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SEC Kicks Off Wave of Trading Investigations

The SEC may be finally getting off its duff by pursuing cheats it suspects may be illegally trading on securities based on the use of non-public or inside information.
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Due to a regulatory breakdown of giant proportions, the investor's cop on the beat--the Securities and Exchange Commission--has taken a lot of Congressional and media heat, justifiably, for refusing to heed a series of red flags about Wall Street's biggest swindler ever, money manager Bernard Madoff, the alleged architect of a $50 billion Ponzi scheme. As a result of its Rip Van Winkle slumber, the SEC permitted untold numbers of investors, loads in their golden years, to be butchered in the marketplace, with many losing much, if not all of their life's savings.

The commission, though under fire for the Madoff fiasco, may be finally getting off its duff by pursuing cheats it suspects may be illegally trading on securities based on the use of non-public or inside information.

Reflecting this suspicion, the SEC, I've learned from regulatory sources, has recently embarked on a flock stock trading investigations, at least 17 all told, a number of which include some of the best known names in Corporate America. Among them are IBM, 3M Co., Procter & Gamble, AIG, JPMorgan Chase & Co., and Coca-Cola.

These are not investigations of the companies themselves. Rather, the SEC's interest centers chiefly on the trading in their shares both here and abroad. The focus is whether certain investors got a head start and cheated the system by trading on privileged company information that had not yet been disseminated to the investing public at large.

The SEC, as usual, was as loquacious as a sphinx when I rang up the agency and asked them about it. Spouting the usual party line, a commission spokesman, John Heine, said, "We will neither confirm, nor deny, any investigations."

Regulatory contacts, however, confirmed the trading investigations. In addition, I have obtained copies of internal SEC documents that the agency recently fired off to the brokerage community in which it detailed the names of the 17 companies whose stock trading activity is of particular interest to the agency. In its inquiries to brokerage firms--which are usually kept under deep wraps--the SEC requested the names of U.S. and overseas clients who traded in assorted securities in specific time periods.

A regulatory source figures the bulk of these investigations likely center on trading prior to the release of earnings reports.

Rounding out the 17 SEC trading investigations, according to copies of the agency's inquiries in my possession, are Dell, the Wendy's Arby's Group, National City Corp., Sovereign Bancorp, General Growth Properties, WMS Industries, Alliance Data Systems, Goodrich Petroleum Corp., Allos Therapeutics, JA Solar Holdings Co. Ltd., and LEAP Wireless International.

Reacting to the bunch of stock trading probes, one regulatory contact, a veteran compliance official at a major brokerage firm, reminded me that "being on the inside, not the outside" was Gordon Gekko's winning strategy in the film, Wall Street. The thing to keep in mind, he observed, is that Gekko was a crook who illegally traded on inside information. Judging from the rash of trading investigations, the compliance official added, "Gekko appears to have attracted some real life disciples."

It could not be determined whether the wave of such probes reflects the recent appointment of a new SEC skipper, Mary Schapiro, who is said to be pushing for stepped-up enforcement action, or whether the commission is simply becoming more aggressive in wake of the heavy Madoff criticism.

One SEC staffer told me he expected the commission to exhibit a much tougher regulatory stance, which he thought would likely encompass a closer check of hedge fund activities and investment advisers. He also said "the media should not be given a pass" and pointed, in particular, to one well known journalist, who, he observed, "has been touting a mutual fund she personally owns in her media outlet." He declined to name the journalist or the fund; Likewise, he wouldn't say whether this matter had or could become the subject of an investigation.

Speaking of stock trading investigations, the New York Stock Exchange and Nasdaq have also kicked off some additional probes, according to sources familiar with them. They include Las Vegas Sands, E-Trade Financial Corp., Zoltek Companies and CF Industries Holdings.

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