Not long ago, the Stockholm Stock Exchange had a typically Swedish reputation: It was squeaky clean. The clubby brokers went mostly by unwritten rules. But this will no longer do--not since two recent trading scandals. One involves shares in forestry giant Stora. The other, focused on trading in Pinkerton Inc., a Westlake Village (Calif.) security-services company bought by Sweden's Securitas, has drawn the ire of the U.S. Securities & Exchange Commission. "Our market has an ethical and disciplinary problem," says Claes Norgren, director of Sweden's Financial Supervisory Authority. "Old clubs don't work the way they did."
After booming for more than a decade, Sweden's market is in for some painful changes. Faced with more than 40 charges of insider trading, the Swedish Securities Dealers Assn. must produce tighter rules, enforcement provisions, and licensing and certification requirements by May. Otherwise, Norgren says, his agency will police the exchange directly. Either way, the scandals have jarred a long-coddled broking community. And as equity trading globalizes, Swedes can look forward to more scrutiny from regulators such as the sec.
Investigations into the Pinkerton scandal have mushroomed since the alleged insider trading came to light in late February. Within days, the sec froze the U.S. bank accounts of a Swedish stockbroker and four clients. It alleges that they made $175,000 in illegal profits by trading in Pinkerton stock in New York just before Securitas announced on Feb. 22 that it would purchase the company for $384 million. In Sweden, the Economic Crimes Bureau has questioned 11 brokers, trading house employees, and clients in an investigation--the nation's largest--that is expected to last 18 months.
The Stora scandal also involves a cross-border transaction. Stockholm is looking into whether three brokers in the London offices of Credit Suisse First Boston, working with a Stockholm trader, manipulated Stora's stock last December, just before it merged with Enso Oyj, a Finnish forest-products company. These inquiries are ongoing, but all four brokers have left their jobs.
The scandals hit at a difficult time. As low-cost Internet trading grows, brokers are under pressure to drop commissions that run as high as 6%. There's also concern that the Continent's bourses, denominated in euros, could take the steam out of the kroner-denominated Swedish market. That would end a long party: In the past decade, volume on the Stockholm exchange has grown from a daily average of fewer than 3 million shares to 47.5 million. Market capitalization, now $300 billion, is more than 100 times as large as it was 10 years ago.
STEP LIVELY. The market's lively pace has fueled the growth of independent brokerages, but it has also strained the industry's ability to regulate itself. Often, inexperienced traders either are ignorant of the rules or believe they can flout them. Matteus Fondkommission, Sweden's 10th-largest brokerage, just fired six young traders who have been questioned in the Securitas case. "It had nothing to do with guilty or not," says Matteus President Rickard Bjorklund. "We can't employ anybody suspected of such a crime." Bjorklund plans to launch a new training program and require all new hires to work with veterans for up to two years. New traders will also have to pass an in-house exam on Matteus' trading guidelines. With the rueful wisdom of hindsight, Bjorklund adds: "I wish I had established well-defined internal rules."
New rules are just what the Financial Supervisory Authority now wants to see. And insider trading isn't the only problem. It has also asked for regulations that cover margin buying, stock manipulation, and unauthorized speculation with clients' funds. It wants tougher enforcement of the requirement that phone calls between brokers and clients be recorded and time-stamped.
It would run radically against the Swedish grain for Norgren's agency to introduce a heavy-handed regulatory regime. But if the industry's proposals come up short, Norgren says, he'll even push for legislation to strengthen his authority. For Sweden's brokers, it's time to walk the straight and narrow.