Friday, May 12, 2006
The story of the insider trading ring organized by David Pajcin and Eugene Plotkin, who met while working at Goldman Sachs, took another turn with the arrest of Pajcin's high school friend, Jason Smith, on insider trading and criminal contempt charges. Pajcin and Plotkin showed a voracious appetite for inside information, as discussed in an earlier post (here), that involved obtaining deal information from an analyst at Merrill Lynch and hiring two men to work at a printing plant in Wisconsin to get a sneak peak at advance copies of Business Week. Pajcin first came to the government's attention in August 2005 when large-scale call option purchases in Reebok right before the announcement of its acquisition by Adidas, including trades through an account in the name of his aunt in Croatia, first surfaced and caused the SEC to look at a variety of trading accounts for suspicious transactions.
The latest twist involves a letter carrier who was a member of a federal grand jury in New Jersey. Smith is accused of leaking information to Pajcin and Plotkin about the pending investigation of Bristol-Myers Squibb and its executives for accounting fraud related to channel stuffing that was before the grand jury. That investigation ultimately resulted in a deferred prosecution agreement for the company and indictments of two of its former financial officers on June 14, 2005. According to a press release issued by the U.S. Attorney's Office for the District of New Jersey:
Smith allegedly kept Pajcin abreast of progress and developments in the grand jury and what he believed was the anticipated indictment of one particular BMS officer who appeared multiple times before the grand jury. The two allegedly discussed trading in BMS stock and also met in Manhattan with another of Pajcin’s co-conspirators, Eugene Plotkin, then an associate at Goldman Sachs’ fixed-income research unit . . . According to Pajcin, as related in the criminal Complaint from the District of New Jersey, Pajcin told Smith of the insider trading scheme with which he, Plotkin and others were engaged. Pajcin said he opened a brokerage account in the fall of 2004 with about $6,000 or $7,000 provided by Smith, as well as with money from a $20,000 bank loan taken by Plotkin. Pajcin said Smith told him to use Smith’s money in the insider trading scheme. Subsequently Smith began passing along information on the progress and status of the BMS grand jury investigation. Smith and Pajcin allegedly agreed to share in any profits made as a result of Smith’s information.
Pajcin has been cooperating with the government's investigation since late 2005, and it appears that he assisted in an undercover contact with Smith in April 2006. According to the press release, "During a recorded telephone conversation on April 12, 2006, according to the Complaint, Pajcin told Smith he was considering cooperating with authorities. If he did, Pajcin told Smith, he might have to tell the government about 'the jury thing.' In response, Smith expressed, among other things, serious concerns for himself and discussed possibly fleeing, according to the Complaint."
It is not clear whether Pajcin and Plotkin made any money on their short sales of BMS, although the U.S. Attorney's Office for the Southern District of New York and the SEC are pursuing insider trading charges against them (and Smith) for that trading (see SEC Litigation Release here). While trading based on material nonpublic information usually results in a gain or loss avoided, a Rule 10b-5 violation does not require the defendant to realize a profit from the transaction, and it is not a defense that the trade turned out to be a loser if it was made while the person had inside information that caused the transaction. Of even greater concern for Smith is the contempt charge for violating Federal Rule of Criminal Procedure 6(e), which strictly prohibits disclosure of grand jury information. Courts are particularly concerned about leaks of grand jury information, so if the allegations prove to be true, then Smith will probably face a much more severe sentence than would be the case for the insider trading, particularly because the contempt statute does not contain a statutory maximum (18 U.S.C. Sec. 401 here). (ph)