Today, the SEC filed insider trading charges against fourteen defendants who are reported to have made at least $15 million in illicit profits in connection with two related insider trading schemes in which Wall Street professionals serially traded on inside information tipped to them by insiders at UBS Securities LLC and Morgan Stanley & Co., Inc. in exchange for cash kickbacks.  The complaint alleges that since 2001 several participants, including among others three hedge funds and two broker-dealers, traded using inside information misappropriated by a UBS executive to trade ahead of UBS analyst recommendations.  Additionally, the complaint alleges that several securities industry professionals and a hedge fund traded using inside information misappropriated by an attorney at Morgan Stanley to trade ahead of corporate acquisition announcements.  

Specifically, the complaint alleges that, from at least 2001 through 2006, Mitchel S. Guttenberg, an executive director in the equity research department of UBS, secretly   furnished inside information in violation of the securities laws concerning upcoming UBS analyst upgrades and downgrades to at least two Wall Street traders, Erik R. Franklin and David M. Tavdy, in exchange for sharing in the illicit profits from their trading on that information.  Franklin then illegally traded on the information in his personal accounts, his father-in-law’s personal accounts, and for two hedge funds he managed.  According to the complaint, Tavdy illegally traded on the inside information in his personal account, the accounts of a relative and friend, the accounts of Jasper Capital LLC, a day-trading firm with which Tavdy was associated, and for Andover Brokerage, LLC and Assent LLC, registered broker-dealers where Tavdy was a proprietary trader.      The SEC further alleges that Franklin and Tavdy tipped others including Mark E. Lenowitz, who illegally traded on this inside information personally and for DSJ International Resources Ltd. (dba Chelsey Capital), a private hedge fund, and three registered representatives at Bear Stearns. Additionally, the complaint alleges, David A. Glass, the owner of Jasper Capital, also traded on Tavdy’s UBS tips.    

The complaint also alleges that several of the participants in the UBS scheme, and others, traded ahead of corporate acquisition announcements. According to the complaint, Randi Collotta, an attorney for Morgan Stanley, together with her husband, Christopher Collotta, an attorney in private practice, tipped inside information to Marc Jurman, a registered representative in Florida, in exchange for sharing in Jurman’s illicit profits from trading on this information. The complaint alleges that Jurman had several downstream tippees who also traded, including Franklin and the Q Capital hedge fund, and two registered representatives at Bear Stearns, Babcock and Okada, who also were involved in the UBS Scheme.  Today, the U.S. Attorney’s Office for the Southern District of New York also announced criminal charges against Guttenberg, Franklin, Tavdy, Lenowitz, Babcock, Okada, Glass, Randi Collotta, Christopher Collotta, Jurman, and others in connection with these two insider trading schemes.   

 Several high ranking SEC officials commented on the day’s events:  “Our action today is one of several that will make very clear the SEC is targeting hedge fund insider trading as a top priority,” said SEC Chairman Christopher Cox.    “Today’s events should send a message to anyone who believes that illegal insider trading is a quick and easy way to get rich. No matter how clever you are, no matter how hard you try to avoid detection, you underestimate us at your peril,” said SEC Enforcement Director Linda Chatman Thomsen. “Illegal insider trading undermines the level playing field that is the hallmark of our capital markets. It is, however, particularly pernicious when Wall Street insiders – who derive their already substantial livelihood from the capital markets and those markets’ investors – shamelessly compromise the markets’ integrity and investors’ trust for a quick buck.”   

SEC Associate Director of Enforcement Scott W. Friestad said, “Today’s action is one of the largest SEC insider trading cases against Wall Street professionals since the days of Ivan Boesky and Dennis Levine. It involves fraud by employees of some of the biggest brokerage and investment banking firms in the country. We will do everything possible to make sure that, in addition to any other remedies or sanctions imposed, none of these individuals ever works in the securities industry again.”    As Associate Director Friestad apply points out, today’s cases are reminiscent of the large SEC insider trading cases of the 1980s involving Ivan Boesky, Michael Milken and other large Wall Street players, tales of which are chronicled in the best selling book, Barbarians at the Gate.  The cases in the 1980s were noteworthy for the often larger than life characters at the center of the scandals and the results.   Many of the key figures in those scandals, such as Messrs. Boesky and Milken, settled with the U.S. Attorney and the SEC rather than taking their cases to trial.  Those who settled typically landed in jail and barred from the securities business.  In contrast, may of those caught up in the scandals of the 1980s who contested the government’s claims were acquitted.     

The cases brought by the SEC and the DOJ today are clearly reminiscent of the trading scandals of the 1980’s.  Like the initial cases of that time period, the cases today may be only the first of more to come.  The SEC is also conducting a sweep of Wall Street brokers to determine if information was leaked to hedge fund customers about institutional trade orders in advance of the execution of those orders so that the hedge funds could trade ahead of the institutions – that is, insider trade – at another brokerage firm, as previously reported in this blog.  At the same time a noteworthy feature of the cases brought today is that, unlike most SEC enforcement actions, these cases were not settled at the time they were filed.  Rather, the defendants are contesting the charges.  As these cases proceed we will see if they truly are like those of the 1980s with the SEC and DOJ winning in settlement but not in court.      Next week we will continue our series on SEC enforcement trends.     

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Yesterday, the SEC charged two attorneys in separate actions.  First, the SEC filed an injunctive action in United States District Court for the Southern District of New York against Louis W. Zehil, until recently a partner with the law firm of McGuireWoods LLP, and two entities he controlled.  The SEC alleges that from approximately January 2006 to February 2007, Zehil engaged in a PIPE scheme in violation of Sections 5(a), 5(c), and 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5.  The complaint alleges that Zehil represented seven public companies in issuing their stock in PIPE transactions and he personally invested in the issuers’ PIPE transactions.  As counsel for the issuers, Zehil sent letters to the issuers’ transfer agents directing the issuance of shares bearing restrictive legends, until the Commission declared the registration statements effective to all of the PIPE subscribers, except the entities Zehil controlled.  Zehil falsely indicated that these entities satisfied legal criteria to be issued without restrictive legend.  Zehil then sold the shares and generated profits of at least $17 million.  With the consent of the parties, Judge Preska entered an order granting a preliminary injunction, an asset freeze, the appointment of a receiver and other relief.  In the enforcement action, the SEC is seeking a permanent injunction from future violations of federal securities laws, and a final judgment ordering disgorgement and civil penalties.  The US Attorney for the Southern District of New York also arrested Zehil and filed charges.  

Second, the SEC charged Kent H. Roberts, the former GC and Corporate Secretary of McAfee, Inc., with securities fraud for wrongfully re-pricing McAfee stock option grants awarded to him and others.  The complaint alleges that Roberts secretly changed the grant date of a February 2000 grant made to him in order to take advantage of McAfee’s then-declining stock price, which increased the potential value of his option grant by approximately $197,500 and then he filed false stock ownership reports and signed a misleading proxy statement.  Additionally, the complaint alleges that in 2002, Roberts, falsified the minutes of a compensation committee meeting, and directed the company to issue a 420,000 share option grant to McAfee’s chief executive a day later than the committee had directed and again he signed a proxy statement that misleadingly described the chief executive’s option grants.  The US Attorney for the Northern District of California also charged Roberts criminally. 

As noted several times in this blog, the SEC is and will continue to view gatekeepers as potential violators and when the facts suggest that the gatekeeper participated in a securities law violation, it will bring an action.  

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