SEC investigating possible insider trading

John Dimsdale Feb 6, 2007
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SEC investigating possible insider trading

John Dimsdale Feb 6, 2007
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KAI RYSSDAL: Today’s news from Kodak would be perfect insider trading bait. Somebody at Kodak who knew what was about to be announced buying shares before the public found out.

And as it happens there’s insider trading news today. The SEC confirms it’s looking into allegations of insider trading by hedge funds and other clients of big Wall Street brokerage houses.

The New York Times broke the story this morning. That the feds are looking for evidence brokers are giving advance notice to their favored clients when a mutual fund is about to make a big trade. Marketplace’s John Dimsdale has more.


JOHN DIMSDALE: It’s called front-running. A mutual fund tells a broker to sell a big chunk of a company’s stock. The broker let’s a favored customer in on the fact that the company’s stock price is likely to fall.

That customer, frequently a hedge fund that does a lot of business with the broker, dumps the stock, which drops the price. And that means the mutual fund loses money once its trade goes through.

The mutual fund asked the SEC investigation. Paul Stevens is with the Investment Company Institute

, which represents the mutual fund industry. He says it’s impossible to estimate how much front-running is going on.

PAUL STEVENS: Although I guess from where I sit, thinking of the 94 million Americans that mutual funds serve, that any amount of this kind of activity is too much.

With billions of shares traded on U.S. exchanges every day, Stevens acknowledges policing insider trading is difficult. But it’s the boom in fast-trading hedge funds that gives brokers the opportunity for front-running, according to Columbia University securities law professor John Coffee.

JOHN COFFEE: Those hedge funds are in competition with each other, they need to out-perform the market by a substantial margin. And because they generate huge brokerage commissions, they have brokers falling over backwards to make them happy. And brokers can leak information about what their other clients are doing.

The SEC is reportedly looking at trades by major Wall Street brokers, including Merrill Lynch, Morgan Stanley and UBS. All of whom declined comment.

In Washington, I’m John Dimsdale for Marketplace.

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