Insider trading is a key focal point not only of the SEC’s enforcement efforts but also of regulators around the world. Consider, the following examples:

Bulgaria: The Financial Supervision Commission reportedly fined twelve persons for trading on inside information. The traders allegedly traded in the shares of Elektronika AD and Sofia Mel Ad based on inside information. One of the traders was the son of the managing director of the investment banking firm for Elektronika AD. The others were members of the board of directors. The trading took place on the Bulgarian Stock Exchange.

Peoples Republic of China: According to the head of the China Regulatory Commission, insider trading has become more sophisticated and difficult to detect. In addition, front-running by managers of government-run mutual funds is apparently rampant. This stems from several factors. Managers are poorly paid, while profits from front running are huge. At the same time, the CRC is small and under funded, while class actions are not permitted and private suits must follow the lead of the regulator.

Shanghai, China: The Central Commission for Discipline Inspection warned Party officials to refrain from engaging in insider trading in the country’s stock market. While insider trading is illegal, reportedly there are significant price increases in advance of any major announcement that may be price sensitive.

India: Although the country has had prohibitions against insider trading since 1947, it recently amended the laws to plug loopholes revealed during an insider trading case in 2002. The amendments are similar to those of Exchange Act Section 16(b), and focus on disclosures by those holding 5% or more of the voting securities of an issuer, by directors or officers of their transactions and of short swing profits. In addition, market regulator SEBI recently banned a former managing director of a large company from engaging in market transactions for five years based on insider trading claims.

Japan: A former company president was recently sentenced to 18 months in prison and suspended for three years from stock trading for insider trading. In addition, three employees of public broadcaster NHK in Tokyo are reportedly under investigation by the Securities and Exchange Surveillance Commission for insider trading.

Clearly, insider trading enforcement is more than a U.S. concern.

For months the SEC and other regulators here and abroad have been focusing on insider trading with reports that it is rampant in U.S. markets and those around the world. A new academic study appears to be helping focus regulators on at least one suspected source: Wall Street.

A new academic study reported by Reuters and others suggests that the trading side of Wall Street investment banks may be using information about future deals obtained from their investment banking divisions. All banks, of course, have strict procedures to maintain the confidentiality of the information they obtain on the deal side and ensure it is not used by their trading divisions. Nevertheless, a paper authored by three European finance professors entitled “The Dark Role of Investment Banks in the Market for Corporate Control” is raising questions. The three professors examined data from 1,600 merger deals between 1984 and 2003 and conclude that in the last quarter before a merger announcement, investment banks serving as lead adviser to the acquirers purchased shares in the target company over 19% of the time. In those instances, the banks either began acquiring the shares or added to an existing position. The 19% rate is nearly double that of banks not serving in a lead role.

While the study does not establish insider trading, it has been sufficient to spark an investigation by FINRA, the Financial Industry Regulatory Authority. Apparently, FINRA is looking into the findings of the study. The SEC also has an obvious interest in the study given its recent efforts in the area. Indeed, the SEC has for months been analyzing data concerning the use of trading information by large Wall Street investment banks and has made limited use of a controversial survey directed at hedge funds in an apparent effort to profile those who may insider trade as discussed here.

While the professors who authored the current study do not claim that it establishes violations of the law and many may dispute the findings, similar studies have sparked other investigations by regulators. The current options backdating scandal is perhaps the most well known. At the same time the SEC’s enforcement staff has repeatedly make it clear that they are investigating the use of Rule 10(b)5-1 plans by executives. As discussed here, this inquiry is based on another academic study. The bottom line seems to be that the increasing use of investigative academic studies in a fashion that is reminiscent of the origins of a similar trend in journalism years ago is an increasing source information for the SEC and other regulators. All of this suggests that perhaps it would be prudent to survey the academic literature periodically to spot future enforcement trends.