Pre-merger trades of stocks, options subject to review Rapid increase of share price likely to draw investigators' attention


Investors who participated in the two-day bull run in Alex. Brown Inc. stock and options before the Baltimore investment bank accepted a $1.7 billion takeover offer can count on two things: a short-term profit and the fact that investigators will soon know who they are.

That's because Alex. Brown's stock zoomed up by almost $12 a share to $53.125 Thursday and Friday, with Friday's trading reaching six times the average recent daily volume before Alex. Brown agreed to merge with Bankers Trust New York Corp. The shares rose another $10 yesterday to close at $63.125.

Trading in the company's options Friday was even more unusual: an option to buy 100 Alex. Brown shares at $50 each rose eightfold on 67 times the normal volume of options trading, according to Bloomberg News. Buying options is riskier than buying stock, but can let an investor make a much bigger profit if he or she is right.

"That's something that makes Stock Watches go BOING! BOING! BOING!" at the New York Stock Exchange and at the U.S. Securities and Exchange Commission, said Kevin O'Connell, a Baltimore securities lawyer.

State regulators and sources at the Big Board said an investigation of the Alex. Brown trading is all but certain. The exchanges know which brokerage firm handled every buy order on both days, and all brokers who belong to the exchange agree in advance to identify their customers if the exchange or the SEC investigates trading, said Rohan Prashad, principal analyst in the NYSE's division of market surveillance.

"We would compare the list of those who bought with lists of insiders," NYSE spokesman Ray Pellecchia said, then expand the search to include lawyers, accountants and investment bankers who worked on the deal, plus family members, neighbors and any other associates of either the insiders themselves or the people who worked for them.

"Everything comes up and everything the computer cross-checks," Prashad said.

Even then, in one of the most celebrated insider-trading cases of the 1980s, former Wall Street Journal columnist R. Foster Winans' conviction for leaking advance information about what would be in his columns to a broker, Winans recalled in his memoir that enforcement officials flagged the scheme from among its first trades, partly because the broker made bets in the options market, where trading volume is so light that even small moves are highly visible.

Despite the transparency of the market, investigations don't yield especially large numbers of insider trading cases. SEC spokesman John Heine said the agency had brought between 27 and 45 annual cases involving insider trading charges since 1986.

O'Connell said there are two big reasons for that: it's often difficult to prove that a buyer had the criminal intent necessary to prove an insider trading charge, and many trades involve so little money that regulators don't pursue them in order to concentrate on bigger fish.

"A lot of times, unless it's almost like a conspiracy, it's sort of an accidental thing," O'Connell said, as in a case where Dallas Cowboys coach Barry Switzer beat insider trading charges because the insider who leaked the information was talking to someone else and didn't know Switzer was in position to hear him.

Proving intent could be especially tough in the Brown case, two traders said, because there was so much media attention given the deal before it happened, with detailed speculation hitting cable television and Wall Street wires by Thursday.

Also, Alex. Brown stock had come down more than $20 a share since Feb. 19 as financial stocks weakened and the market for the new technology-stock offerings Brown specializes in withered. Many ethical investors may have bought in the midst of the rumor frenzy with more prosaic motives than theft.

But, O'Connell said, "there's always a possibility, even with sophisticated parties, that you've got people who are just arrogant enough, just crazy enough or just stupid enough to try something."

If the SEC does move ahead -- and Heine, following SEC practice, would not confirm or deny that any investigation is coming -- then regulators may also be hobbled by the significant confusion in insider trading law.

Pub Date: 4/08/97

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