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London, U.S. markets agog with `insider trading' charges

Batuk Gathani

U.S. authorities are aggressive in dealing with such cases

LONDON: Many eyebrows are raised in the financial district of London — now rated as the world's biggest financial trading capital with a marginal hedge over New York — with the latest revelation by the Financial Services Authority (FSA) that nearly a quarter (23.7 per cent) of financial takeover announcements in 2005 were preceded by share price movements that indicated possible "insider trading".

Such deals are attributed to "insider tips" about prospects and price movement of shares based on "inside and privileged" knowledge. This is widely rated as a special prerogative of influential and "well connected" stockbrokers. They often use their special clients as a "front" to stage a buy and sell exercise based on "special information".

According to informed observers, this is not a unique pattern confined to London but the practice of inside deals is widely prevalent in other European, North American and Asian financial markets. The latest revelation has little changed since 2000 from 24 per cent inside deals reported in 2000, but down from a recent peak of 32.4 per cent in 2004. However, so far FSA — much acclaimed on both sides of the Atlantic — has brought only one successful enforcement case of institutional market abuse. The hedge-fund manager in question bolted out of London and commenced trading in Geneva where he is handling an investment portfolio of $1 billion. All this has triggered a debate about what constitutes "insider trading" and what the consequences are for the markets in general and individuals concerned in particular.

The U.S. authorities are rated as being more aggressive in dealing with "ifs and buts" of "insider dealing" and so far have had greater success, if the current level of prosecution by U.S Federal Authority is any criterion. Last week, the U.S. authorities charged 13 people and according to current media reports, personnel at Morgan Stanley, Union Bank of Switzerland and stock broker Bear Stern have been charged with "criminal security fraud relating to two insider trading rings".

According to some observers this is a mere tip of the iceberg. The U.S. Securities and Exchange Commission (SEC) spokesman and deputy enforcement director Peter Bresnan said: "We are increasingly looking at insider trading by financial institutions... . and deterring such activities is one of our primary goals." It is also noted that latest FSA study has only covered equities. However, there is mounting concern about insider trading goings on in the fast rising and ponderous debt and derivatives markets. So far FSA has concluded only eight enforcement actions relating to misuse of information because proving infringement is difficult.

The situation is no different in key Asian financial markets, according to informed observers, who conclude that markets will have to "live with" the reality of "insider trading".

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