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SEC Vets React To Insider-Trading Probe

As CNBC.com reported earlier today, the U.S. Securities and Exchange Commission is investigating whether or not some Wall Street banks are leaking privy information from one client to gain favor with another. But is this illegal? Depends upon whom you talk to.

Apparently the SEC received complaints from mutual funds that claimed stock prices have been moving suspiciously ahead of their big orders. There is speculation that banks use this information to attract hedge funds, because of the big business that comes with executing their massive trades.

Today, the New York Times namedMerrill Lynch , Morgan Stanley , UBS and Deutsche Bank as the banks under investigation.

Let’s not rush to judgment so quickly, says Ernest Badway, partner at Saiber Schlesinger Satz and Goldstein -- and former enforcement attorney at the SEC. The commission isn’t done with its investigation yet, Badway told Bill Griffeth on “Power Lunch” today, and the legality of the information all depends upon the time at which it was released.

Badway also points out that any information bankers may give to hedge funds is probably already known by money managers in that business. Hedge funds are most likely aware of trends in mutual funds long before a call comes in, he claims.

Former SEC Chairman Harvey Pitt says this is insider trading, plain and simple.

“I don’t think this is really a close question,” says Pitt. “If somebody knows about a trade that’s coming down the pike, and tips it to someone else that can take advantage of that information, that’s a misuse of what’s known as ‘market information.’ ” To the SEC that’s both illegal – and unethical.

This type of insider trading may be hard to prove, Pitt admits; but having run the SEC, he knows just how talented the commission’s enforcement division is. Don’t believe him? Just ask the more than 100 companies being investigated for backdating stock options at present, most notably Steve Jobs’ Apple Computer.

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  • Sue Herera is a founding member of CNBC, helping to launch the network in 1989. She is co-anchor of "Power Lunch."

  • "Power Lunch" & “Nightly Business Report” Co-Anchor

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Kenny Polcari