Capital Markets

Boesky Redux? Feds Allege Trading Ring

The SEC charges 14 individuals and companies in what it calls "a brazen insider trading scheme" that netted more than $15 million in illegal profit...
David Katz and Stephen TaubMarch 1, 2007

The Securities and Exchange Commission and the U.S. Attorney for the Southern District of New York filed cases on Thursday alleging “one of the most pervasive Wall Street insider trading rings since the days of Ivan Boesky and Dennis Levine,” according to SEC Enforcement Director Linda Chatman Thomsen.

The commission said it charged 14 individuals and companies in what it called “a brazen insider trading scheme” that netted more than $15 million in illegal insider trading profits on thousands of trades. The alleged perpetrators used information stolen from UBS Securities LLC and Morgan Stanley & Co., Inc., according to the SEC.

The U.S. Attorney for the Southern District of New York filed criminal charges against 13 people in two alleged insider trading schemes that were said to earn them $8 million, according to several published reports, which noted that four have pleaded guilty to securities fraud, conspiracy, and commercial bribery. The U.S. Attorney reportedly planned to release details about the criminal charges late Thursday.

The SEC’s civil complaint alleges that eight Wall Street professionals, including a UBS research executive and a former Morgan Stanley attorney, two broker-dealers, and a day-trading firm took part in the scheme. The defendants also include three hedge funds, which were the biggest beneficiaries of the fraud.

The commission said the scheme involved unlawful trading ahead of upgrades and downgrades by UBS analysts and corporate acquisition announcements involving Morgan Stanley’s investment banking clients.

“Our action today is one of several that will make very clear the SEC is targeting hedge fund insider trading as a top priority,” warned SEC Chairman Christopher Cox, who has been criticized for not appealing an earlier court’s ruling that struck down the SEC’s hedge fund registration rule.

The SEC asserted that the ringleaders of the UBS part of the scheme “went to great lengths to hide their illegal conduct,” first by meeting clandestinely at Manhattan’s famed Oyster Bar and eventually by using disposable cell phones, secret codes, and cash kickbacks before the scheme unraveled.

The commission alleges that Mitchel Guttenberg, an executive director in the equity research department at UBS, provided material, nonpublic information concerning upcoming UBS analyst upgrades and downgrades to traders Eric Franklin and David Tavdy in exchange for sharing in the illicit profits from their trading on that information.

Franklin and Tavdy illegally traded on this inside information personally, for the hedge funds Franklin managed, and for the registered broker-dealers where Tavdy was a trader, according to the complaint. The SEC also alleges that Franklin and Tavdy had a network of people who illegally traded on that inside information, including a third hedge fund, a day-trading firm, and three registered representatives at Bear, Stearns.

Some of those who illegally traded on the UBS information, and others, also traded ahead of corporate acquisition announcements using stolen Morgan Stanley information, according to the SEC. The commission also charges that Randi Collotta, then a lawyer in Morgan Stanley’s global compliance department, together with her husband, Christopher Collotta, an attorney with Zabell and Associates in Bohemia, New York, provided material, nonpublic information about upcoming mergers involving Morgan Stanley’s investment banking clients to Marc Jurman, a registered rep at a Florida broker-dealer.

Jurman then allegedly traded on that information and shared his profits with the Collottas, according to the complaint. Jurman also tipped Robert Babcock, a registered rep at Bear Stearns, who traded on the information and tipped Franklin, a hedge fund managed by Franklin, and another registered representative at Bear Stearns, it added.

In a statement, Morgan Stanley 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.”

A UBS spokesperson said Guttenberg has been put on unpaid leave, and he could not be reached for comment. The company stated that it “is assisting the authorities to the fullest extent possible in their investigation into the alleged actions of a single UBS employee. The US 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.” Morgan Stanley did not respond to a request for comment.

Christopher Collatta could not be reached for comment. Randi Collatta, now an attorney and director of securities operations at Garden Cities Group, was out of the office and could not be reached for comment. Attorneys for Franklin, Tavdy, Babcock, and Jurman, could not be reached for comment. Additional reporting by Helen Shaw.