by John M. Curtis
(310) 204-8700

Copyright March 3, 2007
All Rights Reserved.

etting another black eye, Wall Street reeled again from its latest scandal, as the Security and Exchange Commission nabbed UBS stock analyst Michael Guttenberg and 13 others for insider trading, reminiscent of the wild days of Ivan Boesky and Dennis Levine in the 1980s. Guttenberg was implicated in an elaborate scheme to exchange insider tips about analyst recommendations to repay a $25,000 debt, taking place in face-to-face meetings with his friend Erik Franklin at Manhattan's famed Oyster Bar in New York's Grand Central Station. Guttenberg allegedly used disposable cell-phones and coded text messages to exchange the insider tips. Guttenberg's scheme along with four others at Morgan Stanley, four major investment firms and three hedge funds involved $15 million in illegal profits, amounts to a staggering scandal and publicity nightmare for Wall Street.

      Growing concerns about Wall Street's monopolistic practices have rocked financial markets in recent days, watching a carefully orchestrated profit-taking scheme executed by the nation's largest investment funds. Fund traders have been known to take down markets when it's time to skim profits. Small investors can only hold on or bail out and take their lumps. New revelations about insider trading add insult-to-injury, raising, once again, whether small investors can survive in Wall Street's fast lane. “This involved people who should have known better and people who were making a great living,” said Linda Thomsen, SEC enforcement director, shocked by the flagrant disregard of stock trading rules. “This is outrageous.” Without going after insider trading, there can be no integrity in the investment industry on which corporate America depends for growth and raising capital..

      Wall Street, politics and scandal have crossed path in recent years of former Sen. Bill Frist (R-Tenn.) suspected of insider trading by the SEC. Frist sold thousands of shares of his father's company Columbia-HCA, the nation's largest for-profit hospital chain, right before the company announced disappointing earnings. Frist's SEC problems went into his decision to bypass the 2008 presidential race. Today's insider trading scandal reminds investors that Wall Street isn't safe. When Martha Stewart decided to have her stock broker Peter Bacanovic fudge a stop-loss order on her ImClone Systems' stock, she paid a heavy price, serving 5-months in federal prison. ImClone president Sam Wacksal still sits in club-fed for insider trading. While Enron's former founder and CEO Ken Lay lies six-feet-under, his chosen successor Jeffrey Skilling rots in prison for fraud and insider trading.

      Pointing the finger at flawed individuals diverts attention away from a corrupt system in which the nation's biggest funds routinely engage in insider trading when using programmed selling for profit-taking. Last week's 500-point plunge alerts small investors about the capricious way fund managers take profits. There's no advance warning for small investors trying to protect savings and retirement accounts from Wall Street's premeditated greed. Blaming sell-offs on global events or former Fed Chairman Alan Greenspan's prognostications covers up how traders implement profit-taking. SEC investigations focused on whether largely unregulated hedge funds receive advance notice on major fund's big trades. Civil charges were filed against 11 people, two hedge funds and a day-trading firm, with New York's U.S. attorney bringing 10 criminal indictments.

      In the UBS case, Michael Guttenberg, 41, of Manhattan gave hedge fund manager Erik Franklin, 39, of Denville, NJ inside tips on analysts' ratings. Franklin used the info to make trades for Q Capital Investment Partners and Lyford City Capital, a hedge fund at Bear Stearns Cos, netting the companies $14 million in illicit profits. “Any time you have something that taints the industry it's a topic of conversation, “ said George Rodriguez, a managing director at TradeTreck Securites, an institutional brokerage firm in Newark, NJ. Scandals at Enron, WorldCom, Qwest Communications, etc., rocked public confidence in the stock market. Tough new reforms passed by Congress 2005 to guard against corporate fraud don't address programmed trading. “There's always been a sneaking suspicion that there's information leakage,” said Holly A. Stark, worried about the PR damage.

      Financial scandals at the nation's most respected publicly traded companies opened a Pandora's box about corporate white-collar crime. Revelations on Wall Street completes the picture of an equally vulnerable investment industry pressured to maximize profits at the expense of small investors. When former big-five accounting firm Arthur Andersen cooked Enron's books, then shredded the evidence, it rattled trust and confidence in publicly traded companies. Insider trading now threatens to scare off more investors who trusted the stock market for long-term investing. When the dot-com bubble burst and the stock market crashed in 2000, few questioned how the SEC approved so many phony companies. Restoring confidence in the market requires the SEC to not only police publicly traded companies but to prosecute violators to the fullest extent of the law.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

©1999-2005 Discobolos Consulting Services, Inc.
(310) 204-8300
All Rights Reserved.