Power and Money

Ivan Boesky: Are Lessons Lost In New Era Of Mega Deals?

Ivan Boesky

Every deal worth a headline these days is inevitably followed by the discovery of unusual options activity. In fact, it's become so routine that when news of a deal crosses, all I have to do is pick up the phone, call an options trader, determine how abnormal the trading activity was in the days prior to the deal, and BOOM--I've got a story. Unusual options trading pre-mega deal is definitely not unusual.

The list of examples is mind-blowing: Hilton Hotels ,TXU ,HCA, Harrah's Entertainment ,First Data . I can go on and on. But that's not the point. The point is, what's the common thread of all these deals? The answer: private equity.

Now, hold on. I am accusing no one of wrong doing. But the reality of today's era of LBO free wheeling and dealing is that there are more parties than ever involved in pulling off even one multi-billion dollar deal. There's the consortium of bidders. Each member of the consortium has its own team of lawyers and investment bankers. The seller has its own lawyers and bankers. Then there are the lenders. And among that enormous group of dealmakers, there's bound to be at least one person who simply can't keep a secret.

I talked to Harvey Pitt, former Securities and Exchange Commission Chairman, about this very issue on "Street Signs" last week.

He says that these days, there are a lot of newbies in the dealmaking arena. These neophytes weren't around for, or have forgotten, the lessons of Ivan Boesky. Maybe they are more familiar with the dramatization of Boesky in the movie, "Wall Street."  But they probably only remember the "greed is good" part, and have chosen to forget one minor detail: Boesky served hard time in Lompoc Federal Prison. Pitt says these newcomers don't understand and implement the safeguards necessary to make sure info doesn't leak. Or, they've forgotten (perhaps conveniently) the consequences of leaking.

But even if information is getting leaked and somehow, investors out there are able to play the options market on this information to make a quick buck, it's hard for the SECto prove these cases. Pitt says these cases are tedious. Records and documents and correspondences must be combed through for evidence, which is often all circumstantial. Proving someone had the knowledge before placing that trade is the hardest part of all.

The SEC is working hard to crack down on this, Pitt says. But right now, this may be one weakness in the system that investors are lucratively exploiting in this golden age of LBO's.

Questions?  Comments?  PowerandMoney@cnbc.com