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Boesky May Be Gone, But Not His Game

Legal Affairs


Ivan Boesky, Dennis Levine, and Michael Milken are names synonymous with the insider-trading scandals of the 1980s. All three paid for their crimes as the government set out to make examples of them. In the wake of such grandstand prosecutions, you might think the days of insider trading would have died down. After all, mergers and acquisitions have slowed to a trickle, providing few opportunities to make a fast buck. In fact, insider trading is thriving.

The number of insider-trading cases brought by the Securities & Exchange Commission has remained surprisingly constant, with the SEC filing more cases in 1992 than it did in 1986, the year Boesky was bagged. And SEC officials, prosecutors, and defense lawyers say a flurry of new insider-trading probes has recently emerged. "The large sums of capital invested in the markets today, together with the high number of new issues, provide a great incentive for financial crimes," says Kenneth J. Vianale, acting chief of the securities-fraud unit of the U.S. Attorney's Office in the Southern District of New York.

But these days, the SEC's typical target is not a professional investor. It is more often a corporate insider engaged in a once-in-a-lifetime trade. And instead of basing stock purchases on positive corporate data, such as mergers, today's cheats are more likely to trade on adverse business news. "As the M&A boom wound down, the recession wound in," says Thomas C. Newkirk, the SEC's associate director of enforcement. Newkirk estimates that about a third of insider-trading investigations now involve bad-news trades.

FAKE NUMBERS. A spate of these cases has been brought in the past year. In July, the SEC charged Ratilal Patel, a former officer of Par Pharmaceutical Inc., with selling stock to avoid $450,000 in losses. The SEC claims that Patel, who has denied wrongdoing, knew the company inflated its financial health. A month before, the SEC accused four former officers of Financial News Network with exaggerating the network's revenues and pretax income. One of the defendants was also charged with insider trading because he allegedly sold stock based on knowledge of the falsified financial reports. And last December, a manager at Applied Biosystems Inc. settled SEC charges that he sold company stock prior to an announcement of poor earnings.

While bad-news cases proliferate, so-called good-news cases still pop up. Perhaps the highest-profile of these is the government's current inquiry into a high-society insider-trading ring headed by Edward R. Downe Jr., the husband of automobile heiress Charlotte Ford. Prosecutors allege that Downe, who pleaded guilty to two criminal counts, swapped nonpublic information about various companies with wealthy friends, many of whom had positions on corporate boards. Among the other six alleged members of the so-called South-ampton insider-trading ring are Martin Revson, brother of Revlon Inc.'s co-founder, and Fred Sullivan, former chief executive of Kidde Inc. Revson has denied the allegations. Sullivan settled with the SEC for $58,000.

Part of the reason the SEC is so busy with insider-trading claims is increased vigilance in the private sector. Exchanges and brokerage houses have upgraded their computer systems to detect suspicious transactions more accurately. The New York Stock Exchange boasts that 80% of its investigations yield some type of securities violation. At the National Association of Securities Dealers, the number of insider-trading cases referred to the SEC has jumped from 28 in 1992 to 41 for the first eight months of 1993.

Improvements at the exchanges are mirrored by progress elsewhere. Egged on by laws that reward them for taking preventative measures, investment banks, brokerage houses, and law firms have steadily built up internal safeguards. "The whole lesson of deterrence in the white-collar context is to create incentives for firms to police themselves," says John Carroll, the lead prosecutor in the Milken case.

At New York-based Skadden, Arps, Slate, Meagher & Flom, a law firm that has been rocked by insider-trading problems, code names are used to protect particularly sensitive transactions. New hires must view a videotape about insider trading before starting work. And yearly, they must sign a statement affirming Skadden Arps's rules about proprietary information. At Dean Witter Reynolds Inc., the chairman last year ordered the company's policy on insider trading to be reiterated to all employees, recalls Richard Sheehan, a Dean Witter assistant general counsel. "Regulators come down very hard on you" for failing to comply, notes Theodore Levine, general counsel for PaineWebber Group Inc.

SEXY STUFF. Aside from added vigilance, there may be a more basic reason behind the ongoing prominence of insider-trading cases: They're sexy. "These cases are the stuff of novels and movies," says defense lawyer Harvey Pitt. That, say Pitt and other critics, sometimes tempts prosecutors to bring cases of questionable merit, such as ones against individuals far removed from the source of nonpublic information. Prosecutors dispute this charge. "We pursue cases where there is the greatest public interest, not because something is juicy," says Carmen J. Lawrence, senior associate regional director in the SEC's New York office. While Lawrence and other prosecutors brag about their successes, they admit that more needs to be done. Even with better surveillance, they continually wonder about the Boeskys and Milkens that got away.Linda Himelstein in New York

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