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IMCLONE INQUIRY

Insider Trading an Issue That Won't Go Away

Securities: It's not like the 1980s, but such cases are increasing after years of decline, experts say.

June 13, 2002|DEBORA VRANA and WALTER HAMILTON | TIMES STAFF WRITERS

Though it generates far fewer headlines than in the days of Ivan Boesky, insider trading has remained a persistent and serious problem in recent years.

As Wednesday's charges against Samuel Waksal, former chief executive of ImClone Systems Inc., demonstrate, securities regulators continue to pursue people suspected of illegally using confidential information to reap easy profits in the stock market.

In fact, experts say that after a decline in the early and mid-1990s, insider trading on Wall Street has increased in recent years, primarily among mid-level employees who assume they're too far down the corporate totem pole to be detected. There also has been an increase in the number of offshore cases in which foreign citizens trade U.S. stocks on confidential information, experts said.

The Securities and Exchange Commission brought 57 insider-trading cases in 2001, compared with 40 cases in 2000 and 29 cases in 1996.

"It continues to be a problem," said Stephen Cutler, chief of the SEC's enforcement unit. "Despite the many cases we've brought in this area, some people just don't seem to get it. Either they think they're going to get away with it or they ... don't think of it as a violation of the law."

In one example, adult film star Kathryn Gannon this week pleaded guilty to federal charges that she traded stocks on confidential information leaked to her by former Keefe, Bruyette & Woods Inc. Chief Executive James McDermott.

McDermott, the first CEO of a Wall Street investment bank to be charged with insider trading, admitted last year that he tipped Gannon to pending bank mergers. He was sentenced to five months in prison. She faces sentencing Sept. 20.

In January, a case was filed against a former Wall Street analyst who allegedly tipped off a friend to nonpublic information on several upcoming mergers between public companies. The friend sold shares in those companies, making profits.

So far, no one is forecasting a repeat of the late 1980s, when a rash of insider-trading scandals rocked Wall Street. Ivan Boesky, an arbitrageur who agreed to pay $100 million to settle insider-trading charges stemming from stock transactions in mergers and takeovers that weren't public knowledge yet, came to symbolize the era's insider-trading scandals.

"We haven't seen in recent years very high-profile players charged and convicted ... but it still goes on and it's something we continue to investigate and prosecute regularly," said James B. Comey, U.S. attorney for the Southern District of New York.

Securities lawyers said the bursting of the late '90s stock market bubble has prompted a new type of insider-trading case. These are typically part of a broader case of financial-reporting fraud occurring at a company, rather than isolated cases involving a few individuals.

"We are seeing insider trading in connection with schemes to manipulate a public company's stock price through falsifying offering statements and [other financial documents filed with the SEC]," said Jeff Isaacs, deputy chief of the major fraud section for the U.S. attorney's office in Los Angeles.

In these cases, insiders try to artificially inflate their company's stock, then dump their shares at a profit before the price falls, he said.

For regulators, insider-trading charges can be easier to prove than far more complicated cases involving accounting fraud and other white-collar crime, said Boris Feldman, a securities law attorney at Wilson Sonsini Goodrich Rosati in Palo Alto.

"Insider-trading charges are more understandable to a jury and easier for a prosecutor to establish than a complicated accounting scheme," Feldman said.

There hasn't been a rash of new insider-trading cases on the West Coast, said Randall Lee, head of the SEC office in Los Angeles, but such cases still are a core area of investigation.

Regulators also are trying to crack down on legal forms of insider trading that may be perceived as unfair to investors. The SEC in April approved a rule that would require companies to disclose stock trades by top executives within as little as two days.

The new rule was prompted in part by Enron Corp.'s collapse. Just before the company crumbled, there were heavy stock sales by insiders. While apparently legal, the sales were widely seen as giving the Enron insiders a chance to preserve profits while individual investors were caught when the stock subsequently plunged.

In the ImClone case, the SEC alleges that Waksal gave negative insider information regarding his company to family members, who sold ImClone stock before the news became public.

"This is one of the biggest insider-trading cases in years," said Stephen Bainbridge, a UCLA law professor who wrote a textbook on insider trading.

"The SEC is under a lot of pressure these days to take an activist role. People's stock portfolios are down 2 1/2 years running. They want to see some heads chopped off."

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Times staff writer David Streitfeld contributed to this report.

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