Dear Business Week:

PART ONE:

I read the article and was disappointed in some of the unsupported claims made by the author. On page 70 the author remarks, "the legacy of tough enforcement lives on." Anybody that kept up with the Milken, Boesky, Levine, Siegel, etc. insider trading scam knows the enforcement was anything, but tough. Business Week just ran an article saying that Milken's net worth is estimated to be $500 million and he only spent a couple of years in a minimum security prison. Boesky's net worth after paying the fine was estimated at over $25 million not including $165 million owned by Seema, Boesky's wife. Of that $25 and $165 million there is an estimated $50 million in trading profits made at Boesky's anything but legal, partnership. Boesky served a couple of years. When Siegel was waiting for his sentencing he purchased a $3.5 million home in Florida. Even if you make $100,000 a year it would take you over 50 years to earn $3.5 million (after you pay the taxes). Siegel spent a few weeks in jail. Tough enforcement?

I have enclosed an article from the San Francisco Chronicle (January 26, 1995). The article states that the Bank of Stockton incorrectly recorded a $100,000 deposit as $1,000,000. The owner of the account spent the money. He got a 39-month jail term and had to pay all the money back. The bank made the mistake, the man had to return all the money, and he got 39 months. Boesky traded on inside information, admitted to it, got to keep a lot of money, and he got a 36-month jail term. The only people affected in the bank mistake was the bank and the owner of the account, and the bank got its money back. Boesky's insider trading affected millions of people and most of the people affected received none of the fine money. Tough and fair enforcement?

The author gives numerous examples of people trading on inside information, being investigated, and prosecuted. On page 71 the author states, "the Securities & Exchange Commission brought a record 45 insider-trading cases, up from 34 last year." So What? Is that 45 cases out of 1,000 or is it 45 cases out of 10,000? Your article alone pointed out 34 cases and that was only from the top 100 mergers of the past year. Not to mention all the other mergers and acquisitions, not to mention all the other insider trading which includes tons of trading before negative and positive news announcements (not involving mergers, but announcements which involve earnings, product information, and contracts, all of which can heavily affect stock prices).

Finally, on page 76 the author states, "People are more careful than they've ever been." "They don't want to risk everything[?] by doing something stupid." Based on what? What example did the author give that showed someone lost their reputation, their job, all their assets, and did time in jail equal to the crime?

PART TWO:

The author claims that, "the cast of characters is different." (page 70) "One of the biggest contrasts from the 1980s is that insider trading has gone to Middle America." "Corporate executives, their friends and relatives, their lawyers and their consultants, are taking up the slack from brokerage and investment banks." (page 71) [Looks like we could get rid of a lot of insider trading just by getting rid of the corporate executives since all the leaking seems to come from them?] How does the author support this shift? Is it not true that there is still a problem with insider trading at brokerages and investment banks as much as ever? Is it even possible to have an investment bank that has an M & A department and an arbitrage department, and not have insider trading going on? Do you believe Mr. Jones in the M & A department does not gossip about what he is involved in with Miss Smith in the arbitrage department?

You also believe that the employees at these investment banks and brokerages don't trade on inside information for the company and themselves because of what happened to Milken and Boesky? Milken and Boesky got their hands slapped.

As an investor my biggest complaint with insider trading is not the inside trading that goes on with mergers, but the insider trading that goes on before negative and positive news announcements. On page 77 the author states, "Unloading stocks prior to the release of bad news was the old trend." Again, I ask where is the information to suppot this? There is as much unloading of stocks prior to the release of bad news as there was before.

Last year (1994) my small cap portfolio lost 20%. Of the 11 stocks I owned 7 had negative earnings reports which is why the portfolio was down 20% (the 20% loss was mostly due to the negative earnings and had little to do with the fed raising interest rates and the market's reaction to the rate hikes). Of those 7 stocks that had negative earnings all 7 stocks dropped by a least 30% to as much as 50% before investors like me were given the information, i.e., the investors who had inside information were selling before the company reported the negative earnings publicly.

Insider trading is ubiquitous in the financial markets. It is going on at the investment banks, it is going on at the brokerages houses, brokers do it, market makers do it, CEOs and other corporate executives do it, lawyers and consultants do it, and all the friends and relatives of these people do it too.

Like Harry Johnson (someone the author talked to) said, "Where there are a lot of people involved...you have to believe in the tooth fairy to think there isn't leakage."

Sincerely,