M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Thursday, March 25, 2010

UBS Insider Trading Ring

From the SEC's press release alleging that a former director at UBS shared inside information via “coded” e-mails with college friends:

“They thought it was clever to use code words such as frequent flyer miles and wedding registry gifts to conceal their insider trading scheme,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “These words were code for nothing more than ‘we are breaking the law.’”

According to the SEC’s complaint defendants Igor Poteroba, Aleksey Koval, and Alexander Vorobiev attended college together in the 1990s at the University of New Haven in Connecticut.  Poteroba joined UBS and was eventually promoted to Executive Director.  Koval was living in California and Vorobiev in Canada. 

Here's a sample of the coded e-mails the group used to trade ahead of deals that Poteroba knew about from his work (buying ahead of MGI Pharma):

Poteroba: Keep me posted as to how * * * [m]any frequent flier miles you’ve got this far and how many you plan to get by Friday[.] Will be in Boston tomorrow[.] Plans for a trip look fine so far[.] Worst case we can get a refund by Monday, hopefully we do not[.]

Koval: As I mentioned, I just got into this frequent flyer program. I got five thousand of sign-in bonus miles but thinking maybe if I fly often, I will get additional three to five K miles.

Poteroba: On the frequent flyer program topic you mentioned, I think you should sign up for another flight, if you can, since they are providing bonus mileage soon[.]

So creative!  Or, how about this one (ahead of ID Biomedical):

Subject Line: Potatoes

Poteroba: Let me know if you finished your recent harvest arrangements and how many kilos are available for my parents. They are in Turkey now and could use some once they are back.

Koval: This year the potato yield was not as high as the last one. Whatever is collected is now being transported in the warehouse, with special climate conditions, from where it is going to be available for delivery. My estimates are about 6.8 kilo per square yard. …Of course, some potato [sic] need to be left for the next year [sic] seeds [sic] but it should not be a concern since I have a vendor who will provide enough once the spring comes.

These guys are geniuses.  Who could ever see through this code (buying ahead of Molecular Devices)?

Subject Line: Let me know if you’ve started your wedding registry at Macy’s

Poteroba: Happy to talk about sales items and etc. … sale ends soon …so hurry up.

Koval: Yep, I have set it up. Better do it now when they have [a] sale. I could not believe how many things one needs once engaged. Single life was much easier if you ask me. It is always [a] good idea to know about coupons available. I try to follow up on the rebates programs currently in place but often miss many due to lack of time. Thanks for pointing it out to me. … Although wedding day is not yet announced, I hope to get all the important items ahead of time: I even started buying small things that [are] usually not important until you need them.

Poteroba:  Good points…sale ends on Friday…see if you can get registered for as many items as possible…more you get now…more you save…We should start tracking these events more actively.

OK, here’s a little gratuitous advice for young lawyers: don’t trade on your own deals and don’t have your college roommates trade on your deals, either.  A set of anomalous trades pop up on the screen in advance of an announced deal.  All those names get fed through the (commercially available) database and in about 15 seconds the machine spits out a match between the name on the trade and the name of an investment banker at the firm advising on the deal noting that they both went to the University of New Haven in the 1990s.  Please.  It’s not worth it.

Someone asked me recently what I thought was behind the recent upswing in insider trading activity - particularly in the merger space.  In truth it’s really hard to say.  On the one hand, maybe there’s not really an upswing, but rather with a change in administration we have a new set of cops on the beat who might be more interested in sending a message to the marketplace, especially in light of the market collapse, that integrity in the market is important. 

On the other hand, and I know this is the feeling of some regulators, it’s been over two decades since we’ve gone through a major series of insider trading prosecutions.  Maybe the value of deterrence purchased in the 1980s with those prosecutions has worn off on a younger generation.  Indeed, if you look this group, they weren’t even in the US as young people to absorb those lessons.  They probably think that Rudy Giuliani was only the Mayor of New York!  So, no real answer there, but two reasonable hypotheses.

At least this latest ring had no lawyers in the mix!  Small blessings.



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