Political Economist

May 12, 2007
Suspicious Trading on the Rise
By JENNY ANDERSON

On Wall Street, it feels like the 1980s all over again. Investment banks and
private equity firms are minting money on a binge of deal making. Buyouts
are not only back, but bigger than ever. Billionaire titans of finance are
feted at huge, glittering parties. Even leggings are back in style.

But there was a dark side to the decade, and that seems to have returned as
well. Regulators are again knee-deep in insider trading cases, with
profiteers spanning the globe, from Hong Kong to Lower Manhattan. Just this
week, United States authorities froze the account of a couple who are
suspected of insider trading on $15 million worth of Dow Jones shares,
arrested an energy banker at Credit Suisse who is charged with leaking
information on nine deals to a contact in Pakistan and accused another
couple of illegally trading on information out of Morgan Stanley’s real
estate subsidiary.

"Everything is going global, even insider trading," said Robert A. Marchman,
executive vice president and head of market surveillance at NYSE Regulation.

But unlike the scandals in the 1980s, when Wall Street stars like Ivan F.
Boesky were caught in insider trading investigations, the recent flurry of
cases have chiefly involved young bit players. And the schemes, as outlined
by regulators, are predictably similar. Wives team up with husbands;
investment bankers call friends; research executives pay off old debts with
valuable tips.

Mr. Marchman cut his teeth on the Boesky scandal, an event he says may have
receded too far into the past to scare the young guns on Wall Street today.

“You are dealing with people who don’t have a recollection of what took
place in that scandal and think they are above the law, that the regulators
don’t have the technology to detect this activity. As evidenced by the
number of recent cases, they are flat- out wrong.”

The rash of cases may be partly attributable to the surge in the number and
the size of deals. Unlike deals in the 1980s, when takeovers were often
hostile, transactions today are usually friendly, which means that there are
two groups of lawyers, bankers and company officials in possession of
valuable inside information, not just one. Deals today are also supersize,
with consortiums of private equity firms lining up seemingly every big bank
on Wall Street to finance the buyout.

At the same time that deals and the number of people involved in deal-making
have increased, the number of hedge funds has surged, with their traders
looking for any competitive edge in information. As a result, the potential,
and temptation, for information to be leaked is substantial.

“Given the incentives and the compensation in the hedge fund industry to
deliver extraordinary returns, there has to be an immense pressure on hedge
fund managers to take every opportunity they can find, even if it means
stepping over the line,” said Donald C. Langevoort, a professor of law at
Georgetown and a former special counsel at the Securities and Exchange
Commission. “That doesn’t mean they all do it, but if you think you won’t be
caught, it’s easy money.”

S.E.C. officials expressed dismay over the number of Wall Street
professionals involved in the cases, from investment bankers and advisers to
lawyers and accountants. “When we see Wall Street professionals engage in
insider trading, it’s particularly reprehensible because we rely on them to
keep the markets fair and clean,” said Peter H. Bresnan, deputy director of
enforcement at the S.E.C. After the insider trading scandals of the 1980s,
Mr. Bresnan said “insider trading moved from Wall Street to Main Street; now
it’s back on Wall Street."

Insider trading cases can originate from tips or from cooperating witnesses.
The S.E.C. generally brings about 45 of them a year. Another important
source consists of referrals from the exchanges. Through April 20, before
the recent flurry, the New York Stock Exchange had referred 45 cases to the
commission, compared with 111 for all of 2006. (Not all those referrals will
result in cases.)

The New York Exchange’s 160-member market surveillance division works in a
warren of cubicles inside the exchange. It resembles any corporate office
except for the widescreen television that lists a table of the active
stocks, along with real-time trading data. Computer systems run specialized
algorithms (co-designed by the Massachusetts Institute of Technology) that
generate alerts when stocks exceed preset trading limits.

It was in that office last fall that Ryan Hickey, a senior special analyst,
noted that the market surveillance system had flagged unusual movement in
the stock of Trammell Crow before the announcement of its acquisition by the
CB Richard Ellis Group. Ms. Hickey then opened a case in the trades,
contacting the brokerage firms that handled the transactions.

The information Ms. Hickey and her team gleaned has since grown into the
investigation of nine deals, including the $45 billion leveraged buyout of
TXU, that regulators say was leaked by the Credit Suisse banker.

Still, it is unclear whether the regulators are even touching the surface.
Technology has improved, allowing authorities to capture conversations on
e-mail and instant messaging that makes it easier to establish that
information has been passed around.

“Historically one of the challenges facing prosecutors is proving that
communication took place between the tipper and the tipee,” said Ron
Geffner, a lawyer at Sadis & Goldberg who previously worked at the S.E.C.
“Advances in technology have helped prosecutors, not hurt them. We now have
records of everything, unless it’s like ‘Goodfellas’ where everyone is
actually meeting to talk.”

But at the same time, information travels at warp speed, financial
instruments are more complex and the trading is showing more savvy.

“The way that people are engaging in insider trading is getting more
sophisticated, derivatives, trading in places that won’t come to us, the
combination of products, the combination of accounts, the use of different
prime brokerage accounts,” said David Steiner, a vice president in market
surveillance at NYSE Regulation. “The more sophisticated it becomes, the
more sophisticated we have to become.”

A case in point is that entities can trade onshore and offshore, in stocks,
derivatives, bonds and even spread betting, where traders can bet on a
percentage increase or decrease in a security without buying it.

Christopher K. Thomas, who founded a firm called MeasuredMarkets to identify
unusual trading patters, says he has not seen a drop in suspicious trading
patterns.

“Nothing so far has shown me that the tendency is decreasing,
notwithstanding all the high-profile cases and the publicity,” he said.

And yet this week alone, regulators seemed to be on a full-court press to
catch offenders. Cooperation, both domestically and internationally, is
helping, say regulators, as well as improvements in technology.

Each of the recent cases has quirky elements of intrigue. Regulators are
examining the “highly suspicious” trading of Dow Jones shares and whether a
Hong Kong couple were tipped off that Rupert Murdoch was making an offer for
the company before it became publicly known. In the Credit Suisse case, the
banker accused of leaking information on deals, made calls from his office,
investigators say.

Two separate Morgan Stanley cases put a new twist on pillow talk. Randi
Collotta, a 30-year-old former lawyer in the compliance department at Morgan
Stanley, fed tips about four deals to her husband who passed them on to a
high school friend. The friend netted $38,000; the Collottas, only $9,000.
(The couple pleaded guilty this week.)

On Thursday, the S.E.C. accused Jennifer Wang, a 31-year-old former analyst
at Morgan Stanley and her husband, Ruben Chen, 34, a former analyst in the
hedge fund group at ING of making more than $600,000 by trading on companies
advised by Morgan Stanley’s real estate subsidiary. Ms. Wang, a Princeton
graduate who was a vice president, and Mr. Chen are accused of trading
through Ms. Wang’s mother’s account. David Spears, a lawyer for the couple,
said on Thursday that they expected to plead not guilty.

But nothing yet would seem to match the audacity of what authorities said
was an insider-trading ring uncovered last year. They say that Eugene
Plotkin, a former fixed-income analyst at Goldman Sachs who graduated from
Harvard, teamed up with another onetime Goldman employee, David Pajcin, to
leak information on deals to various associates, including an aunt in
Croatia who was a former seamstress in an underwear factory. She made $2
million on one trade — setting off alarm bells that ultimately brought the
ring down. (Mr. Plotkin has pleaded not guilty and is awaiting trial; Mr.
Pajcin is cooperating with the government.)

Banks uniformly express outrage at such activity. Employees are trained and
retrained to recognize insider trading and report it. But the temptation is
still there.

“When you consider how complex and far-reaching the global securities
markets are, you see what an enforcement dilemma that provides,” Mr.
Langevoort of Georgetown Law said. “A lot more money needs to be spent on
these problems to not let insider trading be the equivalent of the H.O.V.
lane, where the chance of being caught is pretty remote.”

Michael J. de la Merced contributed reporting.

http://www.nytimes.com/2007/05/12/business/12insider.html?ref=business&pagewanted=print

May 12, 2007
Alfred D. Chandler Jr., a Business Historian, Dies at 88
By DOUGLAS MARTIN

Alfred D. Chandler Jr., an economic historian who revolutionized the writing
of business history, shunning the old debate about whether tycoons are good
or bad, and instead arguing persuasively in almost two dozen books that it
was the emergence of professional management that propelled modern
capitalism, died on May 9 in Cambridge, Mass. He was 88.

Jim Aisner, a spokesman for Harvard Business School, where Dr. Chandler had
taught, announced the death.

Fortune Magazine last year called Dr. Chandler “America’s pre-eminent
business historian,” saying that for a long-term perspective on the Fortune
500, the magazine’s ranking of the biggest corporations, “there’s really
only one person to ask.”

Before Dr. Chandler, the bulk of business histories were morality plays that
portrayed executives as heroic or damnable. He helped redirect the field
toward dispassionate analysis of the anatomy of business. He emphasized the
transformative power of technology as railroads and the telegraph spawned
big business. These corporations needed what Mr. Chandler called “a new
subspecies of economic man — the salaried manager.”

The salaried manager represented a new concept: a manager could possess
management expertise independent of the content of what he was managing.
Unlike the traditional entrepreneur, he need have no stake in the company he
managed.

Dr. Chandler developed this theme most famously in “The Visible Hand: The
Managerial Revolution in American Business” (1977), which won the Pulitzer
Prize for history and the Bancroft Prize. His thesis was that managers,
functioning as a “visible hand,” had replaced the “invisible hand” of Adam
Smith’s free market in allocating resources.

This new emphasis on organizational structure so transformed the field of
business history that some call the period before Dr. Chandler’s
publications “B.C.,” meaning before Chandler. Glenn Porter wrote in 1992 in
“The Rise of Big Business, 1860-1920”: “Virtually every work now written on
the history of modern, large-scale enterprise must begin by placing itself
within the Chandlerian analytical framework.”

Dr. Chandler’s work was distinguished by an intellectual rigor he gleaned
from the sociologist Talcott Parsons, one of his professors at Harvard. Dr.
Chandler rigorously compared earlier and later time frames to see what
changed, and, more important, what caused the change. He likened the process
to a controlled scientific experiment.

His conclusions jolted conventional wisdom. For example, he said that
America’s industrial revolution did not start in New England mills, but with
the beginning of large-scale mining of anthracite coal fields in
Pennsylvania in the 1830s and 1840s. This new power source replaced water,
wood and charcoal, facilitating the making of iron and metal products.

Alfred du Pont Chandler Jr. was born in Guyencourt, Del., on Sept. 15, 1918.
Although he was not a blood relation of the du Ponts who founded the
chemical company, his great-grandmother was raised by the du Ponts after her
parents died of yellow fever.

Alfred spent his first five years in Buenos Aires, where his father
represented an American locomotive company. When he was 11, the family moved
back to the United States and settled near Wilmington.

Family lore has it that the boy announced his intention to become a
historian by the time he was 7. He was inspired by Wilbur Fisk Gordy’s book
“An Elementary History of the United States,” a primer for sixth-graders his
father gave him. He read it 19 times.

At Phillips Exeter Academy, he won a prize for excellence in history. In
1940, he graduated magna cum laude from Harvard, where generations of his
family had studied, beginning in the 18th century. During World War II, he
served in the Navy, interpreting intelligence photos.

He enrolled as a graduate student at the University of North Carolina at
Chapel Hill to study Southern regional history. But he became captivated by
sociology, and returned to Harvard to study with Mr. Parsons.

He stumbled on his dissertation topic in old papers on the history of
American railroads written by his great-grandfather, a founder of the
financial-data company that became Standard & Poor’s. The dissertation
became a book, “Henry Varnum Poor: Business Editor, Analyst and Reformer”
(1956).

From 1950 to 1963, Dr. Chandler taught at the Massachusetts Institute of
Technology, where he helped edit the letters of Theodore Roosevelt and wrote
“Strategy and Structure,” which used General Motors, DuPont, Exxon and
Sears, Roebuck to develop his ideas on how companies employ organization
structure to further strategy.

Dr. Chandler taught at Johns Hopkins, where he edited the papers of
President Dwight D. Eisenhower, then joined the faculty of Harvard Business
School from which he retired in 1989. He was editor of the Harvard Studies
in Business History.

He was a visiting professor at Oxford and elsewhere, and president of the
Economic History Association and the Business History Conference. He was a
member of the American Philosophical Society and a fellow of the American
Academy of Arts and Sciences.

Dr. Chandler is survived by his wife, the former Fay Martin; his daughters,
Alpine (Dougie) Chandler Bird, of Annapolis, Md., and Mary (Mimi) Chandler
Watt, of Dina Powys, Wales; his son, Howard, of Maharishi Vedic City, Iowa.;
his sisters Nina Murray, of Bedford, Mass., and Nantucket, and Sophie
Consagra, of Manhattan; five grandchildren and two step-grandchildren; and
one great-grandchild.

Dr. Chandler fancied a glass of sherry with lunch before retiring to write
on yellow-lined paper in small, cramped letters. Though he did not use a
computer, he gave characteristic thought to its impact on economic change.

“All I know is that the commercializing of the Internet is transforming the
world,” he said in an interview with Newsweek last year.

http://www.nytimes.com/2007/05/12/business/12chandler.html?pagewanted=print