Two things that I say a lot around here are:
I feel like … I hate to flatter myself here, but is it just possible that these guys have been reading Bloomberg View?
Additionally, R. Stewart and Trader1 attempted to conceal their illegal trading and evade detection by: (a) primarily meeting in-person to discuss the scheme; (b) using coded email messages to discuss the scheme; (c) spreading trades over numerous stock options series in an attempt to avoid regulatory scrutiny; (d) buying stock options during periods when these securities were more heavily traded in order to blend into the daily volume; (e) refraining from options trading too close to the expected announcement date of a merger or acquisition; and (f) in most instances, sharing the illicit profits through cash payments.
Good effort! I mean, sure they allegedly bought short-dated out-of-the-money call options on the target. But not that many of them. And they also bought longer-dated out-of-the-money call options. And at-the-money-ish options. But what really puts this civil and criminal insider trading case over the top is that those coded e-mail messages were in golf code:
On May 27, 2012, at 9:35 p.m., which was the Sunday of Memorial Day weekend, R. Stewart sent Trader1 a coded email stating, in part: “might have an opportunity to play golf- but would need to book the reservation as soon as the office opens Tuesday morning.”
Trader1 began purchasing Lincare options on the morning of Tuesday, May 29, 2012.
I guess they had already agreed that “play golf” meant “buy Lincare options”? I don’t know. Anyway “the Linde Group, a German industrial gas company,” announced that it was acquiring Lincare, the stock shot up, Trader1 and Stewart made money, and:
Approximately sixteen minutes after Trader1 sold the last of the Lincare call options, he sent an email to R. Stewart saying, “I ment [sic] to tell you and your wife to have a celebration drink on me! I have some good news for you when you get back.” A few minutes later, R. Stewart replied using the same golf-related code he had used in his email of May 27, 2012. R. Stewart stated: “Thanks [Trader1]- saw local story about high cost of golf reservations since a foreign company purchased all- even more expensive than imagined.”
This is kind of a dumb code, to be honest, but points for getting golf into another insider trading case!
The story that the SEC and prosecutors tell is that Sean Stewart was an investment banker who had access to deal information, which he would give to his father Robert Stewart, who would then pass it on to his friend — referred to as “Trader1″ in the civil complaint and “CW-1″ in the criminal one – who would then trade in his own account in order to avoid getting caught. Which is a pretty clever plan except that, before they hatched it, the Stewarts allegedly used a different plan, in which Sean Stewart would give his father the inside information and then Robert would trade on it in his own account. In order to … get caught I guess? Anyway it seems to be how they got caught; this is never a good look:
On or about May 20, 2011, Investment Bank #1 received an inquiry from a regulator in connection with the Kendle transaction. On July 19, 2011, the regulator sent Investment Bank #1 a list of individuals and entities it identified as trading Kendle stock in the period leading up to the announcement of the Kendle transaction. The regulator asked Investment Bank #1 to circulate the list among the individuals who worked on the transaction and ask them to identify anyone with whom they had a relationship. This list included the name “Robert Stewart” and identified the town and state in which he lived.
Investment Bank #1 asked S. Stewart to identify anyone on the list with whom he had a relationship. S. Stewart did not identify his father, “Robert Stewart.” On August 23, 2011, Investment Bank #1 submitted its response to the regulator, indicating that no one at Investment Bank #1 knew “Robert Stewart.”
Oh that Robert Stewart, my mistake:
On August 31, 2011, Investment Bank #1 submitted a supplemental response to the regulator in which it stated that during a second review, S. Stewart had identified his father, R. Stewart. Investment Bank #1′s supplemental response stated that:
(a) S. Stewart “overlooked” his father’s name during the initial review and that S. Stewart now indicated that he recognized his father’s name;
Honest mistake, could happen to anyone, frequently does. If there’s one thing that insider traders like almost as much as playing golf, it’s failing to recognize their own fathers’ names in Finra inquiries.
At this point the story gets a little vague — the SEC and FBI don’t like to give away their investigative methods — but at some point the investigators found Trader1/CW-1 and got him to cooperate against the Stewarts. Here’s the FBI agent:
As part of his efforts to cooperate with the Government and potentially secure a more lenient sentence, CW-1 arranged and recorded in-person meetings with ROBERT STEWART, a/k/a “Bob,” the defendant, on or about March 24, 2015 and on or about April 16, 2015, and recorded a telephone call with ROBERT STEWART on or about May 4, 2015. I observed the meetings, the first of which occurred at a restaurant in midtown Manhattan, and the second of which occurred at a diner in Queens.
The Manhattan meeting featured Trader1/CW-1 handing Robert Stewart $2,500 in cash. But my favorite part of this case — and there’s a lot to choose from — is the Queens meeting:
ROBERT STEWART also asked CW-1 whether “we have statute of limitations” with respect to the trading about which the SEC had inquired. When CW-1 responded that he did not know, ROBERT STEWART noted that “it’s passed” because it had been “four years since the trade.”
Also at the April 16, 2015 meeting, CW-1 asked ROBERT STEWART whether SEAN STEWART had supplied the information for ROBERT STEWART’s and CW-1′s trades “out of the goodness and kindness of his heart for you.” ROBERT STEWART responded, “No, you know what? I think he gets angry at times. Angry at the industry.”
Okay, but that’s not exactly what CW-1 was asking. Do you get what he was asking? I’ll give you a hint: CW-1 has read the Second Circuit’s Newman opinion. Or, I mean, he’s read Bloomberg View. He knows insider trading law better than the average person caught insider trading and now wearing a wire at the FBI’s behest. Robert Stewart missed his point, so CW-1 asked it again: