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Is Someone Sneaking A Peek At Business Week?


News: Analysis & Commentary: INVESTIGATIONS

IS SOMEONE SNEAKING A PEEK AT BUSINESS WEEK?

Early trading of a few Inside Wall Street stocks raises a red flag

On most Thursday mornings, Seymour Zucker, the senior editor who oversees BUSINESS WEEK's Inside Wall Street column, sits down at a Bloomberg terminal and watches the market. On Thursday, Jan. 18, his attention was caught by Creative Biomolecules, a tiny biotech company that was favorably discussed in that week's column. All morning, the stock had hovered around 9. Then, at about 1 p.m., it began climbing--to 10--on heavy volume. "It really hit me between the eyes," recalls Zucker. In all, some 692,000 shares were traded, vs. an average volume of 245,500 during the previous five days.

Inside Wall Street, written by Gene Marcial, often causes stocks to move. But the action usually takes place on Friday. BUSINESS WEEK, which goes to press on Wednesday evening, is not available to the public until 5:15 p.m. Thursday--after the markets close. Zucker worried that the Thursday move meant someone may have gained premature access to the column and was trading on nonpublic information.

Creative Biomolecules was only the latest example in a pattern of suspicious Thursday trading that had begun several months earlier--and eventually involved some 11 stocks. Seven instances seemed especially graphic (table). The other four: Palomar Medical Technology, Pier 1 Imports, Kellstrom Industries, and Rentrak.

POWWOW. On Jan. 19, Zucker, Editor-in-Chief Stephen B. Shepard, and Kenneth M. Vittor, general counsel for The McGraw-Hill Companies, publisher of BUSINESS WEEK, met to discuss the issue. While the evidence was circumstantial, they agreed that signs of wrongdoing had become compelling enough to warrant alerting regulatory authorities. Vittor informed officials at the Securities & Exchange Commission, New York Stock Exchange, American Stock Exchange, and NASDAQ Stock Market. Now, McGraw-Hill is cooperating with the surveillance officials, who all declined to comment for this story.

A big Thursday jump in volume and price by Inside Wall Street stocks happens occasionally. But Zucker is almost always able to attribute the movement to such factors as earnings announcements, news events, or brokerage recommendations. At other times, inexplicable activity can simply be the result of the vagaries of the market.

In recent years, BUSINESS WEEK has strengthened its safeguards against possible leaks. The reason: Beginning in 1988, the magazine suffered a series of breaches in its security system. Some 11 individuals, including three stockbrokers, were convicted of--or settled--charges related to insider trading on information from Inside Wall Street.

Some of the people involved had obtained early copies of the magazine from printing plants in Old Saybrook, Conn., and Torrance, Calif., owned by R.R. Donnelley & Sons Co. They, in turn, passed tips on to others. Another person gained advance information through his employment at Applied Graphics Technology in Carlstadt, N.J., an outside production house for the magazine. Most disquieting to BUSINESS WEEK was the involvement of S.G. Ruderman, BUSINESS WEEK's radio broadcaster, who pleaded guilty to trading on inside information and went to prison.

"A RIGHT TO KNOW." Now, at the magazine's Manhattan headquarters, access to early copies is tightly restricted to a handful of people. Similar protections are used by America Online, which publishes an electronic version of the magazine around 7 p.m. on Thursday. Other restrictions are imposed on BUSINESS WEEK's four printing plants and far-flung distribution system, which ships more than 1 million copies weekly to subscribers and newsstands. "One hundred percent security doesn't exist," says Thomas Tully, McGraw-Hill's general manager of postal affairs and compliance. "If someone really wants to break the law, they can, but we've really tightened things up." Indeed, during the seven years since the 1988 breaches, BUSINESS WEEK has not detected any other consistent pattern of suspicious trading.

After alerting regulators, BUSINESS WEEK decided to disclose the suspicious trading here and in a news release. "Our readers have a right to know," says Editor-in-Chief Shepard. "And we are determined to protect the integrity of the magazine."By Chris Welles in New YorkReturn to top


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