Feature

The scandal Wall Street didn’t foresee

Two key omens presaged the current “holiday wave of enforcement activity” by federal market watchdogs against firms suspected of insider trading, said Katie Benner in Fortune.com.

Katie BennerFortune.com

The clues were in plain sight, said Katie Benner. Two key omens presaged the current “holiday wave of enforcement activity” by federal market watchdogs against firms suspected of insider trading. The first was the 2008 election, which replaced the see-no-evil market regulators of the Bush administration with a new bunch of enforcement-minded overseers. The second data point was the resurgence of takeover activity following the financial crisis. Those deals involved “dozens of bankers, executives, lawyers, and investors” who might have been tempted to pass along privileged deal information to the hedge-fund and mutual-fund managers now under the spotlight of the Securities and Exchange Commission and the Justice Department.

Federal regulators noticed that in the days before a takeover announcement, the shares of the target company often rose sharply—a telltale sign of insider trading. They put two and two together and set out to expose “a vast and shadowy insider trading ring.” An industry that “hasn’t seen the back of a regulatory hand in nearly a decade” is now receiving “fistfuls of subpoenas.” For anyone looking, this crackdown “was entirely predictable.”

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