My browse of the morning news turned up a Wall St. Journal story that the US Securities and Exchange Commission (SEC) is looking at how brokers, hedge funds and others dealt with information about, among a dozen other deals, ANSYS’ acquisition of Ansoft.
Before we all get too excited, it’s important to note that nothing released so far by the SEC or discovered by the Wall St. Journal implicates ANSYS or Ansoft employees — nor is any action taken by the SEC going to undo the merger of the companies. But it is interesting to see how the SEC is trying to safeguard the rights of investors.
According to the Journal,
“The investigations are part of an effort to better understand how people meet and communicate with one another—and swap information—among banks and Wall Street trading floors. People who have seen the subpoenas say hedge-fund executives are being asked to hand over appointment books and business-contact lists, in addition to phone and email records. The SEC is looking at when traders, bankers and others held meetings either in person or over the phone, and how those meetings coincided with progress in deal talks and the timing of trades, a person familiar with the matter said.”
When a company is seeking to acquire another, an army of advisers is involved: investment bankers who do due diligence to figure out if the price is “fair” and who may help to arrange financing for the deal; lots of lawyers; market analysts (like me) who help to explain the market and its dynamics to various stakeholders; more lawyers; management consultants who help determine where “synergies” could be found to improve profitability — and so on. While not company officers, these people are typically considered “insiders” until the deal is announced to the public.
When the company’s shares are traded on US stock exchanges, the law requires that no one involved in the deal comment on it (or even on the possibility of a deal) to outsiders who may use that information to profit from the sale or purchase of stock. But keeping the deal a secret is very, very difficult, with so many people trooping in and out of office buildings they don’t normally visit. An astute observer may decide a deal is in the offing; that person is not considered an insider.
What the SEC is trying to find out about the deals under investigation is (1) who knew what when; (2) who told what to whom, when; and (3) if anyone profited from that information. The SEC’s job is to ensure the equitable functioning of markets: that, as much as is practical, everyone act on the same information. So if a banker involved in a deal for Company X told a hedge fund manager about the deal and the manager promptly bought shares of Company X in anticipation that the price would rise when the deal was announced, both the banker and his friend would have been parties to an insider transaction.
We’ll have to wait for the investigation to run its course to find out what, if anything, happened that was illegal. All of the investment banks I know of have rigorous policies in place to prevent insider trading (and are required by law to report it if they discover it) — but humans are humans. And recent events have shown that human greed really knows no bounds.
(Just FYI: There’s lots of legal insider trading; it just doesn’t make the news. Legal insider trading happens when a company insider buys or sells shares in her company at specific, allowed times in the earnings cycle and reports those trades to the SEC.)