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  • Writer's pictureKirk Hartley

Insider Trading Is Rampant – But Prosecutions Are Not – When Will a Market-based Solutio

A new study confirms the obvious – insider trading is rampant in connection with corporate m & a. The story is told in a June 18 , 2014 article  by Ross Sorkin at the NYT. The SEC and DOJ, however, are woefully unable to keep up. When will a market based solution emerge? Will hedge fund investors create bounty hunters that find and tip the SEC, or otherwise expose the fraud and embarrass the SEC and DOJ into action. Stay tuned …

Pasted below are some key quotes from the article – it is well worth reading in full because it includes a link to the study and more analysis:

“A quarter of all public company deals may involve some kind of insider trading, according to the study by two professors at the Stern School of Business at New York University and one professor from McGill University. The study, perhaps the most detailed and exhaustive of its kind, examined hundreds of transactions from 1996 through the end of 2012.

The professors examined stock option movements — when an investor buys an option to acquire a stock in the future at a set price — as a way of determining whether unusual activity took place in the 30 days before a deal’s announcement.

The results are persuasive and disturbing, suggesting that law enforcement is woefully behind — or perhaps is so overwhelmed that it simply looks for the most egregious examples of insider trading, or for prominent targets who can attract headlines.

The professors are so confident in their findings of pervasive insider trading that they determined statistically that the odds of the trading “arising out of chance” were “about three in a trillion.” (It’s easier, in other words, to hit the lottery.)

But, the professors conclude, the Securities and Exchange Commission litigated only “about 4.7 percent of the 1,859 M.&A. deals included in our sample.”

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