In the biggest Insider Trader scandal in two decades, members of four prominent firms were implicated in the developing scandal. The firms included Bank of America (BAC.N), Morgan Stanley (MS.N), UBS (UBS.N), and Bear Stearns (BSC.N). To begin with, a little history is in order. Insider trading in this country is illegal; this is not the case in certain other countries. In some countries principally England, such trading is legal. Prior to the inauguration of Franklin Delano Roosevelt as President of the United States in 1933, insider trading was legal in this country also.

In order to restore financial confidence in the American economic system after the massive impact of the Depression hit the country in the late 1920’s, the newly elected President Roosevelt mandated the creation of the Securities Exchange Commission, part of the Commission’s duties were now to reign in, and put an end to insider trading. Who did FDR appoint as the first SEC Commissioner – Joseph Kennedy? Old Joe Kennedy was one of the notorious insider traders that took advantage of any and all information that came his way.

In the same league as Jesse Livermore, Jacob Fisk, and Bernard Baruch, Joe Kennedy knew where the bones were buried. He quickly moved to create a series of laws, rules, and regulations that would outlaw the very practices that in past decades had enabled him, Kennedy to become one of the four wealthiest individuals in America. The practice of lawful insider trading had come to an end legally. To show you how effective these policies have been, whenever a real case of such trading comes to public light, it makes nationwide headlines. This is because of the relative rarity of such scandalous behavior being brought to public light.

During the 1980’s, the biggest insider trading scandal which became public knowledge was Ivan Boesky, probably the premiere arbitrage player of his generation when he was accused of insider trading. Boesky was caught via tape recordings taking advantage of such information. His primary source was Dennis Levine, an affable investment banker working for Drexel Burnham Lambert; a now defunct banking firm whose primary asset was Michael Milken’s junk bond capital raising unit.

The Latest Scandal

It looks like this current scandal followed two separate tracks occurring simultaneously. The profits generated amounted to $15 million dollars over a period of five years. Insiders were used at Morgan Stanley and UBS Securities. These individuals including Mitchel Guttenberg, who as an institutional client manager at UBS would be aware of research upgrades and downgrades taking place on a daily basis. He was given hundreds of thousands of dollars for his knowledge of non-public information. The men purchasing the information were David Tavdy, and Erik Franklin. Using the non-public information available to them, they were each able to amass $4 million in trading profits.

In a separate scheme running a parallel track, Randi Collotta a lawyer, was an employee of Morgan Stanley in their compliance department. Her husband Christopher Collotta was an attorney in private practice. Randi would come up with information on mergers and acquisitions that Morgan Stanley was involved with, and pass the tips to her husband Christopher. The husband would then sell the information on Wall Street for money that amounted to hundreds of thousands of dollars.