Wall Street charges recall heyday of insider trading
Wall Street executive Mitchel Guttenberg sat down with his friend Erik Franklin in Manhattan’s famed Oyster Bar about five years ago to discuss repaying a $25,000 loan.
But instead of cash, Guttenberg allegedly offered a currency that’s far more valuable on Wall Street: inside information about dozens of stock analyst recommendations at his firm, financial services powerhouse UBS.
Thus began what regulators described Thursday as one of the most pervasive insider-trading scandals since the days of Ivan Boesky and Dennis Levine in the late 1980s.
Seeking to avoid detection, the men used disposable cellphones so there wouldn’t be records of their calls and exchanged text messages in code, authorities said.
The purported scheme, along with an alleged separate plot at venerable Morgan Stanley also disclosed Thursday, involved 14 people, four major Wall Street firms, three hedge funds and at least $15 million in illicit profit, according to federal authorities.
“This involved people who should have known better and people who were making a great living,” said Linda Thomsen, enforcement director at the Securities and Exchange Commission. “This is outrageous.”
Although insider trading has receded from public view since Boesky paid $100 million to settle federal civil charges, authorities fear that it’s making a comeback in the financial markets.
In particular, they are worried that hedge funds -- lightly regulated investment pools that are often willing to take big risks in pursuit of big profits -- might be especially willing to flout the law to get an edge.
“The SEC has always brought insider-trading cases, but recently they’ve been getting more aggressive,” said Thomas O. Gorman, a former attorney for the agency who heads the SEC practice at Porter Wright Morris & Arthur in Washington.
Insider trading typically involves someone with advance knowledge of an event that would influence the financial markets -- such as an analyst recommendation or a corporate acquisition -- trading ahead of the public release of that information. The gains these insiders usually reap come at the expense of investors who didn’t have the same knowledge.
The emergence of hedge funds as a major force on Wall Street has added a new dimension to an old scam.
Early this year, the SEC opened an investigation into whether stock brokerages were supplying hedge funds with advance notice of customer orders for big trades. The hedge funds are suspected of buying or selling shares ahead of these orders and repaying their tipsters by steering trading business their way.
In the case disclosed Thursday, the SEC brought civil charges against 11 people, two hedge funds and a day-trading firm. The U.S. attorney’s office in New York lodged criminal charges against 10 of those people and three others.
Most of the criminal defendants were arrested at their homes before dawn Thursday by FBI agents. Several were still being arraigned Thursday evening. None of the defendants or their lawyers could be reached for comment.
News of the insider-trading charges rippled through Wall Street investment firms.
“Any time you have something that taints the industry, it’s a topic of conversation,” said George Rodriguez, a managing director at TradeTrek Securities, an institutional brokerage firm in Newark, N.J.
Holly A. Stark, a veteran trader now working as a consultant, said traders “have been talking for ages” about suspicious price movements in stocks ahead of significant news.
“There’s always been a sneaking suspicion that there’s information leakage,” she said. “It’s like, ‘These guys are just not that smart.’ ”
In the UBS case, Guttenberg, 41, of Manhattan, and Franklin, 39, of Denville, N.J., concocted an elaborate scheme to trade on information available to Guttenberg, authorities said. Guttenberg was a manager in UBS’ stock research department and sat on a committee that held daily meetings to review analyst recommendations, according to charges brought by the SEC and the U.S. attorney’s office.
Their meeting at the Oyster Bar, a seafood eatery in Grand Central Station, took place in November 2001, just weeks after the Sept. 11 terrorist attacks. After Franklin recouped his $25,000, the two men shared the trading profits, with Franklin giving Guttenberg cash, according to the SEC’s complaint, which was filed in U.S. District Court in Manhattan.
Guttenberg routinely tipped off Franklin to pending ratings changes on stocks such as Amgen Corp., Whole Foods Market Inc. and Union Pacific Corp., the SEC said.
Franklin then used this information to illegally trade securities for himself and two hedge funds he managed -- Q Capital Investment Partners and Lyford Cay Capital, a hedge fund at Bear Stearns Cos., the SEC said.
Authorities said Franklin also provided information to Mark E. Lenowitz, who used it to make illegal trades for himself and a hedge fund he managed, DSJ International Resources.
Q Capital and DSJ were included in the civil charges, but Lyford Cay was not accused of wrongdoing.
UBS said in a statement that it “is assisting the authorities to the fullest extent possible in their investigation into the alleged actions of a single UBS employee,” adding that the U.S. attorney “has described UBS as a victim of this alleged scheme.”
Several other people allegedly learned of the illicit trading as the scheme progressed and tried to profit themselves.
Robert Babcock, a Bear Stearns broker who processed Franklin’s trades, began monitoring and secretly mimicking many of those transactions, the SEC said. Two other Bear Stearns brokers did the same.
“The actions described in the complaint are clear violations of our policies and procedures,” Bear Stearns spokesman Russell Sherman said Thursday. “We have and will continue to cooperate fully with the investigation.”
When Guttenberg passed tips to another friend, David Tavdy, his trades were secretly mirrored by David Glass, who owned the day-trading firm where Tavdy did business, the SEC said. Glass and Tavdy later teamed up in their trading.
When a supervisor learned of the scheme, he and another man demanded $150,000 to keep quiet about it, according to the SEC. Tavdy and Glass acquiesced and eventually paid $30,000 in several installments, according to prosecutors.
Altogether, the UBS scheme netted at least $14 million in illicit profit for eight people and the three hedge funds, the SEC alleged.
Prosecutors also charged that a broker at Banc of America Securities, a unit of Bank of America Corp., allocated shares of initial public stock offerings to one of the hedge funds that Franklin managed for a payment of $9,500.
The alleged separate Morgan Stanley scheme involved a compliance lawyer whose job was to ensure that others followed securities laws.
The attorney, Randi E. Collotta, 30, of Bayport, N.Y., allegedly leaked news of upcoming mergers to her husband, Christopher K. Collotta, 34, who is also a lawyer, and to another man, Marc R. Jurman, 31, a broker in Florida.
The information said to have been provided by Randi Collotta was used to reap nearly $1 million in illicit stock trades, the SEC said.
In a statement, Morgan Stanley said it was “outraged that a former employee allegedly stole confidential information from the firm, and we have cooperated and will continue cooperating fully with the authorities.”
Among the deals allegedly leaked by Collotta was UnitedHealth Group Inc.’s plan to acquire PacifiCare Health Systems Inc., announced in July 2005.
Although authorities said the schemes at UBS and Morgan Stanley were separate, there was an unusual connection.
Bear Stearns’ Babcock and the two others named in the UBS case received information from Jurman about corporate mergers involving Morgan Stanley clients, the SEC said. As a result, these three were alleged to have taken part in both insider trading cases.
Authorities did not say how they uncovered the alleged wrongdoing in either case.
Boesky and Levine were two of Wall Street’s most infamous figures from the 1980s. Both served prison time for insider-trading-related charges.
tom.mulligan@latimes.com
