genius, master forger, supreme con artist: That is the picture of Dennis Greenman that emerged from his employers' defenses against the scores of lawsuits that were filed against them. Paine Webber, the firm where Greenman's scheme matured, maintains that he was so devious that he could outsmart even the most sophisticated internal controls.

The Securities and Exchange Commission disagrees. In proceedings that led to severe disciplinary actions against two of his supervisors, the agency said that Greenman left a trail that his supervisors simply ignored. It pointed to many customer accounts with identical addresses, some of them at post-office boxes, to a series of customer complaints and to reports that his sales presentations claimed preposterously high returns on investments.

Implicit in the SEC's charges, as well as in the score of customer lawsuits over the affair, is an important question: If the Wall Street firms could not catch Dennis Greenman, whom can they catch?

Under Greater Scrutiny

The securities industry's system of in-house surveillance and discipline, known generally as compliance, has never been under as much scrutiny as it is today.

Under the securities regulations established by Congress in the mid-1930s, the SEC and the stock exchange require investment firms to supervise their employees closely and to respond decisively to customer complaints and other signs of wrongdoing, but the system is pockmarked with countless conflicts of interest and other shortcomings.

Those shortcomings have perhaps never been as obvious as they are now. The parade of top Wall Street executives being marched through federal courtrooms on insider-trading charges has raised serious questions about the securities firms' ability and willingness to monitor their own employees' activities adequately .

Regulators, private attorneys, and investment executives (many of whom agreed to be interviewed on condition of anonymity) say that although the technology for in-house compliance investigations--including computers that can sound the alert on suspicious trading activity--has improved rapidly, the temptations that employees face have multiplied faster.

Not only does the superheated mergers-and-acquisitions market offer the chance to make millions of dollars in profits from a single illicit transaction, the unprecedented complexity of the markets gives unscrupulous brokers, traders and investment bankers the opportunity to commit crimes in nearly undetectable ways.

"As the industry's expanded, with more customers, more products, more strategies," said one prominent regulator, "that's placed a greater burden on compliance departments, and in some ways, an excessive burden."

Once used chiefly to monitor contacts between retail brokers and their individual clients, compliance systems at large, multiple-services firms now cover a variety of businesses that tax the comprehension even of some participants, let alone enforcement personnel.

"All the systems fall short of perfection," said O. Ray Vass, compliance director at Merrill Lynch & Co., which last week fired its London chief of mergers and acquisitions for alleged insider trading for two years. The nominal secrecy of merger negotiations, for example, works against compliance officers. "You don't always know what the investment banking department knows, so you may not even be able to recognize (suspicious trading activity)."

Foreign Markets Used

Lawbreakers can now use the international trading markets to disguise their transactions and, in effect, hide them from surveillance.

Without subpoena power or the ability to monitor employee trading that takes place off their premises, securities firms say, their ability to unearth illicit trading is limited.

Few regulators, for example, fault any of the three Wall Street firms that employed Dennis B. Levine for failing to notice for five years that he was building a $12-million nest egg by taking advantage of inside information: Levine did all of his illegal trading through offshore bank accounts opened under pseudonyms, and often used pay telephones for delicate conversations.

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