The chairman of a leading investment firm said yesterday that improper use of corporate information by securities traders "is far more prevalent than it was a year ago."
"Too many stocks have moved up before deals have been announced for it simply to be a random phenomenon," said George L. Ball, chairman and chief executive of Prudential-Bache Securities Inc. "It is bad by any definition," Ball said. He testified at a House subcommittee hearing on illegal insider trading, the purchase or sale of securities based on confidential corporate information.
Gary G. Lynch, enforcement director for the Securities and Exchange Commission, called on securities firms to do a better job of policing themselves and their customers. When a firm sees a customer on a hot streak of profitable stock transactions clustered around major merger deals, that ought to trigger some questions about sources of information, he said.
"They have an obligation to make an inquiry. . . . They just can't continue to execute orders," Lynch told members of the House Energy and Commerce subcommittee on telecommunications, consumer protection and finance.
Lynch indicated that Dennis B. Levine, the key figure in the most important of the SEC's recent major insider-trading cases, has begun to provide prosecutors with information about others in his network.
Levine, a former managing director with a leading investment banking firm, was permitted to plead guilty to a much reduced list of charges in exchange for his commitment to cooperate with prosecutors. (He still faces a maximum prison term of 20 years and $610,000 in fines.)
Levine reportedly did not offer prosecutors a written commitment outlining identities or generally describing those he would implicate, but Assistant U.S. Attorney Charles Carberry said the government is confident of what it will be getting. "You don't enter into such agreements blindly," he said.
"He's become a cooperative witness," Lynch said at yesterday's hearing. Levine made $12.6 million in illegal profits during the past six years by secretly trading in the securities of 54 companies, taking advantage of confidential inside information, according to the SEC. How many others will be implicated by Levine is the most worrisome question in the financial community.
Wall Street has invited trouble by "pushing young people too fast" into important positions in the securities market, said Ball. Levine is 33. Three other Wall Street professionals and a colleague pleaded guilty in another insider-trading case this month. All are under 30 years of age.
"There is a tendency for young people to be pushed faster than a decade ago," so their opportunities and responsibilities move faster than their judgment, in some cases, Ball said.
"They're being given responsibilities in very fast-changing and complex market places that are beyond that which they would have had five, 10, 15 years ago.
"Are these young people less principled than their predecessors? Certainly I think not, but they are being exposed to, and are assuming greater responsibility," Ball said.
Another witness, attorney Harvey L. Pitt, said Wall Street is no more immune from crooks and corner cutters than any other part of society. But he added, "I would be reluctant to tar an entire generation of investment bankers, many of whom are as proficient, if not more so, than their predecessors. . . . I don't see them as any less ethical."
While commending the SEC's efforts, Chairman Timothy E. Wirth (D-Colo.) and other members of the subcommittee again suggested that SEC Chairman John S. R. Shad should ask Congress for a larger enforcement budget.
Shad deflected the suggestions, as he has in previous subcommittee appearances, indicating he considers his budget sufficient.
"What the commission has done is going to wipe out insider trading," Ball said.
But Pitt, a former SEC general counsel, told the subcommittee the SEC's staff is stretched too thin to keep up with all the potential investigations.
Pitt, who is now with the law firm Fried, Frank, Harris, Shriver and Jacobson, represents Bank Leu International Ltd., which carried out Levine's secret stock transactions, according to the government.
"There are matters that could be pursued that are put on back burners. There are other matters that are never pursued. . . . I think the commission is doing an excellent job. It's bringing the right cases and bringing a lot of them," said Pitt.
"The fact is, with a small increase in staff, the commission could do a lot more," he said.