ANNUAL COST OF INSIDER TRADING PUT IN THE MILLIONS.Byline: Dylan Ratigan Dylan Ratigan is an American financial journalist for the business TV channel CNBC, where he co-anchors the 3-4pm ET hour of the Closing Bell from a set overlooking the New York Stock Exchange (the same set used for Squawk on the Street Bloomberg Business News Illegal insider trading costs Trading costs Costs of buying and selling marketable securities and borrowing. Trading costs include commissions, slippage, and the bid/ask spread. See: Transactions costs. investors millions of dollars a year by inflating the cost of mergers and acquisitions, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. a Harvard Business School Harvard Business School, officially named the Harvard Business School: George F. Baker Foundation, and also known as HBS, is one of the graduate schools of Harvard University. study. Between 1974 and 1990, bidding companies paid an extra $4 billion as a result of trading on information unavailable to the public, according to Lisa Meulbroek, a Harvard University Harvard University, mainly at Cambridge, Mass., including Harvard College, the oldest American college. Harvard College Harvard College, originally for men, was founded in 1636 with a grant from the General Court of the Massachusetts Bay Colony. finance professor. ``Insider trading is tremendously costly for the bidding companies,'' Meulbroek said. Meulbroek compared 112 mergers preceded by illicit insider trading with 112 where there was none. She found that when insiders ran up the stock price of the company being acquired before the announcement, buyers ended up paying a 30 percent higher premium for the company, on average, than they otherwise would have. If that formula is applied to one recent example, Gillette Co. shareholders will pay $770 million more for Duracell International Inc. because of a run-up in the share price allegedly caused by trading on insider tips. The Securities and Exchange Commission said 18 people made $1 million by relying on inside information to trade Duracell options in the two days before the $7.82 billion transaction was announced. ``Insider trading is very costly for the buyer - too costly,'' said Jeff Wardlow, a fund manager at Loomis Sayles & Co., which owned 309,160 Gillette shares as of June 30. ``The only way to avoid it is to rely less and less on investment banks The following is a list of investment banks Financial conglomerates Large financial-services conglomerates combine commercial banking and investment banking, and sometimes insurance. , which you can't always do.'' The SEC sued Lennox SA of Lugano, Switzerland, over the Duracell trades. Lennox bought most of the 1,700 questionable Duracell call options on behalf of 16 unidentified Italian customers, said Catherine Shea, assistant chief litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. counsel at the SEC. Gillette and Duracell declined to comment. Executives generally expect to pay a premium for companies they acquire. The premise of Meulbroek's paper is that once other things that affect an acquisition have been backed out, such as whether or not it is hostile, for cash, for stock or resulting from an auction, the target's stock price jumps an average 9 percentage points more than it would have without illegal trades. Some companies have sued their investment banks for artificially inflating the price of a merger by leaking news to certain individuals before it was publicly disclosed. In a 1983 case, Litton Industries Named after inventor Charles Litton Sr., Litton Industries was a large defense contractor in the United States, bought by the Northrop Grumman Corporation in 2001. Inc. sued Lehman Brothers Lehman Brothers Holdings Inc. (NYSE: LEH), founded in 1850, is a diversified, global financial services firm. It is a participant in investment banking, equity and fixed income sales, research and trading, investment management, private equity, and private banking. and Dennis Levine Dennis Levine (born 1953) was a prominent player in the Wall Street insider trading scandals of the mid-1980s. [1] As a managing director at Drexel Burnham Lambert, he was charged with insider trading by then U. , who was working at Lehman, alleging that Levine leaked Litton's plans to buy Itek Corp. Litton, based in Woodland Hills, maintained that Levine and others he tipped off bought massive amounts of stock, driving up the stock price from $26 to $33 a share. That run-up, Litton said, inflated to $48 a share the price Litton eventually paid for Itek. After an appeals court ruled in Litton's favor in June 1992, the suit was settled. To be sure, the insider trading premium paid by an acquiring company's shareholders benefits those who hold stock in the company being purchased. In the Gillette case, the estimated extra $770 million went to Duracell shareholders - including those who traded on the inside information. Some investors say insider transgressions don't matter to them. ``You can't worry about insider trading like that. It is going to happen,'' said John Hammerschmidt, a fund manager at Turner Investment Partners, who held 332,880 Gillette shares as of June. ``What matters to us is whether or not the acquisition will add to earnings. If so, that's all we care about.'' The Duracell buyout is expected to add 10 cents a share to Gillette's earnings in 1997. |
|
||||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion