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The Insider Trading Scandal Essay

1311 words - 5 pages

The greatest scandal to hit Wall Street in more than half a century began on May 12, 1986, when Dennis B. Levine, a young investment banker, was charged by the Securities and Exchange Commission with having made $12.6 million in illegal profits from "insider"' information. Levine, in return for leniency (two years in prison), assisted the prosecutors in building cases against other violators, and in short order four more young Wall Street professionals were indicted for illegally using insider information. The process of indictment and collaboration did not end there, however, and, like falling dominos, more and more of the brightest and richest of America's financial community have been exposed as felons.In November 1986, the biggest domino of them all, Ivan ("The Terrible") Boesky, fell. Boesky, one of Wall Street's most powerful risk arbitragers (stock speculators), had had a meteoric career, and the size of the fine levied against him, $100 million (with civil lawsuits to follow), testifies to the magnitude of his illegal transactions. But the scandal was far from ended, for Boesky in his turn collaborated with the investigators, and arrests continued into 1987. And. more ominously, the kinds of people being arrested started to change. Whereas the first indictments had been of relatively youthful professionals, like Levine, in firms with less than impeccable reputations like Drexel, Burnham, Lambert, or recently arrived adventurers like Boesky, the new arrests were of respected figures (Martin A. Siegel, for instance) in some of the most conservative firms (such as Kidder, Peabody & Co.). By the spring of 1987, less than a year after it began, the scandal had become international (Boesky's influence had reached Merill Lynch Europe Ltd.), and was beginning to involve even larger firms. "Where we are at today is really no different from the age of the robber barons," lamented one business school dean, and predictions of major reform, if not disaster, were commonplace (Steele, 1986).The crime at the center of the scandal, misuse of insider information, is in outline, familiar enough: it consists of using private information with which one has been entrusted for personal profit. At the local level, insider information often figures in real estate profit: to know before the information is released to the public where a highway will run, or a factory built, is to have valuable inside information denied the general public. Similarly, on Wall Street, an investment banker like Siegel might help arrange for a corporate merger to takeover and, before the move was made public, tip off an investor (Boesky) about the impending surge in stock prices. The investor would then buy stocks at the low, preannouncement price, and, after the move was made public, sell the stock back for a quick and handsome profit. The informant, of course, would not go unrewarded. He would be paid a whopping $700 for his information. The losers would be the stockholders who...

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