Deals and IPOs

Corporate deal leaks are surging in the US: Here's why it matters

The Securities and Exchange Commission in Washington.
Jim Bourg | Reuters

Regulators over the past several years have taken a buzz saw to insider trading, actively pursuing in particular those who leak details about pending corporate deals.

To little avail: The number of leaks is jumping, particularly in the U.S., according to the latest numbers from Intralinks and the University of London. The deals are generating increased profits for the companies involved, the analysis showed.

"On aggregate globally, regulators are placing an increasing focus on new regulations to tackle market abuse and enforcing penalties for financial misconduct. But our data shows this is not translating into fewer deal leaks," said Philip Whitchelo, vice president of strategy and product marketing at Intralinks.

Intralinks tracks share price activity leading up to deals. If activity is "statistically significantly different" over a 40-day period, the deal is considered leaked.

The Securities and Exchange Commission in 2015 tackled cases as diverse as the Shaw Group executive who leaked news of the company's takeover to his brother-in-law; a Swiss trader who used nonpublic information to trade ahead of his company's acquisition by Apple; and friends who traded on the acquisition of Cooper Tire and Rubber by Apollo Tyres.

Location 2015 % leaked 2014 (rank) 2009-2015 (rank)
India2015.8 (2)15.7 (2)
Hong Kong12.922.2 (1)17.3 (1)
U.S.12.68 (4)7.2 (6)
Canada12.57.7 (5)6.2 (7)
UK6.75.3 (6)13.3 (3)
Korea5.32.9 (7)9.3 (5)
Japan3.10 (10)4.3 (9)
Australia32 (8)3.4 (10)
France010 (3)5.6 (8)
Germany00 (9)9.4 (4)

Those cases were just three of 87 instances that year where the SEC took down people accused of leaking deal information, with the total representing a 67 percent increase from the previous year.

Still, the U.S. saw 12.6 percent of deals leaked during 2015, a 58 percent surge over 2014 and the highest level since Intralinks started tracking the data in 2009. Globally, 8.6 percent of deals leaked, which was just shy of the record.

On a country basis, India had the highest level, while the U.S. was third overall.

Insider trading crack down

By sector, real estate had the highest percentage of leaks — 12.9 percent — both in 2015 and in the 2009-'15 time period. Health care surged from fifth place to second in 2015, while energy and power came in third.

Measuring the amount of deal leaks is important from more than an enforcement perspective.

Letting information slip out about pending mergers and acquisitions has financial effects, according to the study. Deals that leak tend to generate higher premiums than their counterparts, and leaks tend to encourage more bids.

Leaked deals had premiums of 53 percent over their share prices, compared to 24 percent for non-leaked. Similarly, 6.4 percent of leaked deals brought in more than one rival bid, compared to 4.4 percent for non-leaked.

"It seems that the benefits of leaking deals remain too tempting despite the risks," the report's authors said. "Against the benefits, those leaking deals must also weigh the risks."

In addition to the U.S. clampdown, regulators in other countries also are getting tougher on leaks.

The Exchange Board of India has toughened its insider trading rules, resulting in charges against the top two executives at Palred Technologies in 2015. U.K. authorities also have stepped up efforts as well with a series of new provisions aimed at making markets more fair.

Still, leak activity has increased in both regions, with India vaulting to first in the world and the U.K. moving up to fifth.