Inside Information

a timely accounting of timeless principles of personal finance

it's easy to beat the market when you're the only one who knows what's going on--but the hottest tips can also get you burned

There are two kinds of information on Wall Street: the information that is flashed over the wire services the instant it's available and the information that circulates beforehand. Inside information.

The first thing to know about inside information is that using it is illegal. You could go to jail for five years. The second thing to know is that no one ever has, though lesser penalties are meted out from time to time.

(There is a third kind of information with which Wall Street is awash--unimportant information; and a fourth kind--misinformation; but here our concern is with important, accurate information of the kind that will really move a stock. Like the news that Warner Communications would report dismal earnings for the fourth quarter of 1982. Warner stock dropped from 52 to 35 in one day. Who could have anticipated such news? Surely not the eight executives of Warner's Atari division who had sold thousands of shares in the weeks preceding.)

In the first Quarterly Report (Playboy, March), it was noted how, through the power of compounding, even a small sum, given time, could grow bountifully large. But who has time? The way to make a killing fast is with inside information. I do not recommend this. It is illegal; it is unfair; it frequently backfires.

It is hard to resist.

Had you known in advance, for example, that Kuwait's national oil company would acquire Santa Fe International in the fall of 1981, you need only have ponied up $37.50 for an option on 100 Santa Fe shares to realize $1925 a week later. Buy 100 such options and . . . well, you can figure it out.

One Santa Fe executive allegedly privy to the deal called his broker in Dallas all the way from China to get in on the action.

A wealthy Kuwaiti called Merrill Lynch (open there from nine A.M. to midnight) and bought options on 50,000 shares. Days later, Kuwait Petroleum Corporation made its offer and Faisal al-Massoud al-Fuhaid was richer by $840,000--a 17-fold profit in two weeks. Confronted with charges that he had acted on inside information, al-Fuhaid was contemptuous. "If I had known of [the deal in advance]," he huffed, "I would have bought much more than just $1,000,000 worth of shares!"

(An odd defense, in that it acknowledges al-Fuhaid's readiness to do the very thing he was accused of, only bigger. The matter is being litigated.)

But who's to argue? It is not always the easiest thing to know--for certain--whether a fellow's been tipped off to "material, nonpublic information," as it's called, or whether he's just been lucky. People do occasionally score big in the market legitimately. (Exchange officials allow this to keep us coming to the table.) Shortly before Kuwait Petroleum made its bid for Santa Fe, one clever fellow with no apparent connection to either company bought 600 options--he just called his discount broker and placed the order--turning a few thousand dollars into $1,000,000 in a matter of days. Did he know something? He got the idea, he told the Securities and Exchange Commission, from reading Forbes. The SEC was satisfied.

And it's true: Inside information is just the stuff you find in magazines or the newspaper. Next week's newspaper. If it's today's newspaper, you're too late.

I flew to Australia a couple of years ago and told my broker I was going. My broker makes much more money than I do (who wants a poor broker?), but he is desk-bound. Others blow $30 on a two-hour lunch; he makes $300 eating a tuna-salad sandwich and a pickle at his desk. One of the secrets of his success has been, simply, availability. He's there when you need him (and frequently on the phone to you when you don't). The only days he gets to travel are the days the market is closed, and you can't tour too many European capitals on a long weekend, so the one thing I can do to get back at him for making so much more money than I do is to send him postcards and phone him collect from exotic places. He pretends not to care. "There are lots of terrific things to see and do right here in New York!" he tells me, as I'm jetting off to Akron or wherever.

The point of all this is that when I jetted off to Sydney and told him the time (continued on page 164)Inside Information(continued from page 135) difference (Australia is a day ahead of New York), he became suddenly quiet. Even a bit respectful, I thought. "Hello?" I said. He said nothing, but I could hear him thinking very hard.

"It's tomorrow in Australia?" he finally said. "You mean, if it's Monday afternoon here, it's Tuesday morning in Australia?" The human voice is an infinitely expressive thing; it was no mystery what he was thinking.

"Oh, come on--don't be ridiculous," I said.

But imagine being able to know what the market was going to do a day in advance. Imagine getting a day's jump on the rest of the world. Genentech gonna drop five points tomorrow? Think I'll short some today. American Express gonna announce a bid for Federal Express tomorrow? Think I'll buy a call on Federal Express.

It's not very sportsmanlike, like memorizing the backs of the blanks in Scrabble (or, if you pull the tiles out of a bag, learning to read them with your finger tips); but if you don't mind cheating, it works.

If caught, you will ordinarily be forced by the SEC to do two things (and only two things). You will be forced to "disgorge" your profit and you will be forced to sign a consent decree agreeing not to violate securities laws in the future. The publicity attendant on all this may also wreck your career--but it may not. It depends on your profession and the sensibilities of the crowd you run with. Late in 1981, the SEC charged former Secretary of the Air Force Thomas C. Reed with turning $3125 into $427,000--in 48 hours--on a tip from his dad, a director of AMAX. Reed disgorged his profit (stick your finger down your throat when you say that) and signed the consent decree amid a good deal of national publicity; he was then appointed to the White House National Security Council staff as a special assistant to President Reagan.

The SEC would prefer stiffer civil penalties and is trying to win them from Congress. For if all you can lose by breaking the law is what you've gained--hey, give it back--where's the risk in trying? Yes, the Justice Department can institute a criminal action subjecting you to a maximum $10,000 fine and five years in jail for each count of insider trading; but few cases have been brought. So far, only one man has ever spent a day in jail for insider trading. That is true, in part, because insider trading is hard to prove and, in part, because it pales before some of the other wrongdoing an overworked Justice Department is trying to fight, and so receives low priority. It is perceived by many as a victimless crime. Amy Cellar, who knows nothing, decides to sell her stock. For whatever reason. No one has tricked her into it. Marty Byer buys it. The next day, a tender offer is announced and the stock doubles. If Byer had not known of the deal--as he might well not have--then Cellar is merely the victim of bad luck. If, on the other hand, Byer was acting on inside information, then--though the consequences to Cellar are identical--Cellar is the victim of a crime. Either way, it was her desire to sell the stock; either way, she got the going price for it--so how has she been harmed?

Actually, you could argue that Cellar got an even better price than she would have if insiders hadn't been in the market bidding up the price of the stock. (On the other hand, you could argue that had they not bid it up, she would not have been tempted to sell.) But if insider trading causes relatively little harm to individual victims, it is harmful in a more fundamental way. For if investors perceive that the game is rigged and that they don't have a fair chance, they may reasonably decide not to play. To the extent that they withdraw from the equity markets, everyone suffers. Prosperity depends on investment. Broad, healthy capital markets are one of America's principal assets.

So even in an Administration not noted for harassing the rich, it is not surprising, when you think about it, that the war on insider trading is going strong. The abuse, like tax fraud, will never be entirely eradicated, but the SEC is trying to "raise the level of risk." More insider-trading suits (about 50) have been filed in the past four years than in the preceding four decades. And there's been progress against one huge loophole: the assured anonymity of trading through Swiss banks. It's not assured anymore.

Still, questions of law and philosophy remain. Just how important must information be to be "material"? Just who is an insider?

Were the good people of Des Moines insiders back in the winter of 1978, when they began to notice planeloads of merger and acquisition specialists arriving at the Equitable of Iowa Companies from the prestigious law offices of Cravath, Swaine & Moore in New York? The good people of Des Moines know an opportunity when it smacks 'em in the face. They began buying stock in the Equitable. A stock that had budged barely half a point all winter suddenly found itself at $21 on Tuesday, $22.25 on Wednesday and $26 on Thursday--a 25 percent move in three days. Trading in the stock was halted.

On Friday, it was announced that, sure enough, the folks from Cravath had been in town to do an acquisition. Only it seemed that the Equitable was to be the acquisitor, not the acquisitee. The good folks of Des Moines should have been buying stock in the Provident Life Insurance Company of Bismarck, North Dakota. (The good folks of Bismarck, North Dakota, were apparently doing just that. Someone was. Its stock, too, ran up sharply before the news hit.) On Monday, the Equitable reopened for trading at $20 a share, down six dollars. "A sure way to lose money in the take-over game," commented Alan Abelson of Barron's, "is to confuse the taker with the takee."

A young theatrical agent called me with inside information about a stock whose name he'd forgotten. A stockbroker friend had told him the company was about to be taken over. Should he buy options on the stock, as the broker had urged? "Oh, come on, Joe," I said. "If it were really being taken over, do you think you would know about it?" (He's not even, at this stage in his promising career, a very important theatrical agent.) Well, the broker was a very close friend of his, and he had a source deep inside the company. "In that case," I said, "you should buy an option. You will almost surely lose your $300, but you're obviously itching to do this. And in the extraordinary event that the information proves accurate and you haven't hopped on board, you will never forgive either one of us." He was positively giddy at the prospect of a quick and easy killing. The fact that it would be illegal seemed, if anything, to make the whole adventure more intriguing.

"Do you remember anything about the company?" I asked. "Anything at all?"

"I remember it's at 28."

"Pittston!" I snorted. ("Piss on you, too," he said.) I knew it was Pittston for three reasons. First, Pittston was around 28 (it's 13 as I write this). Second, it was one of the couple of hundred stocks on which options are traded. Third, everybody in the world had heard the rumor that Pittston, a coal-mining, armored-truck outfit mired in adversity, was going to be acquired at some sensational price, and the rumor had apparently, at last, reached my friend the theatrical agent. He bought the option; he lost his money.

Those of us who have an interest in the stock market are deluged with what is purported to be inside information. A good rule of thumb in such situations is to ignore it. Not always having the maturity to follow such good rules, I bought Pittston options, too. The difference is, my naive friend actually thought he might make some big money. I knew I would lose mine.

Were this idiot and I insiders? Would we have been had someone actually acquired Pittston? (Someone eventually will. The trick is to have it happen in your lifetime and, more to the point, before your options expire.)

I know that strings of unanswered questions make trying reading--reminding us, as they do, of (gag, puke) exams--but try to get into the spirit of the thing and answer these:

If you somehow know that market vaudevillian Joe Granville is going to send out a buy signal tomorrow, is it unfair to buy today? If you know that analyst Marty Zweig, who's been on a hot streak, is going to recommend Standard Microsystems to his 19,000 subscribers tomorrow, is it unfair to buy today? What if you know that The Wall Street Journal is going to be coming out with a highly favorable story on Chi-Chi's, a Mexican-restaurant chain (reporting, among other things, that Chi-Chi's hot sauce retards hair loss)? What if you wrote the story? What if you merely proofread it? What if you found an advance proof on the subway? What if you heard about that draft from your mother-in-law? ("Sidney, our prayers have been answered. Sidney, do you hear what I'm saying to you, Sidney?") What if the draft you wrote or proofread or picked up on the subway was about Chi-Chi's stock but was devastatingly negative--could you short the stock? Could you at least sell the 50 shares you happened to own? What if you had been planning to sell those shares anyway--would you now have an obligation to hold on to them and watch them fall?

I could go on. There's a world of subtlety here I've barely scratched. Stanley Sporkin, the SEC's former chief of enforcement, tried to cut through it. According to Sporkin, if someone--anyone--trades on the basis of important information that's not yet publicly available, he or she has violated the law. Say you are landing at an airport, Sporkin told an audience once, and from the air, you see a company's principal plant burning. Seconds later, on the ground, you race to a pay phone to short the stock. Is that good luck and quick thinking? No, said Sporkin: It's a crime.

And if, instead of shorting the stock, you merely bought stock in the company's chief competitor? Well, if news of the fire could be expected to have a material impact on that stock, it would be a crime, as well.

Obviously, no one at the SEC would treat such a case--if he treated it at all--in the same way he'd treat the case of an investment banker who repeatedly traded on privileged information. But the SEC has gone after a health-club employee who found out from Mrs. Johnny Carson that her husband might be cutting a deal with National Kinney to promote a Las Vegas hotel. (He ultimately didn't, but news of the deal sent the stock up.) And it has gone after the father of a stockbroker who was sleeping with a paralegal who was, innocently, letting things slip about her firm's clients.

Certainly, Nathan Rothschild would have died in jail had King George III had an SEC and had Messrs. Shad and Fedders (current chairman and chief of enforcement) been around to run it. Rothschild, as is well known, had these pigeons. He was forever getting little tidbits of information--such as the British defeat of Napoleon at Waterloo--and using them to good advantage. Waterloo, to take that example, was not the sort of news that, when it became known, would be buried on page three. But rather than merely buy quietly and reap a fat profit, Rothschild, by some accounts, sold quietly. His quiet selling was soon picked up by those who watched his every move (they all knew he had pigeons), and everyone sold in a panic. Rothschild then moved in and bought in much greater volume, and at much lower prices, than he otherwise could have (really quietly this time, which he knew how to do), selling at a huge profit when the news finally reached England.

It's not hard to profit from a situation when you're the only one who knows what's going on.

In 1978, the SEC charged Saul Steinberg (the mogul, not the artist) with having persuaded Beverly Hills businessman James Randall and actor George Hamilton to buy stock in a company called Pulte Home "by informing them that a takeover attempt of Pulte by 'the Rockefellers' was about to occur. The purported takeover attempt was fabricated by Steinberg to increase the market price of Pulte stock, thereby affording him the opportunity to sell [at an inflated price]."

Not only did the SEC go after Steinberg, it went after Randall and Hamilton, charging that they had bought Pulte on inside information (even though it never panned out) and, thus, they had violated the law.

Steinberg and Randall and Hamilton, reported the SEC, "without admitting or denying the allegations in the Complaint" (no one ever does) "consented to Judgments of Permanent Injunction enjoining them from violating Section 10(b) of the Exchange Act and Rule 10b-5."

In the colorful world of W-2 and 1040A, 501c-3 and K-1, 10-K and 13D, 10b-5 is right up there. You get in trouble with 10b-5 and you is in big trouble.

•

Inside information is tricky, tricky stuff. First, you have to be sure you really have it. Then you have to persuade yourself you really don't. And even if you really do have it and know you really do have it and have persuaded yourself you really don't have it (so it's OK to use it), you still have to guess what it means.

Let's say OPEC is going to drop its posted price for a barrel of oil from $34 to $27--and only you know about it! Libya hasn't even found out about it yet. Do you sell the oil stocks short? Not necessarily. For some--because they've been stuck buying oil at the posted price and selling it to the world at the lower spot price--a drop in official oil prices could be good news.

But why deal in hypotheticals?

"Three days ago," says a friend of mine, "a guy calls me up from the Gulf [not the Gulf of Mexico, you understand] and says, 'Sit down.'

"'OK,' I tell him, 'I'm sitting down.'

"He says, 'Allied is going to bid for 27 and a half percent of Bendix--let's buy Bendix.'" (Not the whole thing; just 10,000 or 20,000 shares.)

"I said no.

"He said, 'Why not? They're going to bid 85.'" (Bendix was then 57.)

"I said, 'Don't you see? If they're just going to bid for 27 and a half percent of the company, the stock will go down.'"

Bendix, at 57, had already had quite a run, because Martin Marietta was trying to acquire it. (Martin Marietta was trying to acquire it because it was trying to acquire Martin Marietta. Each was gobbling up the other.) My friend reasoned that Allied's bid was--and would be perceived by the market as--a friendly deal designed to rescue Bendix from being taken over at any price. Otherwise, why would Allied be bidding for just 27 and a half percent?

Savvy guy, my friend.

"If anything," he said, "you shouldn't buy Bendix--you should short it." The stock, he felt, would probably fall four or five points on the news, as those who'd hoped Bendix would be acquired by Marietta saw their dream foiled and dumped their stock.

"'OK,'" said the man from the Gulf, eager to derive at least some gain from his privileged information and not too particular how, "'let's short it, then.'

"So," my friend continues, "we shorted a few thousand Bendix for his account"--hey, let's not go overboard, after all--"and it turned out he had 90 percent of the story 100 percent correct." Allied did, indeed, make a bid for Bendix at 85 ("Obviously, he had a source inside Allied," says my friend), but instead of bidding for 27 and a half percent, they bid for the whole thing. Bendix shares, far from falling four or five points, opened 17 points higher.

Getting it a little wrong can be very painful.

"We had a similar situation with Gulf and Cities Service," my friend adds. "We had information that Mesa was going to be bought out by Cities, so we bought options on Mesa. But Gulf tendered for Cities, and our options, which expired the following week, expired worthless."

In both of these cases, inside information was clearly leaking out and being used illegally. But what is the SEC to do--force the insiders to disgorge their losses? Reimburse them?

It's not an unusual number of larcenous friends that provide me with such a stock of insider-trading anecdotes (though I do happen to be a former business school sectionmate of one of the most notorious offenders of all, Adrian Antoniu--ex--Morgan Stanley, ex-Kuhn Loeb, appealing his 120-day prison sentence even now). It is, rather, that the abuse of inside information, if not ordinarily so organized or premeditated as Adrian's, is so widespread.

It's widespread because all but the most blatant abuses go unchecked. Say you find out Pittston really is being taken over. You really know. (Well, you're the company's lawyer, let's say, or its vice-president of finance.) Rather than buy stock yourself or even for your brother-in-law, you call someone equally well placed and say, "Charlie, don't say anything--do you recognize my voice?--just write this down: Pittston, Tuesday, at 45. Got it? You owe me one."

Charlie, having not been born yesterday, buys a bunch of Pittston and a few weeks later makes a huge profit. Sometime in the future, he returns the favor. If his purchase of Pittston is large enough or comes just days or hours before a deal is announced, the SEC may come a-calling--as well it should. But Charlie, who owns dozens of stocks and makes scores of transactions a year, says he bought the stock because he thought steel would be rebounding (Pittston supplies metallurgical coal), or because its chart looked good, or because--anything. It's one thing if Henry Ford's maid, who owns nothing but a $100,000 savings certificate, buys 200 way-out-of-the-money calls on Ford the day before Ford announces resumption of its dividend; quite another if Charlie, who's in and out of a dozen positions a week, happens to get lucky in one of them.

On Thursday, May 13, 1982, 127 puts were purchased on Chase Manhattan Bank stock. (You buy puts if you think a stock is going to go down.) It was a slow-to-average day for Chase puts. On Friday, 252 puts were purchased. And on Monday, a day before disclosure of the Drysdale Government Securities fiasco that left Chase holding a multimillion-dollar bag, 975 puts were purchased. Just coincidence, probably. The stock plunged and the gleeful put holders used their profits to buy tasteful works of art and repave their driveways.

Just before Sears announced its offer to acquire Dean Witter Reynolds, Dean Witter stock jumped 20 percent. In the month preceding Prudential's offer for Bache, Bache stock moved up 43 percent.

Well, it's tough to keep these things secret!

Seventy-nine percent of corporate-take-over targets examined in one study experienced a trading surge the week before the news hit. In another, Fortune chose 20 take-over targets at random and found that stock in all but one had moved up significantly in the month before the deal was announced. To some extent, that might have resulted from last-minute buying in the open market by the acquiring company. But some, if not most, of the extra trading doubtless came from excited tippees.

"It's just another of those stories," a broker friend told me, "but El Paso is supposed to be the next one to go." Because it was just another of those stories (whoever said there were 8,000,000 stories in the naked city was underestimating), I ignored it. A week later, Burlington Northern made its bid for El Paso Natural Gas.

•

To thwart widespread abuse of inside information, the SEC hopes Congress will grant it authority to seek disgorgement of 150 to 300 percent of insider-trading profits. That would give its civil proceedings real bite. It also hopes for better success in the courts.

Kenneth Rubinstein attended NYU Law School and went to work for Fried, Frank, Harris, Shriver & Jacobson in New York in 1979. He had been there 30 months when he learned the SEC was investigating him on seven counts of insider trading. He resigned from the law firm and subsequently disgorged his profits and signed a consent decree. Although signing the consent decree is neither an admission nor a denial of guilt, it is not the sort of thing that advances a young counselor's career. So in Rubinstein's case, without its ever having gone to court, you might say the SEC was successful.

But Rubinstein's brother Aaron, also an attorney (Kaye, Scholer, Fierman, Hayes & Handler), had also profited from Kenneth's inside information. So the SEC charged him as well. Unlike Kenneth, Aaron fought the charges, admitting that he had bought the stocks on his brother's recommendation but denying that he had ever known he was receiving privileged information. (As one after another of the stocks he bought zoomed on take-over news, he apparently just figured his brother was one heck of a stock picker.) Federal judge Morris E. Lasker ruled in his favor. "We conclude," he concluded, "that in spite of the substantial--some might call it massive--circumstantial evidence . . . the commission didn't meet the burden of establishing its case." So Aaron got to keep his $311,000 profit and was, when last we checked, still an associate at Kaye, Scholer, Fierman, Hayes & Handler.

There was no question that he had profited from inside information. He was allowed to keep the profit because he didn't know it was material, nonpublic information.

(He'd better spend it fast: The SEC could appeal the decision. Or it could go after Kenneth again, this time to force him, as the tipper, to disgorge his brother's profits. Tippers, even if they've not profited themselves, can be held liable for the profits of their tippees.)

Equally awkward for the SEC, and better known, was the case of Vincent Chiarella.

Chiarella was a mark-up man in the composing room of Pandick Press, a financial printer. He worked on prospectuses involved with corporate take-overs. It's true they arrived in his hands with the corporate names left blank or disguised (the real names to be supplied the night before the actual printing), but Chiarella was able to deduce from the prospectuses who the take-over targets were. He cleared $30,000 in trading profits over 14 months. In May 1977, he signed an SEC consent decree, agreed to return the money and was fired. That was the civil side of the action. Then he was indicted on 17 counts of securities fraud and convicted. When his conviction was upheld on appeal, his case ultimately reached the Supreme Court. The Court ruled, in 1980, that because Chiarella had no fiduciary relationship with the sellers, nor any prior dealings with them of any kind, he had not defrauded them. His conviction was overturned.

Chief Justice Warren Burger was one of the dissenters. "The evidence shows beyond all doubt," he argued, "that Chiarella, working literally in the shadows of the warning signs in the print shop, mis-appropriated--stole, to put it bluntly--valuable nonpublic information entrusted to him in the utmost confidence. He then exploited his ill-gotten informational advantage by purchasing securities in the market. In my view, such conduct plainly violates . . . Rule 10b-5."

But that was the minority view.

To redress the Chiarella verdict, the SEC wrote a further regulation--as yet untested--requiring anyone with knowledge of an undisclosed tender offer to tell the seller the news before purchasing stock.

•

If the Chiarella case was the SEC's most noted insider-trading setback, perhaps its most noted success--on the front page for days--was the case against my friend Adrian Antoniu, his friend Jacques Courtois (another business school classmate at Harvard), three confederates and a Long Island dentist. (The dentist was a sort of footnote. He had paid one of the five cash in exchange for inside information.)

Adrian had seemed more buoyant and was rather more stylishly turned out than the rest of the class of '72. He had arrived here from Romania as a child and--only in America--wound up at Morgan Stanley, and then at Kuhn Loeb, as an investment banker. With the relatively small killing he made trading on inside information (hundreds of thousands, not millions), he lived, on Park Avenue, better than any of us could explain. The first clue came in the summer of 1978, when we began getting phone calls from Venice. Adrian was in the sinking city to marry Francesca Stanfill, daughter of then--20th Century-Fox chairman Dennis Stanfill. Some of us, though invited, had been unable to attend. Nor was this any small affair. The cardinal (soon to become Pope John Paul I) was among those who sent congratulations. But even as all this was going on, the SEC was closing in. And Adrian knew it. He was ducking out of the festivities to call his friends back home with a simple if cryptic request: "If you get any calls from the SEC, I'd really appreciate it if you'd call my lawyer before saying anything."

The SEC wrapped up its investigation; the marriage was annulled. Adrian was booted out of his job. He agreed to cooperate with the Government, pleaded guilty to charges of securities fraud and works now for an international executive-search firm in Milan, waiting to see whether or not he will really have to come back to the U.S. to serve a four-month prison term. The cheerfulness in his voice is gone.

Courtois, meanwhile, son of a prominent Canadian, left Morgan Stanley before he was indicted--left North America, in fact--and married a Cliffie, niece of the former president of Colombia, in Bogotá. The U.S. is trying to get Courtois extradited, but he has connections. When last we heard (he failed to show up at the tenth reunion), he was a major exporter of flowers to the U.S. We always knew he'd make good.

•

There's a certain knowing humor to all this. Most people who trade stocks have at least some idea of the role inside information plays. Some, I think, even exaggerate its importance. (Others would say that's hard to do.) Yet, rather than be incensed by it, most folks merely hope to get in on the action.

R. Neil Blake had no inside information when he began playing the stock market. He got involved, reports The Seattle Times' Gary Heberlein, to take his mind off his recent divorce and the suicide of his teen-aged daughter. And for about a year, all was well. In exactly the kind of active options trading prudent investment advisors would have begged him not to undertake, Blake had turned $20,000 into $40,000. And on Thursday, October 1, 1981, he was sitting with a pile of Santa Fe options that, unbeknown to him, would within less than an hour lock him into a further $39,000 profit. All he had to do was nothing. Instead, despairing of Santa Fe's ever being able to rise from $24.625, its price then, to better than $30 a share within the next 11 trading days, as it had to for his options to be worth anything, he sold them all. In fact, to pick up an extra $375 (less tax and commission), he sold more than he owned. That was a safe thing to do as long as Santa Fe did, indeed, remain below 30. Instead, as a result of the Kuwaiti acquisition, it opened the following Monday in the mid-40s. Blake was nearly wiped out.

One could argue that he would have been equally devastated had no one profited illegally from the Santa Fe take-over. He would still have sold those options and would still have been walloped when the news broke. In that sense, there's no harm in insider trading.

But "in the final analysis," former SEC commissioner A. A. Sommer has said, "insider trading is wrong, dreadfully and viciously wrong. It undermines our markets, cheapens and tarnishes the integrity of our system and hopefully, if we are vigilant enough, it may increasingly impoverish those who engage in it."

Some of them, anyway.

"Imagine knowing what the market was going to do a day in advance--getting a day's jump on the world."