Prosecutors Break Up What They Call One of the Biggest Wall Street Insider-Trading Rings
The defendants included husband-and-wife lawyers, registered representatives, compliance personnel and hedge fund portfolio managers who improperly relied on hundreds of tips during five years of illegal trading.
Investigators have broken up what they call one of the biggest Wall Street insider-trading rings since the 1980s -- a sweeping, $15 million scandal that involved power brokers at some of the nation's top financial firms and two lawyers.
In announcing the case Thursday, authorities described a criminal operation that used insiders at Morgan Stanley and Co. and UBS Securities LLC to steal valuable secrets from the companies. Prosecutors also alleged a Banc of America Securities LLC broker accepted cash kickbacks and two former representatives of Bear Stearns & Co. obtained UBS inside information.
"This conduct didn't occur in obscure boiler rooms -- but rather at what are commonly considered `top tier' Wall Street firms," said Linda Chatman Thomsen, director of the Division of Enforcement for the Securities and Exchange Commission.
She said "there is hardly a duty on Wall Street that the defendants charged today didn't breach."
U.S. Attorney Michael Garcia said Wall Street professionals repeatedly traded on secrets revealed to them by insiders at UBS and Morgan Stanley.
The case alleges that people were tipped off about stock upgrades and downgrades by UBS and impending corporate acquisitions involving Morgan Stanley clients, allowing investors to cash in before the news hit the market.
The SEC said the ringleaders of the UBS part of the scheme went to great lengths to hide their illegal conduct, with tactics including a clandestine meeting at Manhattan's famed Oyster Bar and eventually the use of disposable cell phones, secret codes and cash kickbacks.
In all, 13 people have been arrested in the criminal case. The SEC brought civil charges against 11 individuals and three entities.
Among financial professionals charged criminally in U.S. District Court in Manhattan was Mitchel Guttenberg, an executive director and institutional client manager at UBS.
Garcia said Guttenberg, who worked in UBS's equity research department, accepted hundreds of thousands of dollars as he sold nonpublic information to two men regarding upcoming upgrades and downgrades by UBS analysts.
The men, David Tavdy and Erik Franklin, used the UBS inside information to each earn more than $4 million by executing profitable trades in various brokerage accounts they controlled, Garcia said.
Guttenberg pleaded not guilty in federal court in Manhattan Thursday and was released on $500,000 bail. He declined to comment afterward.
The husband-and-wife attorneys, Randi Collotta, 30, a former employee of Morgan Stanley in Manhattan, and her husband, Christopher Collotta, 34, who worked in private practice, were also among those criminally charged. They pleaded not guilty and each were released on $250,000 bail. Their lawyer, Brian Rafferty, declined to comment.
In an indictment, prosecutors said Randi Collotta was an associate in Morgan Stanley's global compliance division when she passed inside stock tips to her husband, who gave it to others, resulting in illegal profits of hundreds of thousands of dollars between September 2004 and August 2005.
After others made money from the tips, they paid Christopher Collotta cash that represented a portion of their profits, the indictment said.
Guttenberg, Tavdy, Franklin and the Collottas all were charged with conspiracy to commit securities fraud and securities fraud, which carry potential penalties of up to 25 years in prison. Franklin pleaded guilty earlier this week to conspiracy, securities fraud and commercial bribery and awaits sentencing. Tavdy was expected to make an initial court appearance in federal court in Miami.
A lawyer for Tavdy, who was being arraigned in Florida, did not immediately return a telephone message. Five others were released on bail after pleading not guilty.
Three additional criminal defendants have pleaded guilty to conspiracy, securities fraud and commercial bribery charges, prosecutors said.
Thomsen said it was "one of the most pervasive Wall Street insider trading rings" since Ivan Boesky and Dennis Levine carried out their notorious insider-trading schemes in the 1980s.
The SEC said in a complaint that Guttenberg's trading scheme began in 2001 when he met Franklin at the Oyster Bar at a time when he owed Franklin $25,000. The SEC said Guttenberg proposed paying off that debt by giving him nonpublic UBS analyst recommendations.
Mary Claire Delaney, a Morgan Stanley spokeswoman, said, "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.
Bear Stearns said in a statement that "the actions described in the complaints are clear violations of our policies and procedures. We have and will continue to cooperate fully with the investigation."
Shirley Norton, a spokeswoman for Bank of America Corp., the parent company of Banc of America Securities, said: "We're aware of the indictment and we're cooperating with authorities."
A call to UBS was not immediately returned.
Thomsen said original tippers in both insider schemes, Guttenberg and Randi Collotta, took steps to evade detection including not trading in their personal accounts and accepting kickbacks in cash.
"Some defendants may have thought they were flying `under the radar' by making modest profits on individual transactions, secure in the knowledge that, over hundreds of tips, they would reap millions of dollars in illicit trading profits," she said. "And yet, despite their best efforts to avoid detection, we caught them."