Tamayo sometimes ate the napkins to destroy the evidence, the SEC says.

The Securities and Exchange Commission on Friday charged a Brooklyn man with facilitating a $5.6 million insider trading scheme that typically involved the passing of illegal tips via napkins or post-it notes at Grand Central Terminal in New York City.

Earlier this year, the SEC charged a stockbroker and a law firm managing clerk with insider trading and alleged they were connected by a mutual friend who served as a “middleman” in an effort to keep the two unlinked.

The SEC said Friday that it had filed a complaint in U.S. District Court for the District of New Jersey, in which the agency identifies Frank Tamayo as that middleman.

The SEC alleges that Tamayo received material nonpublic information from the clerk, Steven Metro, about 13 impending corporate deals involving clients of the law firm where Metro worked.

Says the SEC: “Tamayo then tipped his stockbroker Vladimir Eydelman, who used the confidential information to illegally trade for himself and for Tamayo and other customers. Tamayo allocated a portion of his ill-gotten profits for eventual payback to Metro for the inside information.”

Robert Cohen, co-deputy chief of the SEC Enforcement Division’s Market Abuse Unit, said in a statement that “as the middleman, Tamayo was the firewall between Metro and Eydelman. Metro had the information, Eydelman did the trading, and Tamayo kept them apart. But they were wrong in believing that this would stop the SEC from detecting their scheme.”

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Tamayo. The U.S. attorney previously brought criminal actions against Metro and Eydelman. Those criminal cases and the SEC’s civil case against Metro and Eydelman are pending.

According to the SEC’s complaint against Tamayo, the scheme was deliberately structured to avoid detection, enabling Eydelman and Tamayo to profit without connecting the trades to an insider source and also allowing Metro to share in the trading proceeds.

“For a five-year period, Metro repeatedly accessed confidential information in his law firm’s computer systems and met with Tamayo at bars and coffee shops in New York City to provide tips about firm clients ready to participate in a corporate transaction. Tamayo typically would then connect with Eydelman near the clock at the information booth at Grand Central, where he would show him a post-it note or napkin on which Tamayo wrote the stock ticker symbol of the company to be acquired,” the SEC says.

Tamayo then would chew up and sometimes even eat the post-it note or napkin to destroy evidence of the tip, the SEC says.

“Tamayo also conveyed to Eydelman the approximate transaction price and timing of the deal,” the SEC said. “After Eydelman returned to his office and gathered research about the target company, he would e-mail Tamayo’s supposed thoughts about why buying the stock made sense. Their intent was to create a paper trail of e-mails to make it appear they were making their trading decisions based on research and analysis rather than inside information.”

Check out SEC Enforcement: SEC Busts Scheme Involving Stock Tips on Napkins on ThinkAdvisor.