More insiders outed

Bloomberg previously shed a bit of light on the "uber-informed" goings on with credit default swaps in the context of buy-outs and take-overs. See here. Now they turn their lights on similar goings on in the equity side of these things.

Insider-Trading Ring Bust May Fuel Hedge-Fund Concern (Update3) By David Scheer

Prosecutors in New York and Washington yesterday brought criminal charges against 13 people, claiming that an executive at UBS and a former compliance lawyer at Morgan Stanley tipped off hedge-fund traders and brokers to new analyst ratings and secret takeover talks. Bear Stearns was home to at least four professionals who traded on information leaked from inside the two firms, according to a complaint filed by the Securities and Exchange Commission.

Hedge funds are private pools of capital that allow managers to participate substantially in gains on the money invested. That pay structure creates an incentive for employees to trade in non- public information.

The temptation to cheat extends to the securities firms, which collect $10 billion a year in fees for providing prime- brokerage services to hedge funds.

At least two studies show that stocks and derivatives regularly rise ahead of takeovers, and in the past week trading of options to buy shares of TXU Corp. and Hyperion Solutions Corp. surged in advance of announcements that they agreed to be acquired.

A study by Measuredmarkets Inc. in August showed that insiders may have traded illegally in advance of 41 percent of the largest U.S. acquisitions the previous year. Two months later, Credit Derivatives Research LLC found that credit-default swaps based on the bonds of 30 takeover targets, including four of the five biggest leveraged buyouts by that point in 2006, rose before deals were announced.

Earlier this year, the SEC asked at least 10 Wall Street firms to turn over stock-trading records for the last two weeks of September, seeking to determine whether they leaked details about big stock trades to favored clients.

The government said yesterday that it broke one of the biggest insider-trading cases since the 1980s. According to the SEC, which brought a civil suit against 14 defendants, the scheme stretched over five years, included hundreds of tips and produced more than $15 million in illegal profits.

"Treasury Secretary Henry Paulson and SEC Chairman Christopher Cox are siding with Wall Street and Corporate America insiders in an aggressive push to kill section 404 disclosure provisions of the Sarbanes-Oxley Act (SOX)."