Deja Vu?

Two years ago a couple of obscure academics extensively examined financial and stock market records of many listed companies in the U.S. They concluded that higher-ups in a number of these companies seemed to have an uncanny knack of being granted stock options. The Wall Street Journal based a lengthy article on the study. This led to the backdating scandal which put a number of businessmen in jail.

The other day The Journal ran a lengthy article based on a study by a couple of obscure academics. This study concluded that some investment banks appear to be trading on the basis of inside information. I suspect the eventual outcome of this article will be jail time for a number of investment bankers.

The problem stems from the fact that most investment banks have people who do deals and people who trade securities. For example, J.P. Morgan Chase was hired in the spring of 2007 to advise Verizon about a possible purchase of a small provider of telephone services, Cellular Corp. By the end of June two sections of Morgan for the first time had accumulated a 2.4% share of Cellular. When the deal was announced on July 30, Cellular stock shot up 34%. Coincidence?

Morgan is not alone. There is a wonderful graph that shows Citibank’s holdings of a company called Fritz before and after it was acquired by UPS, a client of Citibank. On September 30, 2000, Citibank held 116,400 shares of Fritz. By year-end they held 1,009,900 shares. The deal was announced in early January. Fritz stock was up 62%. Coincidence?

Credit Suisse was even more blatant. It advised both sides of an acquisition. Royal Bank of Canada, a Credit Suisse client, bought Centura, a Credit Suisse client. When the talks began in September, Credit Suisse did not hold a single share of Centura. By the end of the quarter, they owned more than 250,000 shares. Coincidence?

Goldman Sachs advised Motorola in its acquisition of Symbol Technology. By the time the deal was announced Goldman had increased its holdings of Symbol from 142,000 shares to 1,169,200. Coincidence?

Morgan Stanley advised Philips Electronics in its acquisition of Intermagnetics General. Morgan’s holdings of Intermagnetics went from 29,600 shares to 244,600. Coincidence?

Morgan Stanley has “strict policies” to ensure that inside information is protected. “We firmly believe that no improper trading occurred."