Study: Corporate Mergers Overrun By Insider Trading

by

On Wall Street, winning trades often come down to who has the most information — who has the most “edge.” The question is, just how often does edge cross the line into insider trading?

A jaw-dropping new study of mergers and acquisitions (M&A) suggests the problem is not only pervasive, but also rarely enforced.

Watch To Catch a Trader, FRONTLINE’s examination of the government’s vast investigation into insider trading in the hedge fund industry.

According to the study, as much as 25 percent of all M&A deals from 1996 through 2012 may have involved some degree of insider trading. The typical “rogue trade,” the authors found, reaped an average profit of $1.6 million.

The authors — Patrick Augustin of McGill University and Menachem Brenner and Marti Subrahmanyam of New York University — focused on movements in the price of stock options in the 30 days before an M&A deal was announced. Options allow investors to acquire a stock at a future date at a set price.

M&A deals are supposed to be secret, so “we should not be able to distinguish options trading activity before an announcement … on any randomly chosen date,” the authors wrote.

That’s not what they found, however. The trades flagged in the study as suspicious were so well-timed, the authors say, that “the probability of the unusual volume in the sample arising out of chance” is approximately “three in a trillion.”

In addition to the sheer extent of insider trading, the authors found that regulators at the Securities and Exchange Commission are often overmatched in their efforts to keep pace with such activity. Out of 1,859 deals examined in the study, fewer than 5 percent resulted in any form of litigation by the SEC.

In recent years, the government’s most successful actions against insider trading have originated at the Department of Justice. Since 2009, prosecutors in the U.S. Attorney’s Office for the Southern District of New York have won 81 convictions or guilty pleas for insider trading in the hedge fund industry. The historic crackdown was the focus of the recent FRONTLINE investigation, To Catch a Trader.

One problem at the SEC, say the authors, is that regulators appear overly focused on insider trading with stocks, rather than on trading in options. From 1990 to 2013, they note, the SEC investigated 207 M&A transactions for insider trading in stocks only, but only 102 cases involving options.

“The modest number of civil lawsuits for insider trading in options made by the SEC appears small in comparison to the pervasive evidence we document,” they conclude.

blog comments powered by Disqus

In order to foster a civil and literate discussion that respects all participants, FRONTLINE has the following guidelines for commentary. By submitting comments here, you are consenting to these rules:

Readers' comments that include profanity, obscenity, personal attacks, harassment, or are defamatory, sexist, racist, violate a third party's right to privacy, or are otherwise inappropriate, will be removed. Entries that are unsigned or are "signed" by someone other than the actual author will be removed. We reserve the right to not post comments that are more than 400 words. We will take steps to block users who repeatedly violate our commenting rules, terms of use, or privacy policies. You are fully responsible for your comments.

SUPPORT PROVIDED BY

FRONTLINE on

ShopPBS
Frontline Journalism Fund

Supporting Investigative Reporting

Funding for FRONTLINE is provided through the support of PBS viewers and by the Corporation for Public Broadcasting. Major funding for FRONTLINE is provided by John D. and Catherine T. MacArthur Foundation. Additional funding is provided by the Park Foundation, the Ford Foundation, Wyncote Foundation, and the FRONTLINE Journalism Fund with major support from Jon and Jo Ann Hagler on behalf of the Jon L. Hagler Foundation.
PBSCPBMacArthur FoundationPark FoundationFord Foundationwyncote

FRONTLINE   Watch FRONTLINE   About FRONTLINE   Contact FRONTLINE
Privacy Policy   Journalistic Guidelines   PBS Privacy Policy   PBS Terms of Use   Corporate Sponsorship
FRONTLINE is a registered trademark of WGBH Educational Foundation.
Web Site Copyright ©1995-2014 WGBH Educational Foundation
PBS is a 501(c)(3) not-for-profit organization.