Insider Trading Goes from Wall St. to Main St

By Rhoads, Christopher | American Banker, February 26, 1996 | Go to article overview

Insider Trading Goes from Wall St. to Main St


Rhoads, Christopher, American Banker


The day before First Washington Bancorp announced last December that it had hired an investment adviser to look into selling, the thrift's trading volume was three times higher than average, and its stock price jumped 10%.

Less than a month later, the Herndon, Va., the company was sold.

Were investors trading on inside information? Or was it speculative good luck, mere coincidence?

"When a ratio radically changes from its historic norm and then that's followed by a merger announcement, the chances are that something got out," said Paul V. Gerlach, an associate director in the division of enforcement at the Securities and Exchange Commission. "It's usually not just fortuitous timing."

Though the trading activity at First Washington may not raise many eyebrows - stock volatility has become a common feature of the bank merger scene - such instances at community banks and thrifts lead to a significant portion of the insider trading cases brought by the SEC these days, a review of enforcement actions shows.

"It's not the Levines and Boeskys anymore," Mr. Gerlach said. "In many cases it's the management of small banks, secretaries, and family members."

Insider trading cases are not as sexy as in the 1980s, but there are more of them than in most of that decade.

Regulators don't tally bank-related cases separately, but the overall trend is clearly up.

The SEC brought 35 cases involving all sorts of industries in fiscal 1994 and again in fiscal 1995 - almost as many as in the peak year, 1989, when it brought 39. And the National Association of Securities Dealers, which regulates the Nasdaq, the exchange on which most community bank stocks trade, referred 107 cases to the SEC last year, its second-highest total ever.

Officials at both agencies said the number of bank insider trading cases, particularly involving community banks, has risen significantly in recent years with the consolidation boom.

"It's a major trend," said Thomas J. McGonigle, a lawyer with McGuire, Woods, Battle & Boothe in Washington, which is handling about six bank insider trading cases at the moment, a third of its total caseload. "Four or five years ago these banks weren't in play, but now it's where the takeovers are happening.

"Insider trading has gone from Wall Street to Main Street," he said.

Instead of seasoned traders using insider information to trade on a number of takeover deals, most of the recent cases involve amateurs looking for profits from once-in-a-lifetime events, such as the sale of their local bank. The defendants include sons-in-law of bank directors, law school buddies, brothers in their seventies, and an accountant and his fiancee.

Most of the illegal trading involved relatively small amounts of stocks and profits - sometimes several hundred shares and less than $10,000.

Why they do it, particularly given all the publicity from the insider trading scandals of just a few years ago, can be explained by both ignorance and greed.

"You have to be avaricious or dumb to trade on nonpublic information, and there are enough out there that fall into one or the other category," said David M. Becker, a partner at Wilmer, Cutler & Pickering, the Washington law firm that defended Mr. Boesky in the late 1980s.

"If you are not relatively sophisticated and a family member sits on the board of the local bank that's about to be acquired, you might do something without thinking it through."

Other banking lawyers suggested that the people are not fully aware of the surveillance capability of regulators and believe they can outsmart them. Some said the perpetrators believe that their trades are so small and inconsequential that regulators would never notice.

But regulators don't buy the idea that they're dealing with country bumpkins.

"I think most people getting caught know exactly what they're doing," said William R. …

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