Insider trading is often not worth the cost

Again and again, we've seen professionals entrusted by their clients with confidential information turn around and abuse their privileged positions by trading on their inside knowledge. And again and again, these people get caught.

The Globe and Mail
April 5, 2001

Insider trading is often not worth the cost
Andrew Willis

Why do they do it?

Again and again, we've seen professionals entrusted by their clients with confidential information turn around and abuse their privileged positions by trading on their inside knowledge. And again and again, these people get caught. Now we have a juicy insider trading scandal unfolding at RBC Dominion Securities Inc.

Most times, the insider traders end up without much money in their back pockets — that seems to be the case here. Even those who made millions off swapping inside tips — the Marty Siegels, Ivan Boeskys and Dennis Levines — find the money pales in comparison to jail time and the cost of a career that goes up in smoke.

Wall Street's 1980s hall of shame is populated by takeover specialists such as Messrs. Levine, Boesky and Siegel who thought that they were so clever, their questionable personal trading would never be caught by regulators. They were proven wrong, as offshore bank accounts and a web of tipping were all exposed in an experience that, in retrospect, probably provided a healthy lesson in morality for the Street, along with some terrific books.

The morality play is now coming to a Canadian stage, with only the identities of the principal actors still in doubt.

Over the past week, RBC Dominion's compliance department started putting together the pieces of an illegal trading puzzle.

Offshore accounts, from a financial institution in the Bahamas, used the dealer to buy shares in a thinly traded stock.

Shortly after, the company was taken over in a transaction that featured RBC Dominion as an adviser. Someone, it's not clear just who, got suspicious. They started pulling records. And a pattern emerged.

In more than a dozen instances over a prolonged period — some sources say up to 20 deals — the same offshore accounts had used RBC Dominion to buy stock just ahead of takeovers that featured the same dealer as an adviser — it is one of Canada's strongest mergers and acquisitions advisers.

The investments weren't huge — sources say they amounted to tens of thousands of dollars per trade — but the pattern raised eyebrows. Either someone had developed a prescient ability to pick takeover targets, or there was a leak.

These puzzle pieces were assembled late last Thursday on the desk of RBC Dominion chief executive officer Chuck Winograd. The next morning, he and chairman Tony Fell walked up to the Ontario Securities Commission and laid out the picture. Forensic accountants were hired by the investment dealer to work with market regulators on tracing just who has this hot hand.

RBC Dominion decided to go public with the problem yesterday in large part because it wanted to stomp out the possibility of any insider trading in the stock of other clients. Executives with the firm said shedding light on the suspicious trading wouldn't hamper an investigation, but should halt the tipper in his or her tracks.

It's not at all clear that someone from RBC Dominion's ranks is at fault here — though God help the individual if they are at the dealer and partners catch on while the culprit is still on the premises.

For all the secrecy that surrounds merger and acquisition activity, the circle of those in the know on big deals can be quite large. In addition to investment bankers, you've got lawyers and accountants. Then there are outside players: media consultants, security guards, janitors, printing plant workers. The latter were a source of tips in the 1980s Wall Street scandals.

But with this much attention now focused on the suspicious trades, our insider trader is likely to be found out. Offshore banking confidentiality is something of a myth. If presented with evidence of criminal wrongdoing, such as insider trading, foreign regulators and foreign bank executives are quick to open up the books. Trading leaves fingerprints. This mystery is going to be solved.

The questions, then, are whether compliance systems should have caught this problem earlier, just how widespread the problem is and what can be done to stop this sort of behaviour in the future?

On the first point, we turn to RBC Dominion's Mr. Winograd, who also wears the mantle of chairman of the Investment Dealers Association, the industry's self-regulatory body.

"When the full story can be told, I'm confident everyone will conclude that what took place here doesn't reflect a failing in Canadian regulatory systems, or our own compliance systems," Mr. Winograd said yesterday.

On the extent of the suspicious trading, RBC Dominion only knows what its own systems have revealed. But you can be sure every other Canadian dealer is now reviewing offshore trades, and information is being shared.

On the last point, well, you're always going to get people who are corrupt and think they're smarter than the system.

The Street's rawest recruit knows it is illegal to trade on confidential information.

A decade ago on Wall Street, we saw an example made of high fliers who broke the rules. Those who traded on inside information went to jail. The same sort of harsh punishment should be meted out in Canada as an example to this community.

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WHAT THEY SAID:
'Our investigations to date indicate the identified trades were not material relative to the size of the transactions, but reflect a suspicious level of knowledge regarding details of the transactions.'

From a statement issued yesterday by Royal Bank chairman Tony Fell and Charles Winograd, president and CEO of RBC Dominion Securities


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Risks: Insider trading, Mergers and acquisitions, Abuse inherent in modern franchising, Opportunism (self-interest with deceit), Ontario Securities Commission, Canada, 20010405 Insider trading

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