The Securities and Exchange Commission disclosed yesterday that it has launched a series of investigations into insider trading on Wall Street by professionals who deliberately plant false takeover information and then profit from the wild swings in stock prices.
SEC enforcement director Gary Lynch called the recent stock price activity "unsettling." Lynch, who disclosed the agency investigations during an interview, said he was particularly alarmed recently when rumors, rather than news events and other public disclosures, dictated much of the action on Wall Street for an entire week.
Recent takeover rumors have caused sharp hourly fluctuations in the price of some stocks, such as CBS Inc. CBS stock jumped 15 points during trading late last week, only to fall more than 5 points yesterday when no bidder materialized.
"A couple of weeks ago, we started taking a look at the insider trading area with a fresh eye," Lynch said yesterday. "I don't know if it is insider trading or spreading of unfounded rumors, but there is something going on in the market that I find unsettling. And we're going to see if we can get to the bottom of it.
"There were six companies that were the subject of takeover rumors one day and their stocks moved up appreciably," Lynch said. "That week there were over 20 stocks subject to takeover rumors."
Lynch also said yesterday that the SEC is in the midst of more than 35 investigations of insider trading. Wall Street sources said some of the investigations involve stock purchases in prominent takeover targets by professional investors, known as arbitrageurs, during the last year. Lynch refused to comment on specific deals the SEC is looking at.
Insider trading involves the illegal use of nonpublic information by investors seeking to profit from sharp changes in the price of stocks. For example, a corporate director with advance knowledge of a takeover bid could profit by buying stock in the target company prior to an announcement, an act that Lynch said would be a clear violation of insider trading laws.
The SEC's intensified concern about insider trading comes at a time of explosive merger and acquisition activity. During the third quarter of 1985, the total value of corporate buyouts was more than $34 billion, the second-highest quarterly volume ever, according to Mergers & Acquisitions magazine.
Familiar companies include Nabisco Brands Inc., which was acquired in the third quarter for $4.9 billion by R. J. Reynolds Industries Inc. General Foods Corp., American Broadcasting Cos. Inc., and Carnation Co. have all been involved in multibillion-dollar mergers this year.
Though it has not been involved in an actual merger, CBS has been the target of more takeover rumors this year than any other corporation. Even though the company successfully defended itself against a hostile takeover bid from Atlanta broadcaster Ted Turner several months ago, the takeover speculation has continued.
CBS officials are convinced that the company is the target of rumors planted by professional investors, who profit when the stock rises, following a rumor, and then sell before it falls, when the rumor fizzles.
"We have been victimized by far-fetched rumors for months now," CBS Senior Vice President William Lilley III said yesterday. "We are particularly concerned about the impact on the CBS shareholder of rumor-manipulated trading done for the purpose of arbitrageurs' running up the price of the stock, and running down the price of the stock, and trading to their advantage on the swings.
"It is particularly difficult for CBS, a company which receives a disproportionate amount of publicity, to defend its shareholders from rumor-driven manipulation of the stock, since CBS management is in no way connected with the rumors," Lilley said.
Lilley said the SEC investigation of takeover rumors and insider trading is "long overdue." Rep. Timothy E. Wirth (D-Colo.), chairman of the House subcommittee on telecommunications, consumer protection and finance, and other critics of the SEC say that the commission's failure to clearly define insider trading makes it more difficult to solve the problem. Wirth also questions the agency's commitment to prosecuting complicated insider trading cases.
Lynch defends the SEC's policy in the area by pointing out that it is a lot more difficult to prosecute insider trading cases involving professional investors than it is to follow through on those involving corporate directors and others who may trade stocks less frequently.
"The problem in making a case against the professional trader is that they are in the market all the time," Lynch said. "It is much more difficult to detect insider trading when you have someone who is trading 20 stocks a day."
New York Stock Exchange officials said yesterday that the Big Board has also intensified its effort to prosecute insider trading by forming a special unit to assist in investigating unusual takeover-related trading. NYSE spokesman Richard Torrenzano said the unit was formed after the number of questionable transactions increased with the recent surge in merger activity.