Report: SEC Investigating Brokers for Insider Trading

March 3, 2005 ( - The Securities and Exchange Commission (SEC) has reportedly launched an investigation into possible widespread Wall Street abuses, with the focus now being put on brokers giving inside information to preferred clients.

According to, unnamed sources have said that for the past six months, the SEC has been investigating whether some brokers are tipping off preferred investors to large block trades – those that involve over 10,000 shares – by allowing them to listen in on internal communications.

The investigation is still broad-based and has to this point focused on no single firm as a prime target, according to the sources. The SEC, however, believes that some brokers are allowing preferred investors to listen in on internal morning calls at brokerage houses, which often contain information about such moves. Allowing to investors to listen in to the “squawk box”, as it is referred to as on Wall Street, would violate insider-trading and front-running laws, according to

Front-running occurs when a trader has advance knowledge that an investor has plans to make a large move on the markets, and acts on that knowledge buy buying or selling shares ahead of the investor’s stock movement. The largest profits in front-running come from the movement of small-cap stocks that have few outstanding shares.

The SEC has already issued subpoenas and has questioned several brokers and traders, according to the source.

One source said that the practice is quite common. The easiest way for brokers to give preferred investors a heads up, according to the story, is to leave the phone off the hook while the morning internal communications take place, the source said.