Rooting out one dishonest investment banker amongst the hundreds who sign confidentiality agreements for a merger is virtually impossible despite the checks and balances banks put in place.
On Wednesday, U.S. federal prosecutors accused two men of running a 17-year conspiracy to trade on corporate merger secrets stolen from three of the nation's most powerful law firms, including venerable Silicon Valley firm Wilson Sonsini Goodrich & Rosati PC.
The charges come amid a broad government crackdown on insider trading, including the criminal trial of Galleon Group hedge fund founder Raj Rajaratnam and last month's charges that a U.S. Food and Drug Administration chemist traded on insider information about drug approvals.
Questions also have surfaced about David Sokol, a former top deputy to Warren Buffett who quit Berkshire Hathaway Inc last week amid questions over his trading in stock of a company Berkshire later agreed to buy.
Despite clear rules governing non-disclosure of inside information, investment bank's large compliance departments, and code words used to conceal merger partners' identities, insider trading cases still continue to happen.
You can't legislate human behavior. People will act as people will do, David Lazarus, senior managing director, co-founder, EdgeRock Realty Advisors, said at the Reuters Global Mergers and Acquisitions Summit in New York.
The greed of humans and the way it's structured in the U.S. is a good thing because it's the way of capitalism, but there's always those people who will go over the line, Lazarus said.
In any given merger auction, for example, several hundred people ranging from investment bankers and lawyers to corporate executives and public relations consultants and event planners may know private information that could move the stock market.
You have three advisors with five people teams. Another 10 at the firms who know they're working on it. You have a couple of law firms. Eleven bidders you sent books to. The universe gets to 250 people pretty damn quick. It's very, very hard to manage that kind of information, Lazarus said.
The way info flows these days: computers, emails, fax, texts -- very, very hard to manage these processes in a way that they can stay confidential, Lazarus said.
Still, every firm, boss and co-worker needs to be vigilant to make sure sensitive information remains private, bankers said.
When people come to me and say 'Gee, I'm thinking of investing,' or I see someone trade a lot of stocks in my group, my antenna goes up because I don't do it, said Jackson Hsieh, vice chairman of UBS investment banking group.
People start spending in unusual ways, buying certain things, basic stuff, you have to ask questions -- what happened? You married a rich wife? You inherited it? Hsieh said.
It's a small percentage but it does happen. People do stupid things, Hsieh said.
Corporations, banks and law firms have long had rules in place about the disclosure of proprietary information. Compliance departments also oversee the stock trades of employees and ethics training happens for new and existing employees, bankers said.
We all have very, very careful procedures, said Garrett Moran, chief operating officer of the private equity group at Blackstone Group LP You just don't do a trade unless you ask your compliance department in advance.
I think it's really a question of executing on policies, people being more vigilant, educating junior bankers in the right way, making sure people don't get arrogant or view their role in transactions in a different way than they have historically or how policies would dictate, said Brad Whitman, co-head of FIG M&A at Barclays Capital.
Confidentiality and conflicts and Chinese walls and all that are taken incredibly seriously. It could destroy your reputation in the market. It's staying focused and making sure no one is trying to elevate themselves above their clients or our institutions, Whitman said.
Another insider trading case in 2009 included an executive at the Blackstone Group, who was charged with masterminding a $3.6 million scheme.
These stories are incredible -- that someone would put themselves above the clients and above the firm and I think just mis-assessing. Their judgment is just way off, Whitman said.
(Additional reporting by Megan Davies, Nadia Damouni and Paritosh Bansal; Editing by Bernard Orr)