From the April 2007 issue of Research Magazine • Subscribe!

April 1, 2007

14 Charged with Insider Trading

The titans of Wall Street aren't involved. But a former UBS executive director, ex-Morgan Stanley compliance attorney, and several former Bear Stearns brokers are.

"UBS is assisting the authorities to the fullest extent possible in their investigation into the alleged actions of a single UBS employee," the company says in a statement. "The U.S. Attorney has described UBS as a victim of this alleged scheme. UBS is committed to safeguarding the integrity of its proprietary information and has rigorous procedures in place to avoid any theft or misuse. Any violation of these procedures is taken extremely seriously."

"We are outraged that a former employee allegedly stole confidential information from the firm, and we have cooperated and will continue co-operating fully with the authorities,'' explains Morgan Stanley.

On March 1, the SEC charged 14 defendants and several hedge funds with insider training in two schemes. Regulators have said that the arrests illustrate how serious they take insider trading involving hedge funds, according to SEC Chairman Christopher Cox.

And more broadly, the message is that regulators are watching any and all illegal trading. "No matter how clever you are, no matter how hard you try to avoid detection, you underestimate us at your peril," said SEC Enforcement Director Linda Chatman Thomsen.

And SEC Associate Director of Enforcement Scott W. Friestad explains that the recent arrests represent "one of the largest SEC insider trading cases against Wall Street professionals since the days of Ivan Boesky and Dennis Levine. It involves fraud by employees of some of the biggest brokerage and investment banking firms in the country."

According to the SEC complaint, Mitchel Guttenberg of the UBS equity research department gave tips about upcoming UBS analyst upgrades and downgrades in exchange for a share of the gains. Several of those who illegally traded on the UBS information, and others, also traded ahead of corporate acquisition announcements using information stolen from Morgan Stanley via Randi Colotta, a former attorney in the global compliance department, the SEC maintains.

Experts say the arrests are not expected to tarnish the long-term reputation of any of the large brokerage firms involved or sharply affect their financial performance. Nor should it do much damage to their recruiting, says Andy Tasnady, general manager of Tasnady Consultants in Port Washington, N.Y. "This doesn't affect brokers moving between firms, because they join the private client operations," he explains. "It's about corrupt individuals," not organizations.

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Insider-Trading: Then & Now

Then

Who: Arbitrageur Ivan F. Boesky ("Ivan the Terrible").

What: Based on a tip from a broker-dealer, he was charged with securities fraud and agreed to settle with the government.

When: On Nov. 14, 1986, news of the settlement was announced; Boesky paid $100 million in penalties and was sentenced to three years in prison; he served 19 months in Lompoc, Calif. (a.k.a. Club Fed West).

Why: Boesky's arrest was part of a larger trading investigation that involved civil and criminal actions against Michael Milken (the "Junk Bond King"), Drexel Burnham Lambert and others in the late '80s and early '90s.

After being charged by then U.S. Attorney Rudy Guiliani in New York in '89, Drexel paid $650 million-plus in fees. Milken agreed to pay $600 million; he served two years in a prison in Pleasanton, Calif., and was released after a diagnosis of prostate cancer.

Now

Who: The SEC filed charges involving up to 14 individuals, two hedge funds and one day-trading firm.

What: Wall Street professionals made trades based on non-public information in exchange for cash kickbacks by UBS and Morgan Stanley and made a combined $15 million in profits.

When: The alleged UBS scheme took place from 2001-2006 and the alleged Morgan Stanley scheme from 2004-2005; arrests were made and announced March 1, 2007.

Why: The SEC and other regulators "want to make it clear" that hedge-fund insider trading is a top priority, says SEC Chairman Christopher Cox.

Where: The first clandestine meeting took place at the Oyster Bar in Grand Central Station, New York.

(Sources: SEC, wikipedia, news reports)

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Janet Levaux is the managing editor of Research; reach her at jlevaux@researchmag.com.

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