Regulators flush out inside traders around the globe

In London, New York, and Tokyo this summer, financial authorities are busting another wave of inside traders. Although global finance has made inside trading possible on a global scale, the current crackdowns are not necessarily part of a coordinated international effort. But around the world, even laissez faire financial centers, such as Tokyo, are becoming concerned about the seriousness of inside trading - especially the way it undermines perceptions of the fairness of free markets.

``A lot of individuals,'' notes veteran Wall Street observer Perrin Long of Lipper Analytical Services in New York, ``feel that Wall Street is a gambling casino. Inside trading certainly isn't helping to bring the individual investor back.''

In Britain, National Westminster Bank last week sacked an officer of County NatWest, its securities arm, for allegedly carrying out trades worth $3.4 million, netting a $170,000 profit, based on inside information on a company called Grand Metropolitan. The information was said to have been leaked by the finance department of County NatWest, which advises Grand Metropolitan, to an associate director of County NatWest.

In another development, one employee each from Samuel Montagu, Morgan Grenfell, and Lazard Brothers left their jobs for alleged dealings in Pleasurama shares before Mecca Leisure Group announced a takeover bid for the group. These cases are considered a serious breach of the ``Chinese Wall'' that is supposed to prevent conflicts of interest by separating investment-banking advisers from traders.

The British Department of Trade and Industry recently said there were more than 10 possible inside-trading cases under investigation. The British government has been under pressure to keep the recently deregulated financial markets clean.

In the United States, a former Merrill Lynch broker last week agreed to plead guilty to fraud charges and cooperate with investigators in a case involving stock trades made with pre-publication issues of Business Week magazine's ``Inside Wall Street'' column.

Business Week also fired its broadcast editor for violating the magazine's code of ethics and possibly trading on advance knowledge of stocks mentioned in issues before they were released.

Federal investigators, meanwhile, continue to mine the massive inside-trading scandal centered on financier Ivan Boesky. The ongoing inquiry appears to concentrate on the activities of Drexel Burnham Lambert and Michael Milken, Drexel's junk-bond specialist.

And in Japan, the Ministry of Finance, concerned that investors could lose confidence in the high-flying Japanese stock market, is starting to get serious about the inside trading that has long pervaded the Tokyo Stock Exchange.

Japanese regulators now have tough new rules defining and forbidding inside trading, and they are starting to step up investigations. But they have a long way to go, given the tradition of inside trading in Tokyo and chummy relations between government and business.

As always, says Mr. Long in New York, the motive for inside trading is ``simply greed.''

James Lorie, a University of Chicago professor who specializes in the workings of financial markets, says the wave of merger and acquisition activity over the past 10 years has provided a greater opportunity for inside trading. Although he sees inside trading as essentially a ``victimless crime,'' Dr. Lorie is concerned about its ``destroying confidence in the integrity of the market.''

Inside dealing takes advantage of two very important truths about investing: Information is the most prized commodity, and a crowd mentality prevails among investors. When an investor knows secret information - about a pending merger, for instance, or what a company might earn - he can fulfill his fondest wish: Buy low and sell high. He purchases shares in a company before anyone else knows the secret. In due course, other investors learn the secret. They rush to buy, too, bidding up the stock price, and the inside trader scores big.

In the Business Week case, readers of the magazine's ``Inside Wall Street'' often bought stocks that received favorable mention in the column. One or more brokers secured pre-publication copies of the column through employees at the company that printed the magazine and bought the stocks mentioned. When the issue appeared on the newsstands, stock prices rose.

Overseers such as the stock exchanges or government securities regulators constantly use their computers to check for suspicious trading patterns. But their work is complicated by the globalization of trading, the speed of telecommunications, and the sheer volume of paper work in stock markets.

Since Tokyo, New York, and London are more and more closely linked, the US has been pushing for more uniform regulations. The US and Britain now routinely trade information on suspicious transatlantic stock deals. They have been urging Tokyo to do likewise.