Wednesday, November 24, 2010
Monday, November 22, 2010
Saturday, November 20, 2010
The WSJ is reporting that the FBI has an insider trading dragnet in the works (also being reported by Bloomberg). From the tone of the article, it sounds like it could be bigger than the Galleon sweep. They reprinted an e-mail from Broadband Research to its clients:
"Today two fresh faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information," the email said. "(They obviously have been recording my cell phone conversations for quite some time, with what motivation I have no idea.) We obviously beg to differ, so have therefore declined the young gentleman's gracious offer to wear a wire and therefore ensnare you in their devious web."
Another research firm in the article suggests that as many as three dozen firms have been contacted as part of this investigation. The focus of the investigation are apparently expert-network firms that connect hedge funds and professional investors to experts and consultants, some of whom I imagine have inside information.
Friday, November 19, 2010
Remember Brien Santarlas, the former Ropes & Gray associate who along with Arthur Cutillo, got wrapped up in the Galleon insider trading scandal last year (here)? He took $30,000 in exchange for his tips on transactions. In addition to paying $32,500 in fines, he was recently disbarred. So now you know. (H/T Lawshucks)
Friday, November 12, 2010
Bad Canadian lawyers. Still. According to the Ontario Securities Commission Mitchell Finkelstein, a partner at the Bay St. firm of Davies Ward Phillips and Vineberg, is alleged to have gathered information on were four major Canadian business transactions that took place between 2004 and 2007. Here's how the OSC describes Finkelstein actions in the complaint:
Kohlberg Kravis Roberts & Co. (“KKR”) acquisition of Masonite International Corporation (“Masonite”), announced December 22, 2004 (the “Masonite Transaction”) – Davies acted on behalf of Masonite and Finkelstein was counsel on the matter. On the evening of November 16, 2004, Davies’ lawyers, including Finkelstein, met with management of Masonite to discuss the Masonite Transaction.
In the following three days, there were several telephone contacts between Azeff and Finkelstein, the last one occurring approximately two hours before the first buy order was placed on November 19, 2005 by Azeff and/or Bobrow.On January 26, 2005, Azeff met with Finkelstein in Toronto. In the two days following the meeting, Finkelstein made two cash deposits in $50 and $100 bills to his two bank accounts.
Cash. He took cash. The OSC isn't clear on how much was deposited, but as any good lawyer knows, if you're making a large cash deposit banks are required to report it to the Treasury Department - in the US anyway. Canada has a similar requirement.
In any event, the OSC alleges that Azeff (the tippee) passed along the informatio to Miller who in turn sent the following e-mail out to clients:
Call me I have a tip … Stock trades on TSX at around $34 - cash takeover of $40 Timing should be before xmas but you never know with lawyers … I'm long
So what probably started out a tip to a friend in exchange for some extra walking around money got broadcast over the Internet in the form of an e-mail to clients that identifies the source of the info as a "lawyer". Great.
OK, kids, don't do this at home.
Tuesday, October 26, 2010
Andrew Ross Sorkin flags this recent insider trading prosecution. It's of a breed of cases where the SEC is pursuing its "level playing field" theory of insider trading. Traditionally, there has to be a breech of a fiduciary duty tied to the trading in order to lead to liability of the insider trading laws. The SEC, obviously, hates that. They have pushed for years to get the court to adopt a level playing field theory that would permit prosecutions even in the absence of a fiduciary obligation. Such was the case last year in SEC v Dorozhko. That was the case of a hacker who stole inside information and was then prosecuted for trading on it. Clearly, hacking is a bad act. But, was it insider trading? The Second Circuit thought so.
Now comes the SEC's prosecution of this group of 5 railway engineers, railyard workers, and their families. Their crime? According to Sorkin, they were a little too observant for their own good.
(a) in early March 2007, FECR’s Chief Financial Officer requested that Gary Griffiths prepare a comprehensive list of all of the locomotives, freight cars, trailers and containers owned by FECR, along with their corresponding valuations, which she had never requested before;
b) Gary Griffiths became aware of the unusual number of Hialeah yard tours, which began on March 15, and he believed that the tours were being provided to investment bankers who were considering buying or investing in FECI; and
(c) shortly after the tours began, yard employees began asking Gary Griffiths whether FECI was being sold and whether their jobs would be affected by any such sale.
I don't know. It strikes me as a bridge too far. Although, this group did have the sense to go big - scoring $1.6 million in profits. Anyway, I don't imagine the SEC has exhausted its supply of inside-trading investment bankers to go after. It's a little odd that they would focus on this crew.
Sunday, September 19, 2010
By now it should be obvious to most readers that one of my target audiences when I write this blog is mostly recent law grads still getting their footing as young associates. I think it's useful to reinforce a couple of lessons that they may not have thought much about while in law school, but once you get out in practice confront you every day. First among them for transactional lawyers - particularly those new to the practice who are, often for the first time, handling confidential client information - is insider trading. As any transactional lawyer will tell you, when you work on deals, you're constantly handling inside information. If you want to have a long career you have to take that seriously. That's why I will often highlight "idiot lawyers" and others who ruin their careers for small amounts of cash, or for fleeting personal glorification. Some of these people deserve what they get, others ... well ... others could have been you. These are lessons worth learning.
All that said, the latest addition to the pantheon of people who should have known better, but thought maybe nobody would notice, is Dr. Bobby Khan. The SEC recently filed a civil complaint against Khan alleging that Khan traded on material nonpublic information that he acquired from a long time business associate and friend. The associate was an officer at Sciele who shared information with Khan about a pending transaction in which Sciele would be acquired by a Japanese pharmaceutical firm. The SEC alleges that Khan received that information after having assured his associate he would keep it confidential. In fact, the SEC alleges that after having learned about the acquisition from his associate over dinner, Khan sent the following email:
"Had a great dinner with you on Friday and I wish all the best with the negotiations on the potential buyout of Sciele. Of course, I will keep it confidential."
Of course, he will. But, you know how the story ends. Following his receipt of this information, Khan allegedly opened an online brokerage account, his first since 2003 and then transferred approximately one-third of his then liquid net worth into that account in order to purchase about 4,000 shares of Sciele stock only a few days before public announcement Sciele's acquisition on September 1, 2008. Following the tender offer announcement, Khan sold all of his Sciele shares in October 2008, making $45,000 in profits.
I'll give you three guesses where the SEC got the e-mail to the officer of Sciele. It probably wasn't Khan. I'm sure that when the SEC starting putting the dots together on who Khan was it took them about three minutes to realize that the Sciele officer was on the advisory board of Khan's startup. In fact, I wouldn't be surprised if the Sciele officer gave up Khan right away.
The good news for Khan is that he is a medical doctor and not a lawyer. Presumably he will still have a career after this is over.
Tuesday, September 14, 2010
Before his arrest, Bob Moffat had it all - stand out student in college, led to an "extraordinary career with IBM, a happy family. He had it all. And then he threw it all away when he became involved with the Galleon crew. From today's Bloomberg report on the latest Galleon sentencing:
“Why the defendant betrayed the only employer he has had for his entire career has not been addressed,” Batts said. “His astounding breach of his fiduciary duty to his employer is why he is here.”
I think I know why. He didn't make any money. No, that's true. But it's a familiar story. According to the pre-sentencing report (Moffat - PSR):
"My actions were not driven by greed or the desire to profit by disclosing this information. In fact, I did not make any money as a result of what I did. In the end, I believe my actions stemmed from misplaced trust, letting 'my guard down' and a misguided desire to appear important and knowledgeable to share Ms. Chiesi that I was 'in the know' about important matters." Bob's mistakes were real and he is deeply sorry for them, but it must also be understood that his motives were not venal and not profit-driven. Perhaps his ego got in the way by making him want to impress someone with whom he had become intimate. Perhaps he just wanted to seem knowledgeable and worldly. This case is tragic precisely because Bob Moffat's actions are so inexplicable and because he threw away what he had spent so much of his life working for -- in exchange for non-pecuniary benefits that were, at most, fleeting and insubstantial.
It's just another reminder that if you're handing out tips on inside information, you don't actually have to "profit" (as in receive cash) for those tips to be liable. Moffat got six months in jail and lost it all today.
Thursday, September 2, 2010
Yesterday, the SEC settled insider trading charges against James Self and Stephen Goldfield. Self was director of Business Development at Merck and Goldfield, Self's classmate at the Wharton School (UPenn), was a hedge fund manager. According to the complaint, Self disclosed confidential inside information about Merck's pending acquisition of MedImmune to Goldfield. Goldfield traded on that information and according to the complaint made approximately $14 million in profits.
Here's the thing. Self didn't make any money on this deal. In fact, he didn't "profit" at all. Rather, he provided the information for reasons that most facebookers will readily recognize. According to the SEC,
"Self divulged the confidential information to Goldfield in order to boost his reputation in Goldfield's eyes and to show Goldfield that he was working on important matters"
Hey, I get it. Your buddy got out of Wharton and immediately joined a hedge fund. As near as you can tell, he's making a gazillion dollars a year, has houses in three cities, and leads a glamorous life-style. You? Well, you were smart, but you decided to work for Big Pharma. You might not be rolling in cash, but you're doing important work. There's a natural inclination to let others know that you, too, are important, that you, too, are a big deal. Like I said, I get it.
But ... get over it. Before you start first day at that fancy law firm. Here's some advice - it's time to learn to be discreet. You may not brag to hedge fundies you know from law school about deals you are working on. (Who would be that stupid?) But you may do other things. I know everyone always has to have a status update on their facebook page or gchat that lets everyone what exactly they are up to. If you're not careful, these could get you into trouble. How about this possible facebook status update for example:
"On my way to a board meeting at MedImmune. Who wants to buy a cheap biotech company?!"
Definitely a career killer if you posted something like that. Now might be a good time to start weening yourself off of many of the social media sites. Less is more.
Thursday, August 26, 2010
I haven't touched on BHP's hostile bid on Potash to date and hadn't planned to. But, now I feel like I have to. The SEC just charged two Spaniards (Juan Jose Fernandez Garcia and Luis Martin Caro Sanchez) with insider trading in advance of BHP's bid for Potash. Garcia and Sanchez fall into the growing category of idiot insider traders. Forget the insider trading charges, these guys should be charged with "idiot insider trading." Why? Well, two words: call options. I've blogged about the idiocy of using call options for insider trading before (here and here).
According to the complaint Garcia and Sanchez bought 331 out-of-the-money call options for Potash in the two weeks prior to the transaction being announced. Prior to these purchases, neither Garcia nor Sanchez had ever dipped into the call option market. And, what? The very first time they decide to buy options they load up on one company's options just prior to the announcement of a hostile acquisition and make $1.1 million in profits?! [Anyway, props to them for going big.]
The second reason that these guys are idiot inside traders is that bought all these options through their personal brokerage accounts. What? No old aunt in Croatia to run the trades through?!
The final reason why these guys are idiot insider traders is that Garcia was head of equity derivative research at Banco Santander, which had been advising BHP on its bid. Let's see BHP approaches its bankers at Banco Santander and says, we'd like to acquire Potash and the first thing that enters Garcia's mind is that he should trade on the info?! Garcia should have known better than to betray client confidences.
Anyway, is it any surprise that the SEC filed its complaint on August 25, just eight days after BHP announced its offer for Potash? Wait a minute -- the original complaint was filed last Friday (August 20) but only unsealed yesterday. That's three days between announcement of the deal to filing of the sealed complaint. Man, these guys are idiots.
Friday, July 30, 2010
You know, I can't understand why people risk so much (career, reputation, family) for so little. How many times have you heard about the lawyer who gave in to the temptation to trade on client confidence only to reap $5,000 profit and an indictment. Now, comes word of two guys who know what they are doing. The SEC alleges that the Wyly brothers of Texas used a series of offshore trusts and corporations to engage in a monumental sized insider trading scheme to the tune of $750 million worth of stock and profits in excess of half a billion dollars! On one series of transactions they allegedly earned more than $30 million. "Go big, or go home" as they say.
According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, the public companies the Wylys used in the scheme were Michaels Stores Inc., Sterling Software Inc., Sterling Commerce Inc., and Scottish Annuity & Life Holdings Ltd. (now known as Scottish Re Group Limited)
The SEC's complaint alleges that the Wylys and French knew or were reckless in not knowing their legal obligations as public company directors and greater-than-five-percent beneficial owners. The laws require such persons to report holdings and trading in their companies' securities on Schedule 13D and Form 4, which are filed with the SEC. The Wylys and French also knew or were reckless in not knowing that the investing public routinely uses such disclosures to gauge the sentiment of public companies' insiders and large shareholders about the financial condition and prospects of those companies, relying on those disclosures when making investment decisions.
The SEC alleges that the Wylys and French systematically and falsely created the impression that the Wylys' entire holdings and trading were limited to the fraction that they held and traded domestically. By depriving existing shareholders and potential investors of information deemed material by the federal securities laws, the Wylys were able to sell — in large-block trades alone — more than 14 million shares of issuer securities over a period of 13 years for undisclosed gains in excess of $550 million. The SEC further alleges that the sales generating most of these illicit gains were made pursuant to materially false or misleading SEC filings.
Read the complaint here. My first reaction was, “Thank goodness the Wylys not lawyers.” Then I realized that their alleged co-conspirator is French, the lawyer. And, that their entire scheme would have been impossible without the help of a lawyer. In fact, as far as I’m concerned if what has been alleged is true then the lawyer is at the heart of this decade long scheme. It gets worse. The lawyer was not content to simply set up and help run this conspiracy (while also sitting on boards), but he is alleged to have set up his own (smaller) network to carry out similar trades. If you are a rising 3L studying for your MPRE next week, these guys as described in the SEC's complaint are not exemplary figures.
I doubt ignorance of the disclosure rules will fly as an excuse (from the complaint):
Moreover, by the time the fraudulent scheme detailed herein commenced in early 1992, Sam Wyly and Charles Wyly each had over twenty years' experience as public company directors and Schedule13D and Form 4 filers; and Michael French had over twenty years' experience as a federal securities lawyer. They were each thus on abundant notice of the relevant SEC reporting obligations.
The SEC alleges that the Wylys with help from their lawyer used their positions as directors of public companies to trade on inside information in advance of mergers and other material corporate transactions. You know, like during the Gilded Age, when public company directors routinely traded on inside information.
In October 1999, after having agreed to put Sterling Software on the selling block, the Wylys had their Offshore System enter into a bullish offshore transaction in the form of a security-based swap agreement with Lehman Brothers that economically replicated the purchase of two million shares of Sterling Software for approximately $20.36 per share. Based on Sterling Software's closing price of$36.25 on February 14, 2000-the date that Sterling Software's agreement to be acquired by Computer Associates was announced-the Wylys' illegal imputed profits from this transaction totaled approximately $31.7 million.
In what universe can someone think that this kind of activity would not violate federal securities laws?! They probably knew it violated lots of securities laws, but that doesn’t seemed to have mattered much (again from the SEC's complaint).
As high level insiders of the Issuers, the Wylys and French were aware of the negative impact that sales by them of Issuer Securities-including the above detailed large-block sales-would potentially have on the Issuers' share prices if they were disclosed in accordance with law. In effecting these sales offshore, the Wylys and French were motivated by a desire both to avoid such declines and to eliminate any risk thereof. On March 24, 1995, for example, French wrote to Sam Wyly that filing of "insider sales reports ... seem to set everybody off" and that selling offshore without making such filings would facilitate "pull[ing] some gains out ... without attracting any attention." In September 2001, Sam Wyly elected to forgo an onshore collar transaction in Issuer Securities and instead attempted the same transaction offshore, in order to avoid any bearish signal to the market; and Charles Wyly, in September 2003, took a similar action for the same stated reason.
Hmm. The best way for an insider to pull out some gains without attracting any attention is with a planned sale program. Lots of firms have them. Maybe the Wylys have heard about such programs. On the other hand, planned programs are terrible if you want to make money on inside information about a pending transaction. So, I can understand why one might neglect to pursue that option. You’ve got to hand it to them. They’ve got guts thinking that they could carry this out for so long. ... And there’s a question worth asking. How is it possible that the SEC, brokers, I-Banks, etc let them get away with this for so long? I mean $500 million is still a lot of money.
Thursday, May 27, 2010
This week the FBI arrested the administrative assistant to a high-level Disney executive and her boyfriend. Turns out they were not the smartest couple of inside traders out there. The SEC’s complaint speaks for itself:
9. Beginning in early March 2010, various hedge funds, including several in New York, received letters from an anonymous sender claiming to be able to obtain pre-release access to Disney’s 2Q-2010 quarterly earnings report and offering to share such information prior to its public release for a fee. The letters, post-marked from Los Angeles, California, stated:
Hi, I have access to Disney’s (DIS) quarterly earnings report before its release on 05/03/10 [sic]. I am willing to share this information for a fee that we can determine later. I am sorry but I can’t disclose my identity for confidentiality reasons but we can correspond by email if you would like to discuss it. My email is firstname.lastname@example.org. I count on your discretion as you can count on mine. Thank you and I look forward to talking to you.
10. At least twenty hedge funds, including funds based in several U.S. states and European countries, received the same or substantially the same letter
Discretion. Right. Randomly sending letters out to hedgefunds advertizing an offer to engage in insider trading ahead of earnings calls – that’s discretion? Of course multiple hedge funds forwarded this letter on to the FBI and they promptly set up a sting operation. The substance of the negotiation between the hapless boyfriend and the FBI went something like this:
• “First of all, i am not a fed, I have no way to prove it at this point but i am not asking you to disclose your identity not i will disclose mine. It is up to you to determine if this is worth the risk as i did. I work for Disney, that is all i can tell you.”
But did he ask them if the guys on the other end of the e-mail were Feds? Apparently not.
• As i said in my letter, i am able to get the earnings report of Disney 3 to 4 days before they are out. I will be happy to email them to you for a fee that you can pay after you close your trades. Let me know if you are interested and how much i will get from you for this transaction. Also, i am looking to build a relationship for future earnings and other insider news.”
• I am not asking for any payment up front, i will email you the earnings report and you can pay me after. I was thinking that $20000 is a fair compensation but you are free to make an offer.”
• I am very serious and i will show you that very soon. $15k sounds great and $30k even better as i hope you will make a killing from Q2 earnings. I promise i will keep you informed of any unanticipated event, i keep my ears wide open here.”
And just how profitable was this alleged scheme for the administrative assistant who apparently risked her career and may end up going to jail? She allegedly did it for a handbag and shoes.
[Bonnie] Hoxie stated “here is the bag that you are going to get for me – thank [sic],” and attached a link to a picture of an expensive Stella McCartney designer handbag available for $700 at Neiman Marcus, an upscale department store. Sebbag replied that he would get Hoxie the bag “next week.” Anticipating that they would receive substantial compensation from the Putative Traders, Sebbag stated “I may be able to [buy] u 2 of them, lol.” Hoxie responded via email, “In that case, i also love love these shoes” and attached a link to a picture of expensive Stella McCartney shoes also sold at Neiman Marcus.
Thursday, March 25, 2010
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.
Thursday, February 11, 2010
The SEC is now investigating these trades. Of course they are. I'm continually surprised that there remain people who think that buying options ahead of a major corporate announcement like an acquisition will go unnoticed. Believe me, it's not all that hard to figure out. It's called a database. It's the same way that Walmart knows that men tend to buy beer and diapers when their wives send them shopping.But before the takeover bid was announced, a burst of activity in a few select Airgas call options occurred, fueling suspicion that the news was leaked ahead of time and was used to profit on a potential spike in Airgas' stock.
"This does not surprise me that regulators would want to find out who was behind the heavier-than-normal call option volume on the last trading day prior to the announcement," said Henry Schwartz, president of Trade Alert.
"In fact, Airgas call volume started to lift on Jan. 29 and continued to be above normal all that week, suggesting that the leak, if there was one, happened about a week in advance of the proposed deal," Schwartz said.
Tuesday, February 9, 2010
Specifically, in April 2007, GOEL obtained Inside Information regarding Intel's earnings announcement for the quarter ending in March 2007 from a colleague who worked at Intel. GOEL provided this Inside Information to RAJARATNAM on Friday, April 13, 2007, at which time Galleon Tech held a short position of approximately 1,150,000 shares of Intel common stock (worth approximately $23.5 million). Intel was scheduled to announce its quarterly earnings on Tuesday, April 17, 2007.
Between April 13 and April 17, 2007, after receiving the Inside Information from GOEL, RAJARATNAM caused Galleon Tech to cover its entire short position in Intel common stock and to purchase approximately 1.72 million additional shares of Intel common stock (worth approximately $36 million). These trades changed Galleon Tech's position in Intel common stock from short approximately $23.5 million to long approximately $36 million -- a swing of approximately $59.5 million -- in the three business days preceding Intel's earnings announcement. In addition, on April 17, 2007, RAJARATNAM also caused Diversified to purchase approximately 250,000 shares of Intel common stock.
Goel also provided Rajaratnam with information related to a
pending Intel joint venture. According
to the complaint
from the SEC, Rajaratnam bought stock on Goel’s behalf and presumably as a payoff for the information that Goel provided.
Galleon is a continuing object lesson for a new generation of
investors and Rajaratnam is fast becoming the Ivan Boeksy of this
generation. Of course, the US attorney
probably got lucky here. Without a
wiretap, both of the charges against Goel could have been hard to make
First, the trading in advance of the announcement of the Intel
joint venture: Rajaratnam received the
information and bought months in advance of the announcement. That’s not the kind of thing that gets easily
noticed and there are plenty ways to explain that away if pressed.
Second, the trading in advance of an earnings release. Well, the timing of earnings releases are like the phase of the moon – they’re highly predictable. And, when pressed it should be relatively easy for an investor like Rajaratnam to make a case that he had been following Intel for some time and could justify a purchase/sale prior to earnings.
On the other hand, if you’re going hand out inside information
business school classmates about the company you’re working for, rest assured that
the SEC knows where you went to school.
Also, if your business school buddy is buying shares of Hilton in your
name and you’ve not sent him a check, it doesn’t take a genius to figure out
what’s going on.
Thursday, December 10, 2009
Well ... Galleon claims another lawyer scalp. The SEC and the US Attorney's Office in the Southern District of NY announced that Brien Santarlas, another former Ropes & Gray attorney has pleaded guilty to criminal insider trading charges. According to the USAO's criminal complaint:
From June 2007 through May 2008, SANTARLAS conspired with others to steal material, nonpublic information ("Inside Information") from the law firm of Ropes & Gray for the purpose of buying and selling securities. In violation of his duty of confidentiality to the law firm and its clients, as well as Ropes & Gray's written policies and procedures, SANTARLAS stole Inside Information about several mergers and acquisitions of public companies for which Ropes & Gray was providing legal services, prior to the public announcements of the deals. Specifically, SANTARLAS stole Inside Information about the acquisitions of 3ComCorporation and Axcan Pharma, Inc., and provided it to his co-conspirators in exchange for thousands of dollars in cash payments. As a result of trading that was based on the Inside Information provided by SANTARLAS and his co-conspirators, other individuals collectively made millions of dollars in illegal profits.SANTARLAS, 33, of Hoboken, New Jersey, pleaded guilty today to one count of conspiracy to commit securities fraud and one substantive count of securities fraud. The conspiracy charge carries a maximum sentence of five years in prison and a maximum fine of the greater of $250,000, or twice the gross gain or gross loss from the offense. The securities fraud count carries a maximum sentence of 20 years in prison and a maximum fine of $5 million, or twice the gross gain or loss from the offense.
- "Whatcha working on?"
- "Oh, not much. We're selling 3Com to a PE investor. Too bad insider trading rules prohibit me from trading on that info."
- "Yeah, too bad."
Friday, November 20, 2009
Here's a relatively recent empirical study of insider trading in India in advance of merger announcements, Merger Announcements and Insider Trading in India: An Empirical Investigation. Shorter version: insider trading is rampant. Don't be surprised. It's apparently rampant here. Why shouldn't it be in India as well?
Abstract: Insider trading activity is investigated prior to merger announcement in Indian capital market. An attempt is made to check it out whether trading takes place on the basis of asymmetric and private information. For examining the behaviour of stock prices a modified market model is used to estimate the parameters for the estimation window. These estimates are used to compute average return and cumulative average returns for the event window, which are measures of abnormal returns. Besides price run-ups, it is also common to see unusually high levels of share trading volume before public announcement of merger. Daily trading volume pattern of the target companies is also investigated. The analysis carried out in this study is based on a sample of 42 companies for which merger announcement date was announced during the period of 1996-1999. Based on the analysis for each company individually, we recommend investigation in six companies for existence of possible insider trading.
Wednesday, November 11, 2009
OK, it's almost too much to bear. Someone stop the madness. Bloomberg is reporting that 3Com options were trading at records volumes and a 26-month high just prior to today's announcement of 3Com's acquisition by HP.
Almost 4,000 of the November $5 calls and 3,300 December $5 calls traded today, with almost all of the transactions occurring at noon. That compares with a total of six puts giving the right to sell 3Com shares. Hewlett-Packard, the world’s largest personal-computer maker, agreed to pay $7.90 a share in cash for 3Com, a 39 percent premium to today’s closing price.
“I don’t believe in that much luck,” said Steve Claussen, chief investment strategist at OptionsHouse LLC, the Chicago- based online brokerage unit of options trading firm PEAK6 Investments LP, and a former market maker at the Chicago Board Options Exchange. “If you’re on the other side of someone buying calls and a takeover is announced, it’s like someone held you up at gunpoint. It’s like you’ve been robbed and you feel violated.”
More than 8,000 3Com calls changed hands yesterday, 17 times the four-week average. The most active were contracts conveying the right to purchase 3Com for $5 through Nov. 20, followed by December $5 calls. The shares rose 5.2 percent, the most since Sept. 28, to $5.68 in Nasdaq Stock Market composite trading prior to the announcement.
Friday, November 6, 2009
Don't trade options. Yes, that's right, but it turns out these guys weren't as smart as they thought. Best not to share confidential information about your client's transaction with anyone. From the DOJ's criminal complaint:
Thursday, November 5, 2009
The Securities and Exchange Commission today announced insider trading charges against nine defendants in a case involving serial insider trading by a ring of Wall Street traders and hedge funds who made over $20 million trading ahead of corporate acquisition announcements using inside information tipped by an attorney at the international law firm of Ropes & Gray LLP, in exchange for kickbacks. The SEC alleges that Arthur J. Cutillo, an attorney in the New York office of Ropes & Gray, misappropriated from his law firm material, nonpublic information concerning at least four corporate acquisitions or bids involving Ropes & Gray clients — the 2007 acquisitions of Alliance Data Systems Corp. ("ADS"), Avaya Inc. ("Avaya"), 3Com Corp. ("3Com"), and Axcan Pharma Inc. ("Axcan").
I like the bit about the cell phones. Clearly, these guys have been watching TV. One thing they didn't do was pay attention in law school when they should have learned about their obligations to clients and the insider trading rules. Cutillo is a 2005 law school grad - four years. That's a very short legal career. I wonder what he'll do with the rest of his life.
Arthur Cutillo is an attorney at the international law firm of Ropes & Gray. He has worked in the firm's New York office since 2005. Throughout 2007, he had access to, and learned of material nonpublic information concerning corporate acquisitions in which Ropes & Gray represented acquirers or bidders in proposed acquisitions. Cutillo owed a fiduciary or other duty of trust and confidence to Ropes & Gray and its clients to keep this information confidential and not to disclose or personally use this information.
Zvi [Goffer, former Galleon employee] traded on-this inside information and had numerous downstream tippees who also traded. As part of this illegal trading scheme, Cutillo, [Jason] Goldfarb, and Zvi at times used disposable cell phones in an attempt to conceal the scheme. For example, prior to the announcement of the 3Com acquisition, Zvi gave one of his tippees a disposable cell phone that had two numbers programmed in it labeled "you" and "me." After the announcement of the 3Com acquisition, Zvi destroyed the disposable cell phone he had provided the tippee by removing the 8IM card, biting it, breaking the phone in half) throwing away half of the phone, and instructing his tippee to get rid of the other half of the phone.