“Securities regulators, prosecutors and legislators have made high-profile efforts to prevent inside information about stocks from flowing selectively to favored investors. But in the wake of the crackdown, big players are finding other ways to pick up lucrative Wall Street secrets,” writes Ianthe Dugan in today’s Wall Street Journal.

“Merrill Lynch & Co. retail analyst Peter Caruso unexpectedly learned one July day two years ago that Home Depot Inc. sales had been weak in the prior two months. He quickly crafted a research report that reversed his bullish projection for the home-improvement chain.”

“But first, according to a New York Stock Exchange disciplinary proceeding, Mr. Caruso leaked the bad news at a lunch with a few big clients. A Merrill institutional saleswoman attended the lunch and told several people afterward she believed the stock would be downgraded, the document says.”

“Mr. Caruso also allegedly let his new information about Home Depot slip to more investors in a conference call. By day’s end, investors had dumped 3.7 million shares of Home Depot and the stock was down 5.6%, according to the proceeding, which Merrill, Mr. Caruso and the saleswoman recently settled.”

“The next morning, Billy Williams, a retired highway engineer in Atlanta, woke up more than $2,000 poorer. His original $60,000 investment in Home Depot reached its lowest level in four years, shrinking a nest egg for his retirement and his grandchildren’s college. The 66-year-old recalls thinking: ‘Someone must know something we don’t.’ “

“The Securities and Exchange Commission’s Regulation Fair Disclosure, or ‘Reg FD,’ said in 2000 that a company releasing market-moving information to anyone had to disclose it publicly. New York State Attorney General Eliot Spitzer last year reached a settlement with brokerage firms designed partly to stop them from favoring privileged investors. The 2002 federal Sarbanes-Oxley law also takes a crack at analyst conflicts of interest by seeking to separate analysts from investment bankers. And both the New York Stock Exchange and the National Association of Securities Dealers have stiffened their efforts to stanch information leakage in recent years.”

“But these efforts have not so much blocked the flow of valuable nonpublic information as shifted the channels. One venue that has risen in importance: Meetings that corporate executives often hold with small groups of investors — where useful nonpublic information sometimes slips out, inadvertently or otherwise. Brokerage firms give special treatment to big investors who pay the most commissions, and that includes inviting them to those meetings with corporate executives.”

“Meanwhile, last year’s scandal involving rapid trading in mutual-fund shares revealed that some funds were regularly giving favored investors extra data about what stocks the funds owned.”

“While regulatory action cracked down on that practice, several research firms have sprung up whose specific purpose is to find out what mutual funds are buying and selling and market the information. Another network of research firms helps big investors get an edge by linking them with industry experts, such as doctors, who can give extra insight into certain companies’ prospects.”