WASHINGTON – The Securities and Exchange Commission is examining possible leaks from major Wall Street investment houses of inside information on large trades to valued clients in a preliminary yet broad inquiry, an SEC official confirmed Tuesday.
The examination by SEC inspectors seeks to determine whether the illegal use of confidential information, such as large stock trades by mutual funds, is widespread among Wall Street investment banks' clients such as hedge funds. Inside knowledge of planned large purchases or sales of stock could provide an advance indicator of the stock's direction that wouldn't be available to most market participants.
The inquiry by the SEC's Office of Compliance Inspections and Examinations, known as OCIE, was first reported in Tuesday's editions of The New York Times. The newspaper, citing unnamed executives at Wall Street banks, said the examination touched on the major institutions including Merrill Lynch & Co., Morgan Stanley Inc. and UBS — which it said were among the banks that received letters from the SEC seeking information.
Employees of the investment banks could be leaking the inside information on stock trades to favored clients like hedge funds in order to curry favor with them, and the clients can use the tips to make trades at another bank so as to muddy the trail, the Times suggested.
Lori Richards, the director of OCIE, confirmed the existence of the inquiry but did not confirm or provide details.
"We're looking at information broadly in the industry," she said in a telephone interview.
Richards said the inquiry was prompted by complaints from mutual funds that information concerning their stock transactions appeared to be leaked to other market players who used it to trade ahead of the mutual funds. The move can lessen the mutual funds' profit on the trades, the fund companies have complained.
Richards said her office was looking into the allegations in a broad examination. "It's fact-finding," she said. "We don't know whether this exists."
If evidence were found of such illegal insider trading, the SEC could upgrade the examination to a formal investigation, enabling the agency to issue subpoenas for documents rather than requesting them.
Spokesmen for Merrill Lynch (MER) and Morgan Stanley (MS) declined to comment to The Associated Press and would not confirm that the banks had received letters from the SEC inspectors seeking information on stock trading for the last two weeks of September, as the Times reported. UBS spokesmen didn't immediately return a telephone call seeking comment.