SEC, NYSE Investigate Trading In Buffett's Big Rail Deal

03/18/2010 05:12 am ET | Updated May 25, 2011

Even though securities industry regulators are on the warpath over what they perceive as illegal stock trading by Wall Street cheats, the practice of trying to make a fast, unlawful buck, nonetheless, continues to swell.

What follows is a number of examples, the most noteworthy one centering on the recent big dollars purchase of a company by investment guru Warren Buffett, the world's second richest man with an estimated net worth of $37 billion.

I've learned authoritatively that two of Wall Street's top cops on the securities beat have recently kicked off investigations into one of the year's biggest corporate deals -- the $44 billion or $100-a share acquisition of Burlington Northern Santa Fe, the nation's biggest rail company, by Buffett's Berkshire Hathaway. The two are the Securities & Exchange Commission and the market surveillance division of the New York Stock Exchange, both of which are focusing on the trading in Burlington Northern shares.

The thrust of the probes -- which are not of the companies themselves -- is to determine whether any investors might have been privy to the Buffet-Burlington deal prior to its official announcement on November 3 and then illegally traded on that classified information.

Both the SEC and NYSE declined comment, but two regulatory contacts confirmed the investigations to me.

In addition, I have obtained copies of internal documents that the SEC and the NYSE very recently sent to the brokerage industry in which each requested the names of clients, both here and abroad, who bought or sold Burlington shares on national or foreign exchanges prior to the public disclosure of the deal.

For example, the NYSE, in its query to brokerage firms, is seeking the names of clients who traded in the stock this year between October 2 and November 2. The SEC, on the other hand, has broadened the stock trading period to cover from September 3 through November 10.

Anyone who did buy Burlington's shares in advance of the official disclosure of the transaction made a bundle. For example, Burlington's shares closed the day before the disclosure at $76.07. After Buffet's $100-a share offer a day later, representing a hefty 31% premium, the stock ballooned to a high of $98.89 and is currently trading at $98.66.

Speaking of stock trading investigations, the SEC has launched a bunch of them over roughly the past six weeks, and some as recently within the past week. Again, all the investigations are documented in copies (in my possession) of queries the commission sent to various brokerage firms in search of the names of clients who traded in the assorted securities.

Included are such well-known names as, Morgan Stanley, Citigroup, Black & Decker, Hearst-Argyle Television, Wyeth, MGM Mirage, Hewlett Packard, Cisco Systems and Las Vegas Sands.

Additional SEC stock trading investigations include IMS Health, I2 Technologies, National City Corp., Sovereign Bancorp., Constellation Energy Group., Imclone Systems, AK Steel Holding, Mylan, Affiliated Computer Services, Gildan Activewear, China Marine Food Group, Ltd., Privatebancorp, GTX, Inc., Allied Capital Corp. and American Capital, Ltd.

In a related development, the NYSE has also been investigating trading in the shares of Playboy Enterprises, which has been the subject of a bevy of takeover rumors

Go figure. With government regulators clearly cracking down on illegal trading on inside information, you would think the Wall Street's cheats would take a breather.

Forget it. The sizeable number of SEC stock trading investigations clearly indicates otherwise. It seems to be business as usual for the guys and gals who want to beat the system, even if it means breaking the law and chancing fines, jail time and disgrace if they're caught.

As one regulator put it, "Maybe some people will get the message if they end up in a different abode."

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