New Gekkos Riding the Merger Wave

Surging M&A has regulators cracking down on insider trading.
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Latter-day Gordon Gekkos are making the most of this year's merger frenzy.

Global M&A volume has surged. Monday's


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bid put announced worldwide merger volume over $2 trillion for 2007, according to Dealogic -- marking the earliest date that figure has been breached.

Wall Street records aren't all that's being broken, though. Regulators have been cracking down on alleged abuses of securities laws tied to the wheeling and dealing.

A string of recent cases suggests that Gekko -- the fictional trader played by Michael Douglas in the 1987 movie

Wall Street

-- is far from the last investor to pull a fast one using inside information.

On Tuesday, the

Securities and Exchange Commission

sued a Hong Kong couple over suspiciously timed stock purchases in

Dow Jones


. The feds say the couple made $8 million by buying 415,000 shares of the publisher in the weeks ahead of

News Corp.'s

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$5 billion bid, which was announced May 1.

Last week, the SEC charged a

Credit Suisse

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investment banker with leaking information on deals including the $32 billion leveraged buyout of TXU.

The SEC also alleges that investors made $5.3 million by buying call options on TXU just days ahead of the March announcement of its buyout by Kohlberg Kravis Roberts, Texas Pacific and

Goldman Sachs

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Other deals the SEC is probing include the $1.8 billion buyout of



by two private equity firms and Adidas' purchase of Reebok, published reports say.

Observers aren't surprised.

"The increasing number of deals creates a larger number of opportunities where people might be able to misuse information," says Geoffrey Ritts, an expert in securities litigation at the law firm Jones Day.

"Confidential information is all over, with the sheer numbers of people that have been hired recently to get all these deals done," says Donna Hitscherich, a professor of economics and finance at Columbia University and a former investment banker. "There are just so many avenues for information."

Start with people working at investment banks and law firms, and consider that there have been "even some cases where information has been stolen from the printers," Ritts adds.

Options trading has also come under scrutiny in deals including Murdoch's Dow Jones bid and last month's private-equity buyout of

First Data

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Besides equities and options trades, insider trading could also show up in the increasingly popular credit default swaps. The derivative instruments are contracts under which a Wall Street bank or other so-called counterparty agrees to pay a bondholder in the event of a default.

A study last year found

increased trading activity in the market for so-called credit default swaps on several buyout targets, causing some to believe that this trading activity was done on knowledge that an impending LBO was coming.

Michael Greenberger, a professor at the University of Maryland Law School and a former director of trading and markets for the Commodity Futures Trading Commission, says inside trading within credit derivatives is the area that has proven to be the trickiest for regulators.

While the

New York Stock Exchange


and the

Nasdaq Stock Market


play a key role in helping regulators sniff out abnormal trading through the exchanges, "if the information is gathered from OTC derivatives market, those markets are very opaque to the federal government," he says.