Conspiracy Among Firms Still Prevalent on Wall Street

Scandals will forever plague the financial industry, and the next big ones will probably involve brokerage activities and proprietary trading, according to BusinessWeek.   Investment firms have made a lot of money trading for their own accounts, and many now have prime brokerage businesses, which process trades for hedge funds, and are extremely profitable.   A practice known as front running, which involves trading ahead of big buy and sell orders to profit unfairly from the ensuing ups and downs in prices, is making waves in the industry.   There are worries that prime brokers are tipping off their own traders about large mutual fund orders, and their hedge fund clients as well. In return for the information, banks receive instant easy trading profits and sometimes cash payments right away from hedge funds. Mutual funds suffer from the scheme by buying stocks at higher prices or selling as lower ones then they should have.   Regulators have been slow to react to the growing problem, but front running is very hard to prove. “It’s a gray world,” says New York University Professor Lawrence White, but cooperating to protect high prices and fees is where regulators and plaintiffs are ready to pounce.”   There are other types of schemes that are just as shady, such as short-sellers, who often conspire to horde a company to drive down its stock.   Examining the Street’s response to the near closing of two Bear Stearns’ hedge funds demonstrates that conspiracy takes place, and is continuously changing in ways that challenges black-or-white judgments.   Bear Stearns’ situation is murky. Banks have incentives to keep each other up and running and prevent a systemic rundown. JPMorgan, Goldman Sachs and Bank of America all agreed to help Bear and settled their losses without forcing a liquidation of the fund’s assets, which would have hurt the subprime mortgage market even more.   No matter what, collusion will always take place on Wall Street. When things get out of hand, a case will go to the Supreme Court, but by then it will be years too late.   The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.