Insider trading crimes tied to 13

Major Wall Street firms are tainted by scandal

March 02, 2007|By Walter Hamilton and Thomas S. Mulligan | Walter Hamilton and Thomas S. Mulligan,LOS ANGELES TIMES

NEW YORK -- Wall Street executive Mitchel S. Guttenberg sat down with his friend Erik Franklin in Manhattan's famed Oyster Bar about five years ago to discuss repaying a $25,000 loan.

But instead of cash, Guttenberg allegedly offered a currency that's far more valuable on Wall Street: inside information about dozens of stock analyst recommendations at his firm, financial-services powerhouse UBS.

Thus began what regulators described yesterday as one of the most pervasive insider-trading scandals since the days of Ivan Boesky and Dennis Levine in the late 1980s.

Seeking to avoid detection, the men used disposable cell phones to avoid records of their calls, and exchanged text messages in code, authorities said.

The Securities and Exchange Commission filed civil charges against 11 people, two hedge funds and a day-trading firm in U.S. District Court in Manhattan. The U.S. attorney's office there lodged criminal charges against 10 of those people, plus three others.

Nine of the defendants have been arrested, and four have pleaded guilty to charges including securities fraud, conspiracy to commit securities fraud and bribery, The New York Times reported.

The scheme, along with a separate plot at Morgan Stanley involved four major Wall Street firms, three hedge funds and at least $15 million in illicit profits, according to federal authorities.

"This involved people who should have known better and people who were making a great living," said Linda C. Thomsen, enforcement director at the Securities and Exchange Commission. "This is outrageous."

Though insider trading has receded from public view in the years since Boesky and others dominated the headlines, authorities fear that it's making a comeback on Wall Street.

In particular, they are worried that hedge funds - private firms that are often willing to take big risks in hopes of making big profits - might be especially willing to flout the law to get an edge.

The meeting of Guttenberg and Franklin at the Oyster Bar, a famed seafood eatery in Grand Central Station, took place in November 2001.

After Franklin recouped his $25,000, the two men shared the trading profits, with Franklin giving Guttenberg cash, according to the SEC's civil complaint.

Guttenberg was a manager in UBS' stock research department and sat on a committee that met daily to review changes in analysts' recommendations.

He routinely tipped Franklin, a hedge-fund manager at Bear Stearns, to pending ratings changes on stocks such as Amgen Corp., Whole Foods Market and Union Pacific Corp., the SEC alleged.

Other people learned of the illicit trading and tried to profit themselves. Robert D. Babcock, a Bear Stearns broker who processed Franklin's trades, began monitoring and secretly mimicking many of Franklin's trades, the SEC said. Two other Bear Stearns brokers did the same.

"The actions described in the complaint are clear violations of our policies and procedures," Bear Stearns spokesman Russell Sherman said yesterday, adding that the firm is cooperating fully with the investigation.

When Guttenberg passed tips to another friend, David M. Tavdy, his trades were secretly mirrored by David A. Glass, owner of the day-trading firm where Tavdy did business, the SEC said. Glass and Tavdy later teamed up in their trading.

When a supervisor learned of the scheme, he and another man allegedly demanded $150,000 to keep quiet about it. Tavdy and Glass agreed and eventually paid them $30,000, prosecutors said.

Altogether, the UBS scheme netted at least $14 million in illicit profits for eight people and three hedge funds, the SEC said.

Prosecutors also charged that a broker at Banc of America Securities allocated shares of initial public stock offerings to one of the hedge funds that Franklin managed, in exchange for $9,500.

The Morgan Stanley scheme involved a compliance lawyer whose job was to make sure others followed securities laws. Randi E. Collotta, 30, of Bayport, N.Y., allegedly leaked news of impendingmergers to her husband, Christopher, 34, who also is a lawyer, and to Marc R. Jurman, 31, a broker in Florida.

The information provided by Randi Collotta was used to reap nearly $1 million in illicit stock trades, the SEC said.

Among the deals leaked by Randi Collotta was the July 2005 announcement by UnitedHealth Group that it planned to acquire PacifiCare Health Systems Inc., the SEC alleged.

The schemes at UBS and Morgan Stanley were separate, except for one unusual connection: Babcock and the two others named in the UBS case got information from Jurman about Morgan Stanley merger deals, the SEC said. They were alleged to have taken part in two other insider trading cases.

Authorities did not say how they uncovered the alleged wrongdoing. UBS and Morgan Stanley both said they are cooperating with authorities in the investigation.

Walter Hamilton and Thomas S. Mulligan write for the Los Angeles Times.

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