SEC hunts inside traders
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September 17, 1996: 8:32 p.m. ET
Agency seeks to unmask those who profited illegally in Duracell buy
From Correspondent Allan Dodds Frank
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NEW YORK (CNNfn) -- Sometimes it's luck, but this time it's illegal.
The Securities and Exchange Commission asked a federal court Tuesday to unmask the alleged inside traders who netted nearly $1 million as a result of the proposed $7.6 billion merger between Gillette and Duracell.
Officials at the American Stock Exchange became suspicious when they noticed significant trading activity in Duracell before the deal was even announced.
They alerted the SEC, which filed an insider trading lawsuit in U.S. District Court in New York against people who used offshore brokerage accounts to load up on Duracell options prior to last week's merger announcement from Gillette.
The SEC said the scheme generated "highly fortuitous profits." Officials said the anonymous traders used a Swiss bank account and a Bahamian company to hide their identities and money from Prudential Securities and Donaldson Lufkin Jenrette, the firms that executed the trades.
"The particular bank involved here has on prior occasions been caught in the same position as the unwitting intermediary," said John Coffee, a professor at Columbia Law School, "and it has been required by American courts under penalty of very large fines to identify who the inside trader was, who it acted for and that individual was criminally prosecuted."
After Gillette and Duracell both announced a merger agreement on Sept. 12, Duracell shares shot up 27 percent over two trading days, and the insiders sold their options for a profit of $950,000, the SEC said.
"They used a Canadian bank to trade on behalf of a Bahamian entity. Your guess is as good as mine as to what's behind that. It could be a Lichtenstein-Ahnstalt, could be a Panama bearer share corporation, or it could be an attorney in the Isle of Guernsey -- and there could be several other layers," said Bruce Hiler, securities law partner at O'Melveny & Myers.
The SEC intends to pursue the case aggressively to deter increasingly sophisticated traders. Stephen Lister, executive vice president of the American Stock Exchange said there has been an increase in insider trading this year because of the numerous mergers and acquisitions. (436K WAV) or (436K AIF)
But the SEC is hoping to catch future inside traders with broader legal agreements with countries that once helped hide illegal profits from American law enforcement.
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