Family Affair: SEC Claims Insider Trades

The SEC charges a former Morgan Stanley vice president, her husband, and her mother with involvement in an alleged scheme to buy up stocks of compa...
Marie LeoneMay 11, 2007

Two bankers were charged with insider trading by the Securities and Exchange Commission yesterday for allegedly buying stocks on the basis of material, non-public information culled from confidential merger talks.

According to the lawsuit filed by the SEC, Jennifer Xujia Wang, a former Morgan Stanley employee, and her husband, Ruopian Chen, a former employee of ING Investment Management Services, were charged with the violation.

The new charges were issued on the same day that another former Morgan Stanley executive, Randi Collotta, and her husband, Christopher Collotta, pleaded guilty to insider trading charges in a separate case. The case involving the Collottas was reportedly one of the biggest insider-trading schemes since the 1980s.

The civil suit against Wang and Chen was filed in the U.S. District Court for the Southern District of New York. The SEC charged that the couple used online brokerage accounts registered in Wang’s mother’s name, Zhiling Feng, to buy the stocks of three companies on the verge of announcing they would be acquired. The SEC charges that Wang and Chen used non-public information from Morgan Stanley, including analyses of the pending acquisitions.

The couple’s attorney, David Spears of Spears & Imes says that Wang and Chen intend to plead not guilty to any criminal charges brought, and defend themselves against any charges made by the SEC. Spears told CFO.com that as of Friday morning, his clients had not been served with the SEC complaint. He also said that he was unsure whether the assets of Wang and Chen had been frozen, as the SEC noted they had been in the press statement the commission issued yesterday. Amy Greer, an SEC trial attorney for the Southern District of New York, declined to comment at press time.

According to the SEC statement, a temporary restraining order was issued by the court freezing the couples’ assets and mandating repatriation of funds taken out of the United States. “Today’s action continues our crackdown on illegal insider trading. The Commission simply will not allow industry professionals to illegally profit from their access to nonpublic information,” said Linda Chatman Thomsen, director of the SEC’s Division of Enforcement.

The SEC charged that Wang and Chen obtained illegal profits of more than $600,000 by trading on the basis of material nonpublic information before the public announcements of three acquisitions: Morgan Stanley Real Estate’s December 19, 2005 announcement of its acquisition of Town & Country Trust; MSRE’s August 21, 2006 announcement of its acquisition of Glenborough Realty Trust; and Formation Capital and JER Partners’ January 16, 2007 announcement of its agreement to acquire Genesis HealthCare.

The SEC is seeking permanent injunctions against future violations, disgorgement of all ill-gotten gains, prejudgment interest, and civil penalties from Chen and Wang. The complaint names Feng, who lives in Beijing, China, as a relief defendant and seeks disgorgement of the couple’s allegedly ill-gotten gains and prejudgment interest from Feng. A relief defendant is associated with the defendants and responsible for paying restitutions.

The complaint also charges that while working for Morgan Stanley as a vice president in one of the investment bank’s transaction support units, Wang had access to nonpublic information about the pending acquisitions. The complaint further alleges that Wang received documents via E-mail and had access to documents on a shared network drive related to evaluating the possibility of Morgan Stanley financing the deals before news of the acquisitions were publicly announced.

In January, Morgan Stanley was contacted by the SEC and notified that the regulator was investigating stock trades made by Wang. At that time, Morgan Stanley began its own internal investigation. In March, Wang resigned. She had been employed by Morgan Stanley since August 2005.

“The alleged wrongdoing by a former employee of our [f]irm is an egregious violation of Morgan Stanley’s values and policies,” said Morgan Stanley spokesman Mark Lake. “We fully support, and will provide every assistance to, the government’s prosecution of insider trading by those who take personal advantage of the trust of our clients and the [f]irm,” he added.

As part of the alleged scheme described in the SEC complaint, Wang and Chen funded and exercised control over Feng’s online brokerage accounts. The complaint points out that when Feng’s first brokerage account was opened, it was funded with money from a checking account in Wang and Chen’s name. In addition, Feng did not access the online accounts on the days of the alleged trading violations. Instead, says the SEC, most of the logins to the accounts were from an Internet address at ING and from Chen and Wang’s home in New Jersey.

ING spokesperson Tracey Gordon noted that, “Mr. Chen has not been with the firm for some time,” and that the company has cooperated with the SEC “in connection with its inquiries.”

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