Attorney Charged With Giving Inside Data on Colt Plan : SEC’s Civil Complaint Also Names 6 Relatives, Friends
A 34-year-old lawyer was arrested Tuesday on insider trading charges and accused of informing relatives and friends about the $1.7-billion recapitalization of Colt Industries last summer, allegedly allowing them to parlay an investment of $38,273 into $1.5 million in just two weeks.
The lawyer, Israel G. Grossman, was charged in a criminal complaint with violating federal securities laws and mail fraud. He and six relatives and friends were also charged in a civil complaint filed by the Securities and Exchange Commission.
The case, originally brought to the attention of the SEC by the market surveillance department of the Philadelphia Stock Exchange, whose computers picked up unusual trading patterns, is not connected with other major insider trading cases brought by the government in recent months.
The biggest such case involves former investment banker Dennis B. Levine and millionaire stock speculator Ivan F. Boesky. Levine, arrested last May on charges of making $12.6 million from illegal stock trading, led federal investigators to Boesky, Wall Street’s best-known stock arbitrageur.
Boost to SEC Argument
The latest development in that case came Friday, when former investment banker Martin A. Siegel pleaded guilty to criminal conspiracy and tax evasion charges and paid the government $9 million to settle civil charges that he was a tipster for Boesky.
But, even though it is not connected with the major cases, the Grossman case lends credence to the SEC’s argument that it has become much better at tracking down securities laws abusers and can juggle several separate insider trading cases at a time. The agency has said that it has about 50 separate insider trading cases pending.
“It is certainly a profitable business, and the only way to change that is to make it a very risky business,” said U.S. Attorney Rudolph W. Giuliani at a news conference after Grossman’s court appearance. “That is what the SEC and the United States attorney’s office and the postal authorities are trying to do.
“Obviously this case and many other cases illustrate that a great deal of money can be made,” Giuliani said. “The only way you can stop this kind of activity is when it starts entering people’s heads . . . that one of the things that may happen to them is that they may get caught. If they get caught, they may get arrested. They may get convicted and get sentenced to federal prison and basically ruin their careers and be financially destroyed.”
Giuliani said a “substantial” number of lawyers are being implicated in insider trading cases. “It is not just investment banking firms. Attorneys have been involved in eight other cases,” he said.
Grossman, who faces a prison term of up to 15 years and fines of up to $750,000 in the criminal case, was arraigned Tuesday afternoon before U.S. Magistrate Nina Gershon. The defendant stood for 15 minutes before the bench as Gershon, Irving P. Seidman, Grossman’s lawyer, and prosecutor Steven M. Kaplan came to terms on bail.
Grossman was finally released on personal recognizance but will have to provide the government with collateral consisting of his home in Brooklyn and a summer house in Lakewood, N.J. A preliminary hearing was scheduled for March 9.
Grossman was alleged to have learned about the Colt recapitalization, which would result in a dramatically higher price for Colt stock, from a colleague at his law firm--Kramer, Levin, Nessen, Kamin & Frankel--with whom he shared a secretary. Grossman was not professionally involved in the recapitalization.
The charges said that between last July 11 and 18, Grossman called friends and relatives who purchased 1,400 “deep out-of-the-money” call options for Colt stock. Such options--which entitle an investor to buy a stock at a predetermined price on a set date--sell for extremely low prices because there is little expectation that the stock’s price will rise high enough within the specified time period.
The Colt recapitalization plan was announced July 20, and the next day its stock rose nearly $30. Besides Grossman, the other defendants in the SEC case are George Hirshberg, his uncle; Alan Hirshberg, a first cousin; Walter Herzberg, another first cousin who was said to have fled to Israel; Saul Listokin, a brother-in-law, and friends Norman Stein and David Lev.
According to Jeffrey Kalmus, an official of Kramer, Levin, Nessen, Kamin & Frankel, Grossman was asked to leave the firm last September for reasons unrelated to the alleged fraud because “his work wasn’t up to par.”
The following month he joined the law firm of Carter, Ledyard & Milburn as an associate assigned to employee benefits. Bernard Cedarbaum, a Carter, Ledyard & Milburn partner, said the firm had been assured by federal authorities that the alleged violations occurred before Grossman’s employment there, but he declined to say if Grossman is still an employee.
