Wall Street is hardly recognized as a bastion of high moral values, but many were shocked to learn of the recent insider-trading scheme that resulted in illegal gains of over six million dollars. Three investment bankers, in addition to other conspirators, were arrested on charges of insider-trading last week.
Stanislav Shpigelman, an analyst with Merrill Lynch's merger & acquisition unit, used his position to pass on sensitive information on pending acquisitions. Other alleged conspirators include Eugene Plotkin, an associate at Goldman Sachs' fixed-income research unit, and David Pajcin, a former Goldman Sachs analyst.
Pajcin passed insider information to his aunt in Croatia, who would purchase large amounts of stock right before acquisitions occurred, profiting immensely from the tips. A wide variety of individuals across the world were used to make similar purchases in order to hide the sources of the information, including a New York exotic dancer and Plotkin's father.
A second scheme included two printing-plant employees who had access to Business Week before it reached newsstands. These printers would pass off information regarding stock recommendations to the alleged conspirators, who would than have purchases made right before the stock soared as a result of the recommendations.
By the time the conspirators were caught, they had stolen an estimated $6.7 million from investors. The three investment bankers, Plotkin's father, and the two printing-press employees are all being prosecuted.
News like this affirms the fear of the small investor: that there is no way that he or she can compete with Wall Street. Additionally, frauds like Tyco and Enron that are constantly in the news continue to lower the American people's trust in US businesses.
Another issue is that investment banks have been in the news quite a bit recently for their unethical practices. With regulators cracking down on Goldman Sachs, Deutsche Bank, UBS, and Credit Suisse over various securities violations, in addition to multi-billion dollar lawsuits won against numerous investment banks over allegations of cover-ups dealing with Enron, the industry continues to remain in a bit of hot water.
The current insider-trading scandal, however, is different. The previously mentioned scandals were on an institutional level, involving company fines, as opposed to fines on individual workers. At least in this case, it is fair to call the alleged criminals "bad seeds." It appears as if no one else within Merrill Lynch or Goldman Sachs knew of what was going on.
Unfortunately, it is virtually impossible to prevent these types of crimes. Many young bankers have access to critical information that they are expected to keep secret. Fortunately, it does not seem as if many take advantage of this information in respect to trading illegally.
The US Securities and Exchange Commission (SEC) is extraordinarily effective at catching those that break securities laws. The major clue that led to this series of arrests was found by the SEC, which monitors trading activity before and after acquisitions that take place in the United States.
The SEC was able to recognize an unusually large purchase immediately preceding an acquisition of stock in Reebok by a woman in Croatia. A follow-up investigation by the SEC led them to Pajcin As disappointing as it may seem that such a large theft occurred, it is very encouraging to see how competent the SEC is in tracking down these types of crimes.
Stories like this one can hopefully serve as a dire warning against insider-trading. As incredibly complex and far-reaching as this scheme was, the perpetrators were still caught. One can only hope that this will dissuade others from attempting similar types of crimes.
