Third Major Case This Month : Lawyer, 4 Others Indicted on Insider Trading Charges
In the third announcement this month of a major insider trading case, federal authorities said Wednesday that five men have been indicted on charges that they traded on confidential information stolen by one of them from the law firm where he worked.
The key defendant is apparently Michael David, 27, a lawyer and a former associate at the prominent law firm of Paul, Weiss, Rifkind, Wharton & Garrison. David is charged with stealing confidential information about six of the firm’s clients, passing it on to the other defendants and trading on it himself. Three of the clients are not identified in the indictment because they are involved in deals that have not been publicly disclosed.
David was fired from the firm in March after it learned of the Securities and Exchange Commission’s investigation of the suspect trades.
Wednesday’s announcement follows the $400,000 settlement May 6 by the investment firm of First Boston Corp. of SEC charges that it made an illegal profit on the stock of an investment banking client and the May 12 case against Dennis B. Levine, a Drexel Burnham Lambert executive, on charges that he made $12.6 million in six years of illicit trading.
Also for the third time this month, scandal touches the Drexel Burnham firm, one of Wall Street’s fastest growing and most aggressive investment houses. Among those indicted Wednesday is Robert Salsbury, 27, an analyst for Drexel’s risk arbitrage unit specializing in buying and selling takeover stocks.
Salsbury is charged with recommending that Drexel buy stock in Avondale Mills after having been tipped by David that a Paul, Weiss client, Dominion Textile Co., was planning an offer for Avondale.
Earlier this month, another Drexel executive, Antonio Gebauer, was accused by Morgan Guaranty Trust Co., his former employer, of having misappropriated as much as $6 million of customer funds. He resigned his post at Drexel.
A spokeswoman for Drexel said Wednesday that the firm bought 90% of its total holding of 21,000 Avondale shares before Salsbury made his recommendation in February. “We had no idea he was encouraging us to buy based on inside information,” spokeswoman Angela Dailey said. Salsbury resigned last week, she said. Drexel’s arbitrage unit employs six professionals, including three analysts, she said, and is generally under orders to buy stocks only after a takeover has been formally announced.
Dailey also released a prepared statement saying that Drexel is “particularly outraged that we have been victims of unconscionable behavior by two individuals (Levine and Salsbury) who have surreptitiously violated our trust and firm policies. Even though we have not been named, our firm has been damaged by implication.”
In the latest case, prosecutors released no estimate of the profits turned by the five defendants or the three brokerages among their employers, beyond charging that three of the defendants made nearly $150,000 by purchasing the stock and options of one unidentified company.
David was initially charged March 27 with tipping a friend, Andrew Solomon, an analyst for the small brokerage of Marcus Schloss & Co., to purchase Union Carbide stock while David’s firm was representing GAF Corp. in connection with its unsuccessful takeover bid for Carbide early this year.
David was indicted Wednesday on counts of conspiracy, securities fraud, mail fraud, obstruction of justice and subornation of perjury. He faces 10 years in jail if convicted on the obstruction and subornation counts, five years on each of the 16 fraud counts and a total fine of $4.5 million.
The law firm has previously said that David had not worked on merger and acquisition cases and represented none of the clients whose deals were involved in his trading. Wednesday’s indictment says David told another defendant that he gleaned some information by peeking at a loose-leaf binder in the possession of some partners.
Also indicted were:
- Solomon, 27, who faces a five-year jail term and $250,000 in fines on charges that he inspired the Marcus Schloss firm to buy stock in Carbide, Avondale Mills and two unidentified targets of two other Paul, Weiss clients. Solomon was fired from the brokerage in March.
- Morton Shapiro, 24, a stockbroker for the brokerage of Moseley, Hallgarten, Estabrook & Weeden, who faces a maximum term of 10 years and $500,000 in fines for allegedly setting up, along with David and another defendant, Daniel J. Silverman, a brokerage account in Silverman’s name in which the three split profits from trading on David’s tips. The trio made $140,000 on one trade alone, the SEC and federal prosecutors said.
Shapiro was also charged with perjury in connection with his testimony to the SEC that David had not tipped him, that David did not share in the brokerage account and that David had not counseled him to lie.
Moseley’s general counsel in New York, Kevin Moynihan, said Shapiro was fired by the firm the day after his April 9 testimony to the SEC. He had been with the firm about a year and had only recently emerged from its trainee program.
- Silverman, 23, who faces a five-year term and $250,000 in fines for allegedly trading on David’s tips.
- Salsbury, who faces 10 years in jail and $500,000 in fines on charges that he traded on David’s tips and urged Solomon to lie to the SEC about his own trades.
None of the defendants could be reached for comment.
SEC officials and prosecutors said Wednesday that all five may also be charged with civil violations of the SEC’s insider trading rules. They also observed that many such cases now focus on Wall Street lawyers and traders rather than corporate officials.
Observing that, of 50 people indicted on insider charges in the last year and a half by federal prosecutors here, four were lawyers and seven more were employees of law firms, U.S. Atty. Rudolph Giuliani said he found “serious problems in how law firms handle this kind of information.”