When the board members of Atlanfed Bancorp convened on April 8 to approve the sale of the Baltimore thrift to Susquehanna Bancshares, they apparently weren't the only ones privy to the impending news.

At 3 p.m., with the board still in session, Atlanfed's stock price surged $3 -- a 25% increase in a half hour.

"It was only a couple thousand shares, but we never did find out what the heck happened," said president Michael P. Gavin.

Whatever the cause, the situation was not as unusual as one might think.

In fact, a new American Banker/SNL Securities analysis shows that over 40% of the announced mergers and acquisitions in the bank and thrift industries this year were preceded by unusually large price increases in the stock of the acquired companies.

Of 78 M&A deals involving public companies through the second week of December, stock in 34 of the acquired companies increased more than 5% in the month preceding the merger announcement.

And in 25 of those transactions, or almost one-third of all deals, the shares moved up more than 10% In each case, the stock movement more than tripled the increase in the overall bank or thrift index during the same month.

While legitimate merger speculation surely could explain some of the movement, the heavy volume and price increases naturally fan insider trading suspicions.

Officials of some of the institutions acknowledged that regulators are scrutinizing the activity that occurred prior to their deals, although it was unclear whether full-blown insider trading investigations are imminent.

At the same time, the suspicious price movements are proving frustrating to bankers.

In one typical case, New Jersey-based Summit Bancorp was forced to announce a planned acquisition of Bankers Corp. after Bankers' stock rose 15.3% in the five days prior to the deal announcement. Less than a month later, the banks broke off talks, blaming the premature disclosure for ruining the deal.

Experts attributed the high level of apparent insider trading to a number of factors unique to the banking industry.

"The reason insider trading is so prevalent in banking is it is such a large, fraternal community," said Reid Nagle, president of SNL Securities Inc., which provided data on the unusual stock price movements.

"Acts seldom occur in a vacuum, and generally there are a lot of outsiders that know about specific situations," he added. "It is harder to keep a secret in the banking industry than in other industries."

Insider trading prohibitions are not always easy to follow, said H. Rodgin Cohen, a bank and thrift lawyer with Sullivan & Cromwell.

The basic rule is if a person receives information about a possible merger from a company, or the person believes it to have come from the company, he or she cannot trade on that information, Mr. Cohen said. The problem in determining whether trading is illegal, he added, is that the person may not know the source of the information.

Earlier this month the Securities and Exchange Commission charged two directors of Community Savings Bank in Rochester, N.Y., with tipping off friends to a potential acquisition and then tipping them off again on plans to scuttle the merger.

One has agreed to pay a fine, while the other is fighting the charges.

And the SEC already is conducting a full investigation of CoreStates Financial Corp.'s late 1993 purchase of Independence Bancorp. [see box].

When SEC Probed Pa. Investor, the Plot Thickened

Insider trading, child molestation charges, multimillion-dollar lawsuits, government intimidation, the jet-set life -- sound like the ingredients of the latest blockbuster suspense thriller?

Hardly. These are the elements of a real-life drama that have emerged in local newspaper accounts of a Securities and Exchange Commission probe of alleged insider trading in CoreStates Corp.'s acquisition of Independence Bancorp.

When CoreStates bought the Pennsylvania bank last year, the SEC immediately noticed that Independence director Robert Hunter, a local businessman, bought 40,000 shares in the week before the announcement.

As already reported in the Philadelphia Inquirer, the SEC sent an agent to look into the matter. In the course of the investigation, the agent began dating Mr. Hunter's much younger girlfriend.

Within months of breaking up with Mr. Hunter, 64, the unnamed woman filed a lawsuit against him, charging he had molested her 11-year-old daughter for the past five years. She then allegedly asked to settle out of court for $3 million.

Mr. Hunter, whose net worth is valued at $15 million, in turn sued the government for harassment.

Mr. Hunter's lawyer hired a private investigator to videotape the girlfriend and the SEC agent during romantic liaisons, and used it as evidence in court.

Mr. Hunter strenuously denies all charges, and says it was only coincidence that his trading took place before the merger.

For its part, the SEC reassigned Mr. Heffernan, and quietly moved the investigation from its Philadelphia office to New York.

The SEC has yet to subpoena Mr. Hunter, and the investigation is continuing.

Mr. Hunter's lawyer, George Bochetto, said his client's investment in a local media company soured late last year and he simply shifted his money to Independence. Mr. Hunter paid $1.2 million for the shares, which were worth $1.7 million after the merger.

"I know it looks bad," Mr. Bochetto said. "But it is all legal, and we will be able to convincingly prove it in court."

"We have got a lot of insider trading investigations under way in all industries," said Thomas C. Newkirk, a SEC associate director of enforcement. He would not comment specifically on financial institutions, although he cited the Rochester case as an example of the commission's efforts.

CoreStates-type investigations have been rare in the bank and thrift industries.

More frequent are reviews by the three stock exchanges and the SEC. Luther Burbank Savings and Loan Association's purchase of New Horizons Savings and Loan in August, and BB&T Financial Corp.'s acquisition of Commerce Bank in June, are both subject to these kinds of reviews.

New Horizon's stock rose 18% in the five trading days prior to the deal being announced, forcing the company to rush its announcement, according to its investor relations director, James Barrett.

Mr. Barrett said the trading records provided by Nasdaq demonstrated no insider trading, but the exchange's review is still under way.

Commerce Bank's investor relations director, Gerald T. McDonald, also said his bank did not know the traders who bought stock in the month prior to the announcement. Nonetheless, Nasdaq's review is still under way.

Commerce's stock rose 22% to $32.50 in the five trading days prior to the merger announcement.

Two of the top three deals in terms of percentage price increases in the target's stocks in the month prior to the merger announcements were Shawmut National Corp.'s 1994 acquisitions of Northeast Federal Corp. (35%) and West Newton Savings Bank (44.2%).

Shawmut would not comment on the trading activity.

Leaked information caused a number of deals to be disclosed prematurely, or even terminated.

This often occurred when trading surged in the five days prior to an announcement. In 19 transactions, prices surged more than 5% in the five days prior to a deal.

National Westminster's two acquisitions in New Jersey also showed signs of unusual trading. Shares of Citizens First Bancorp rose 9.2% in the five days before it agreed to merge with Natwest, and volume topped 640,000 shares in the day before the announcement.

And Central Jersey Bancorp's stock jumped almost 15% in the five days prior to its announced merger with Natwest. In all, there were five deals in New Jersey that were preceded by heavy buying of the targets' stock.

But like Atlanfed's puzzled president -- who is still searching for answers -- the executives at these banks also express frustration and bewilderment over the sudden trading.

So does this mean insider trading is rampant in the bank and thrift industries?

Not necessarily, the experts say.

Looking at 1994 is not entirely fair because merger mania swept the market, pushing up the prices of many stocks.

Most of the purchased companies are community banks and thrifts, added Donald Delson, a director of financial institutions M&A at Alex. Brown & Sons in Baltimore. Employees at these institutions often know when merger negotiations are under way, and information filters out that way, he explained.

But first and foremost, he said, "the banking industry is in a period of aggressive consolidation and people are buying on speculation."

Mr. Cohen of Sullivan & Cromwell said most leaks occur during the due-diligence review by the acquirer. An employee sees another bank come in, and he tells his friend, who tells his friend who is a stockbroker, Mr. Cohen said.

Where the current crop of suspicious trades will lead remains uncertain, but in the past insider trading has had serious consequences.

In the late 1980s, SEC probes of heavy insider trading among New England banks led to convictions of several bank executives.

In 1993, the SEC fined two Colorado brothers more than $600,000 to settle insider trading charges associated with the 1992 merger of Colorado National Bancshares and First Bank System.

And in April 1993 a Milwaukee developer agree to forfeit nearly $200,000 in trading profits he gained from illegal knowledge of Firstar Corp.'s takeover of Federated Bank.

The SEC is mum on its intentions now. But the agency is well known to abide by the axiom: Where there is smoke, there is often fire.

Parameters Were Set To Define Suspect Stock Movements

In compiling the list of mergers that showed signs of insider trading, American Banker defined suspect stock movement as more than a 5% increase in the stock price of the target company in the month before a merger announcement.

Deals were eliminated, however, when the price increase could be attributed to the performance of the overall bank or thrift index.

Generally, institutions with extremely low share prices were excluded, except when the rise was extreme, as in the case of TideMark Bancorp.

Also excluded were companies for which a public announcement or article had affected the stock price. However, market notices released in the days before a merger announcement, acknowledging talks, were not reason for exclusion; these notices are almost always issued in reaction to suspect trading activity.

The data search was limited to deals announced from Jan. 1 to Dec. 12 in which a publicly traded company was acquired.

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