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Insider trading reforms unlikely to come North

Insider trader-related charges against hedge fund manager Steve Cohen will prove a landmark case, pitting anti-finance populists drooling at the possibility of a billionaire perp walk against industry participants claiming the whole thing is just a witch hunt. No matter how it goes, however, Canadian investors hoping that more stringent regulatory oversight migrates here are likely to be disappointed.

Mr. Cohen, who has generated an estimated net worth of $9-billion (U.S.) as founder of the wildly successful SAC Capital group of hedge funds, has been charged by the SEC with "failure to supervise" his shark tank of portfolio managers. The fact that he has not been charged with insider trading himself highlights the difficulties faced by regulators and how close to the line between research and insider trading the major hedge funds operate.

Global hedge-fund assets have ballooned from a few hundred million to $2.4-trillion over the past 15 years. As a result, the competition for investment ideas has intensified.

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Although the blogosphere is filled with unsubstantiated tales about sketchy tactics, it's a matter of record that SAC Capital employed a former institutional salesperson, Sam Evans, solely to arrange golf afternoons mixing SAC portfolio managers and corporate executives until SEC scrutiny ended the practice in 2011.

If illegal insider information was exchanged using either of these strategies, under-funded and under-staffed regulatory agencies would find it virtually impossible to collect evidence without an informant wearing a listening device.

Canadian regulators face similar difficulties, but for different reasons. Hedge funds are less of dominant force in Canada but markets are globally infamous for suspicious trading ahead of major merger and acquisition deals.

The last comprehensive study of major Canadian mergers and acquisitions was commissioned by Bloomberg and executed by research firm Measured Markets. It found that almost two thirds of deals in Canada were directly preceded by what they termed "unusual trading." Shares of the target firm were being acquired in suspiciously large amounts and in some cases, shares of the buyer were being sold.

In the U.S. and U.K., unusual trading ahead of deals occurred far less frequently – 41 per cent and 25 per cent of the time, respectively.

Insider trading needs to be curtailed – fair disclosure rules were designed to prevent financial insiders from using privileged positions to benefit at the average investor's expense – but the challenges for the provincial securities commissions are daunting. The vast majority of major deals are organized within 15 or fewer office buildings across the country, which makes them difficult to hide from prying eyes.

From personal experience, I can note that it's hard to hide a deal that is about to happen. I've had my own employer acquired three different times – once the e-mail goes out saying all meetings are cancelled to free up the boardrooms, and there's strangers in really nice suits everywhere, everyone knows something big is up.

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There may very well be egregious insider trading happening – lawyers behind the Chinese wall leaking deals to large investors, for example – but they would be hard to separate from leaks of the "I just saw Mrs. X just come out of the elevator with Mr. Y" variety.

So no matter what happens with Steve Cohen and SAC Capital, the clubby, centralized financial worlds of Vancouver, Calgary and Toronto make it hard to see how things will change in Canada.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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