NEW YORK (Reuters) - Suspected insider trading cases reached an all-time high last year, driven less by hedge funds and more by pillow talk between relatives and friends, the head of surveillance at the New York Stock Exchange said on Wednesday.
In a year when bombshell revelations rocked bank stocks, governments outlawed short-selling, and panicked investors brought on the worst market rout since the 1930s, there was much to tempt those with privileged information.
NYSE Regulation, the Big Board’s oversight body, referred 146 cases of suspected insider trading to the U.S. Securities and Exchange Commission in 2008, five more than in 2007, the previous record year, and more than twice as many as in 2004.
Hedge funds, often associated with insider trading, contracted amid the market drop and played a smaller role in suspected insider trading on the Big Board, said John Malitzis, executive vice president of market surveillance at NYSE Regulation.
He said a corresponding rise in classic cases of insider trading -- where material information about a public security is exchanged and used in breach of confidence or fiduciary duty -- was behind the overall increase.
“That’s where we saw a shift in our referrals -- to the relative of a corporate insider ... or a colleague, or a member of a country club, or somebody in their inner circle,” Malitzis told Reuters.
Slightly more than half of last year’s referrals involved one or more hedge funds, down from 72 percent in 2007. For a factbox, see:
The drop-off may be the result of an overall contraction in the hedge fund industry, where investor redemptions have forced the funds to liquidate positions, compounding the sell-off that centred on banks and other financial institutions.
“Were there leaks of important information on the profitability of banks, that insiders were taking advantage of?” Malitzis said. “That is absolutely a concern and a priority for us.”
Since September, it has also been responsible for detecting insider trading in all NYSE-listed securities, wherever they trade in the United States. Its counterpart for Nasdaq listings, the Financial Industry Regulatory Authority, reported a similar rise in August.
Malitzis said volume spikes in the last minutes of trading, as well as big midday price swings, emerged as trends in 2008 that tipped off market police.
A study by Credit Suisse showed that 17 percent of trading volume on the Standard & Poor's 500-stock index .SPX took place in the final half-hour of trading in November, up from 12 percent in 2006 and 2007.
Insider trading spiked in the late 1980s, highlighted by the 1989 mass indictment for racketeering and securities fraud of U.S. financier Michael Milken, who was ultimately charged with lesser violations.
A sharp regulatory crackdown was followed by a quiet 1990s, but the number of cases has risen steadily over the last five years. Malitzis, 41, said the average trader working today “was probably in elementary school” during the late 1980s crackdown.
“When a new generation comes up that wasn’t front row to the lessons of the late ‘80s, they think it’s easy to do and no one’s going to catch them,” he said. “But the fact is it’s very easy for us to catch these folks. And I think they’re learning the hard way.”
Most of NYSE Regulation’s referrals are fully investigated by the SEC. It is unclear how many result in convictions.
In October, the SEC said it brought 671 enforcement actions during its 2008 fiscal year, with insider trading up 25 percent and market manipulation up 45 percent from the previous year.
A sweeping investigation launched last summer into market rumours, as well as the temporary ban on short selling financial stocks, dominated much regulatory attention in a year mired in recession.
“Whenever you have major disruptions in price, you’re going to have allegations of manipulation,” said James Angel, associate professor of finance at Georgetown University’s McDonough School of Business, who is currently writing a paper on wide oil market swings.
“But manipulation is hard to prove because one man’s manipulation is another man’s price discovery.”
Editing by John Wallace, Phil Berlowitz
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