A Securities and Exchange Commission survey of large Wall Street firms that speculate on corporate takovers before they become public showed yesterday that 80 percent of the firms also help underwrite such deals.
The SEC, at the request of Sen. William Proxmire (D-Wis.), had the New York Stock Exchange survey 31 investment firms, whose identities were not revealed. The firms earned $1.13 billion from risk arbitrage in 1984, 1985 and 1986.
Arbitragers buy undervalued stocks in hopes that the companies will become takeover targets and the stock's value will soar. The high-risk practice can be abused by those with information not known to the general public.
Twenty-five of the 31 firms with arbitrage divisions also underwrite mergers and takeovers, a practice Proxmire called "a billion-dollar potential conflict of interest.
"What troubles me is that the very companies engineering the current tidal wave of takeovers are investing in deals, sometimes before the public finds out about them. Something's amiss when the jockey bets on the race," said Proxmire, chairman of the Senate Banking Committee.
The survey found that the 31 firms collectively earned $180.2 million from arbitrage in 1984, $386.8 million in 1985 and $566.6 million in 1986.
But the SEC's chief economist, Annette Poulsen, said in a memo that those figures are "at best crude estimates" and are probably understated. The figures collected by the stock exchange were not independently verified and do not include every firm involved in arbitrage, she said.
Missing from the survey, for instance, were firms owned by Ivan F. Boesky, formerly Wall Street's top arbitrager before he pleaded guilty to illegal inside trading last year and agreed to pay a record $100 million fine.
In 1986, the arbitrage profits of the top five firms accounted for 65 percent of the total. The top two firms earned $108.1 million and $107.2 million, respectively, from arbitrage in 1986.
"Risk arbitrage is at least a billion-dollar business and, considering the magnitude of profits involved, seems to be highly concentrated among a relatively very few securities firms," Proxmire said in a statement.
"Of even greater potential concern is the apparent fact that the clique of securities firms partaking in these billion-dollar profits may also be playing roles which put them into possession of the inside information that could be the key to those profits," he said.
Proxmire is proposing, as part of the Tender Offer Disclosure and Fairness Act of 1987, that arbitrage firms register separately with the SEC, enabling them to be regulated more easily. They now are registered as broker-dealers and the SEC cannot readily identify them as arbitrage specialists.