by T. GormanPosted on Posted in SECActions

As the Galleon trial approaches the insider trading ring that that began with two Ropes and Gray associates and the Galleon investigation keep spawning insider trading cases. Two new SEC civil insider trading actions and a criminal case were filed.

In SEC v. Smith, Civil Action No. 11-CV-0535 (S.D.N.Y. Filed Jan. 26, 2011) the Commission brought an action against Adam Smith, a former portfolio manger of the Galleon Emerging Technology funds. The complaint, which alleges violations of Exchange Act Section 10(b), states that Mr. Smith obtained inside information about a then pending transaction in which Advanced Micro Devices Inc. or ADM would take over ATI Technologies, Inc. The information came from a source that Mr. Smith had known for years. While in possession of the information Mr. Smith caused the Galleon funds he advised to purchase ATI shares. Those shares were later sold at a profit of over $1.3 million.

In a second case the SEC charged Michael Cardillo, a former trader at Galleon Management, LP, with insider trading. SEC v. Cardillo, Civil Action No. 11-CV-11 civ 0549 (S.D.N.Y. Filed Jan 26, 2011). Mr. Cardillo is alleged to have traded while in possession of inside information about the acquisitions of 3Com and Axcan. As a result of that trading the fund made over $730,000 in trading profits.

Two Ropes and Grey associates are the source of the information according to the complaint. Former firm attorneys Arthur Cutillo and Brien Santarias misappropriated the information about the two deals. They then tipped Zivi Goffer, a former trader at Schottenfeld Group LLC known as “Octopussy” because of his many sources of information. Mr. Goffer in turn furnished the information to a trader who worked in the Galleon offices, who furnished it to Mr. Cardillo.

Previously, Mr. Cardillo pleaded guilty to criminal charges. Messrs. Cutillo and Santarias were named as defendants in a suit brought by the SEC and pleaded guilty to criminal charges. The Galleon criminal trial begins late next month.

by T. GormanPosted on Posted in SECActions

Merrill Lynch resolved claims that it misused customer order information, charged certain customers undisclosed trading fees and failed to maintain proper records. The firm consented to the entry of a cease and desist order and agreed to pay a $10 million civil penalty. In the Matter of Merrill Lynch, Pierce, Fenner & Smith, Inc., Admin. Proc. File No. 3-14204.

The Order for Proceedings alleges violations of three Sections of the Exchange Act: 1) Section 15(c)(1)(A) for effected transactions in a manipulative or deceptive manner; 2) Section 15(g) for failing to establish written procedures to reasonably prevent the misuse of material non-public information; and 3) Section 17(a) for failing to make records of certain terms and conditions of customer orders.

The conduct on which the Order is based occurred from 2002 through 2007 and centers on three types of transactions. The first concerned the use of certain customer order information by the firm’s Equity Strategy Desk. That Desk began operations in February 2003 and continued through 2005. It traded securities for the benefit of the firm and had authority over $1 billion in capital.

Merrill told customers that information regarding their orders and business affairs would be kept confidential. This point was confirmed by its Guidelines for Business Conduct published on the firm website. Contrary to those representations, in certain instances the firm’s market making desk shared institutional customer order information with its proprietary trading desk. The Order cites several instances where institutional customer order information was used by the firm’s proprietary trading desk to trade in securities. While the Order states that there were “other instances,” there is no indication regarding the number of instances when this occurred or the magnitude of the difficulty.

The second involved improper mark-up and mark-down charges. During the time period Merrill operated one of the largest NASDAQ market making operations in the world. Its institutional and high net worth customer orders for NASDAQ securities were, for the most part, executed on an agency basis through a computer system. The firm also executed orders on a principal basis through its market making desk.

During the time period Merrill had agreements with certain institutional and high net worth customers to only charge an agreed upon commission for executing riskless principal trades. Nevertheless, in certain instances the firm charged these customers an undisclosed mark-up and mark-down. The Order cited several examples which occurred between 2002 and 2006 while noting that there were “other instances.” There is no indication of the magnitude of the difficulty.

Finally, in some instances during the time period Merrill agreed to guarantee a customer a specific per-share execution price or a price tied to an agreed upon benchmark. Usually the firm made these agreements orally and in many instances failed to record them in writing as required by Section 17(a)(1). As a result of this conduct Merrill violated not only the Sections cited above but it also failed to reasonably supervise persons subject to its supervision as required by Section 15(b)(4)(E). It failed to reasonably supervise traders associated with its proprietary trading desk and its NASDAQ market making operations with a view to detecting and preventing violations of the Exchange Act

The Commission’s press release regarding the case notes that the settlement reflects the cooperation of Merrill after its acquisition by Bank of America.