Insider
trading has been a part of the market since William Duer used his post as
assistant secretary of the US Treasury to guide his bond purchases in the late
1700s. Here are some of the largest United States insider deals.
Albert H. Wiggin: The Market Crash Millionaire
During the
Roaring '20s, many Wall Street professional, and even some of the general public,
knew Wall Street was a rigged game run by powerful investing pools. Suffering
from a lack of disclosure and an epidemic of manipulative rumors, people
believed coattail investing and momentum investing were the only viable strategies
for getting in on the profits. Unfortunately, many investors found that the
coattails they were riding were actually smokescreens for hidden sell orders
that left them holding the bag. Still, while the market kept going
up and up, these setbacks were seen as a small price to pay in order to get in
on the big game later on. In October, 1929, the big game was revealed to be yet
another smokescreen.
After the crash, the public was hurt, angry, and hungry for vengeance. Albert
H. Wiggin, the respected head of Chase National Bank, seemed an unlikely target
until it was revealed that he shorted 40,000 shares of his own company. This is
like a boxer betting on his opponent – a serious conflict of interest.
Using wholly-owned family corporations to hide the trades, Wiggin built up a
position that gave him a vested interest in running his company into the
ground. There were no specific rules against shorting your own company in 1929,
so Wiggin legally made $4 million from the 1929 crash and the shakeout of Chase
stock that followed
Not only was this legal at the time, but Wiggin had also accepted a $100,000 a
year pension for life from the bank. He later declined the pension when the
public outcry grew too loud to ignore. Wiggin was not alone in his immoral
conduct, and similar revelations led to a 1934 revision of the 1933 Securities
Act that was much sterner toward insider trading. It was appropriately
nicknamed the "Wiggin Act".
2. Levine, Siegel, Boesky and Milken: The Precognition Rat Pack
One of the most famous cases of insider trading made household names of
Michael Milken, Dennis Levine, Martin Siegel and Ivan Boesky. Milken received
the most attention because he was the biggest target for the Securities and
Exchange Commission (SEC), but it was actually Boesky who was the
spider in the center of the web.
Boesky was an arbitrageur in the mid-1980s with an uncanny ability to pick out
potential takeover targets and invest before an offer was made. When the fated
offer came, the target firm's stock would shoot up and Boesky would sell his
shares for a profit. Sometimes, Boesky would buy mere days before an unsolicited
bid was made public - a feat of
precognition rivaling the mental powers of spoon bender Uri Geller.
Like Geller, Boesky's precognition turned out to be a fraud. Rather than
keeping a running tabulation of all the publicly traded firms trading at enough
of a discount to their true values to attract offers and investing in the most
likely of the group, Boesky went straight to the source - the mergers and
acquisitions arms of the major investment banks. Boesky paid Levine and Siegel
for pre-takeover information that guided his prescient buys. When Boesky hit
home runs on nearly every major deal in the 1980s - Getty Oil, Nabisco, Gulf
Oil, Chevron (NYSE:CVX), Texaco - the people at the SEC
became suspicious.
The SEC's break came when Merrill Lynch was tipped off that someone in the firm
was leaking info and, as a result, Levine's Swiss bank account was uncovered.
The SEC rolled Levine and he gave up Boesky's name. By watching Boesky -
particularly during the Getty Oil fiasco - the SEC caught Siegel. With
three in the bag, they went after Michael Milken. Surveillance of Boesky and
Milken helped the SEC draw up a list of 98 charges worth 520 years in prison
against the junk bond king. The SEC charges didn't all stick, but Boesky and
Milken took the brunt with record fines and prison sentences.
3. R. Foster
Winans: The Corruptible Columnist
Although not
high-ranking in terms of dollars, the case of Wall Street Journal
columnist R. Foster Winans is a landmark case for its curious outcome. Winans
wrote the "Heard on the Street" column profiling a certain
stock. The stocks featured in the column often went up or down according to
Winans' opinion. Winans leaked the contents of his column to a group of stockbrokers,
who used the tip to take up positions in the stock before the column was
published. The brokers made easy profits and allegedly gave some of their
illicit gains to Winans.
Winans was caught by the SEC and put at the center of a very tricky court case.
Because the column was the personal opinion of Winans rather than material
insider information, the SEC was forced into a unique and dangerous strategy.
The SEC charged that the info in the column belonged to the Wall Street
Journal, not Winans. This meant that while Winans was convicted of a crime,
the WSJ could theoretically engage in the same practice of trading on its
content without any legal worries.
4. Martha Stewart: The Homemaking Hoaxer
In December 2001, the Food and Drug Administration (FDA) announced that it
was rejecting ImClone's new cancer drug, Erbitux. As the drug represented a
major portion of ImClone's pipeline, the company's stock took a sharp dive.
Many pharmaceutical investors were hurt by the drop, but the family and friends
of CEO Samuel Waksal were, oddly enough, not among
them. Among those with a preternatural knack for guessing the FDA's decision
days before the announcement was homemaking guru Martha Stewart. She sold 4,000
shares when the stock was still trading in the high $50s and collected nearly
$250,000 on the sale. The stock would plummet to just over $10 in the following
months.
Stewart claimed to have a pre-existing sell order with her broker, but her
story continued to unravel and public shame eventually forced her to resign as
the CEO of her own company, Martha Stewart Living Omnimedia. Waksal was
arrested and sentenced to more than seven years in prison and fined $4.3
million in 2003. In 2004, Stewart and her broker were also found guilty of
insider trading. Stewart was sentenced to the minimum of five months in prison
and fined $30,000.
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