A 24-year-old trainee at Morgan Stanley & Co. was accused Monday of leaking secret details of mergers and other deals in what the Securities and Exchange Commission says is the second-biggest insider trading case ever filed.
The SEC suit, brought in U.S. District Court in Manhattan, accuses Stephen Sui-Kuan Wang Jr., the Morgan Stanley employee, and a Taiwanese businessman, Fred C. Lee, of collaborating in a scheme that netted at least $19 million in illegal profits.
Wang, a participant in Morgan Stanley's two-year "junior analyst" training program, had been assigned since March 1, 1987, to the investment firm's mergers and acquisitions department. He is charged with leaking to Lee details of at least 25 planned mergers, leveraged buyouts and tender offers being prepared for clients by Morgan Stanley.
Lee, 38, then used the inside information to make huge profits through the purchase of stock and options before the deals were announced, SEC court filings say. Lee is said to have amassed the profits through trading in brokerage accounts at Morgan and elsewhere held under the names of 33 individuals and companies.
The SEC is seeking to force the pair to "disgorge" the alleged $19 million in illegal profits and to pay triple damages as provided under insider trading laws.
Gary Lynch, the SEC's enforcement chief, said the case was second in size only to the Ivan F. Boesky insider trading case. In that case, Boesky, a well-known stock speculator, paid a fine of $100 million after being accused in 1986 of reaping $50 million in profits from illegal trading. Lynch said the Morgan Stanley case is not related to any leads developed in the Boesky investigation.
The Wang-Lee case is not the first in which Morgan Stanley employees have been accused of illegal insider trading. In 1983, E. Jacques Courtois Jr., a former Morgan vice president in the mergers and acquisitions department who had been a fugitive in Colombia for years, pleaded guilty along with several others outside the firm to illegally trading on inside information.
Lynch said the latest case came about when a member of the SEC staff in Washington some months ago noticed unusual trading activity in one stock involved in the case and began a routine investigation. The New York Stock Exchange later contacted the SEC with information about more suspicious trading and the activity eventually was traced to Lee, Lynch said.
Telephone Records Cited
Court filings say telephone toll records tied Lee to Wang. They allegedly show phone calls from Lee to Wang's office at Morgan Stanley and to his Manhattan apartment just before the suspicious stock and options trades.
The officials said they do not yet know how Lee first came in contact with Wang. But Peter Roche, an official at Morgan Stanley, said Lee had maintained an account at Morgan for some time and Wang may have met him through the firm.
SEC officials said their investigation is not complete. But evidence obtained so far indicates that Wang may have received relatively little for feeding inside information to Lee. The SEC said it has evidence of only one payment, of $200,000, by Lee to a bank account for Wang.
Lee is said to be from a wealthy Taiwanese family with holdings in real estate and public utilities. SEC and other sources said he has business interests in the United States, Taiwan and Hong Kong. While the illegal trading was going on, he had a residence in McLean, Va., SEC documents say. Officials believe that Lee is in Hong Kong.
No Evidence Against Others
Lynch said the SEC does not have evidence to charge anyone else at Morgan Stanley with wrongdoing, but he did not rule out that the investigation might be broadened if new evidence turns up.
A Morgan spokesman said the firm is cooperating with the SEC and had launched its own internal investigation. But he said there was no indication that anyone else at the firm was involved. The firm said it had suspended Wang and is "considering its legal alternatives" against him and Lee.
Neither Wang nor Lee could be reached for comment. A message was left on a phone answering machine at Wang's New York apartment but the call was not returned. But Wang's lawyer, Ira Sorkin, said that "we've read the (SEC) complaint and we are studying the SEC's allegations." He refused to comment further.
An SEC source confirmed that a criminal investigation is also under way in the case by the U.S. attorney's office in Manhattan. Federal prosecutors, however, declined to comment. Under a recent U.S. Supreme Court decision, Wang could be prosecuted for misappropriating his employer's property--the confidential information about the deals.
Power Company, Hutton Deals
Wang allegedly leaked sensitive details of deals including Public Service Co. of New Mexico's planned acquisition of Utah Power & Light Co., the planning leading up to E. F. Hutton Group's acquisition by Shearson Lehman/American Express, and a February, 1988, tender offer for Stop & Shop Cos. Information also allegedly was leaked on pending transactions involving, among others, American Brands, Dayton-Hudson Corp., Federated Department Stores and Kerr-McGee Corp.
In the Hutton example alone, Lee is said to have made a $1.2-million profit from the purchase of Hutton options.
The court papers said Wang worked on some of the transactions as part of his training in the mergers and acquisitions department. The papers also charge that he was able to get additional information about pending deals because his "office is in close proximity to other analysts and professionals" in the department.
Term Nearly Over
The Morgan spokesman, who asked not to be named, said the two-year training program is mainly for recent college graduates who complete the program and then remain at Morgan, go on to business school or go to work at other firms. He said that Wang's two years were due to end next month and that he was expected to leave the firm.
The spokesman said he could not explain how a trainee could have access to so much sensitive information. "That is a great mystery as to how a very junior employee would come in contact with 25 deals," the spokesman said.
SEC officials said they were forced to handle the case on an "emergency" basis and go into court Monday even though their investigation was not complete. Swift action was necessary because of evidence that Lee was attempting to have U.S. banks wire his illegal profits out of the country.
Bank Withdrawals Prohibited
U.S. District Judge Shirley Wohl Kram on Monday granted a temporary restraining order prohibiting the bank withdrawals. She also barred Wang and Lee from violating the anti-fraud provisions of federal securities laws.
The SEC court action followed a bizarre turn of events last week in Hong Kong, where SEC lawyers had flown to take Lee's deposition in the investigation. In two days of testimony, Lee denied that he knew Wang and denied having made any trades based on inside information. But shortly after Lee left the deposition room, his American lawyer, Michael Perlis, returned and said Lee had authorized him to state that Lee's testimony had been false and that he admitted participating in illegal trading.