Regulators ratcheted up their ongoing investigation into insider trading on Wall Street Thursday, but a splashy case might not be enough to make a permanent difference.
The Securities and Exchange Commission and the U.S. attorney in Manhattan announced charges against 14 individuals, including current and former employees of UBS (nyse: UBS - news - people ), Morgan Stanley (nyse: MS - news - people ) and Bear Stearns (nyse: BSC - news - people ), and three hedge funds, in an elaborate trading and bribery ring that is being billed as one of the biggest insider trading cases since the Ivan Boesky scandal of the late-1980s.
The SEC has already been probing whether some employees at investment banks are tipping favored hedge fund clients with nonpublic details of upcoming transactions to keep or win more business.
SEC Chairman Christopher Cox said Thursday the agency was being anything but complacent in its oversight of Wall Street. "Our action today is one of several that will make very clear the SEC is targeting hedge fund insider trading as a top priority," Cox said in a statement.
But many say insider trading is hard to detect, and the big cases of the last few years haven't put a stop to the practice.
Case in point, last year's SEC charges against two former employees of Goldman Sachs (nyse: GS - news - people ), Eugene Plotkin and David Pajcin, who were accused of getting an analyst at Merrill Lynch (nyse: MER - news - people ) to give them tips on upcoming mergers in return for a cut of the trading profits. The two also got people to steal advance copies of Businessweek so they could trade on companies mentioned in a regular column.
William Coates, an attorney and past chairman of the Corporate Integrity and White Collar Crime Committee of the DRI (which is the association of defense lawyers), says the latest case might ignite a "hew and cry" about more regulation, but will likely end up with things pretty much as they are.
Detecting insider trading is tricky, he said. "It takes an awful lot of manpower and investment and work," Coates said. "If you don't have someone inside the scheme helping you, you have data and no roadmap."
Four individuals appear to be cooperating with the latest case. They pleaded guilty earlier this week to a variety of charges, including securities fraud and conspiracy. Nine other defendants were to be arraigned in New York and Florida courts late Thursday.
The case unfolds as the SEC faces harsh criticism and Congressional investigations into its handling of allegations by a former SEC staffer, Gary Aguirre, that his probe two years ago into possible insider trading by a prominent hedge fund and a leading investment banker were squelched by the agency because of political favoritism.
It also comes one week after a group led by U.S. Treasury Secretary Henry Paulson published a report recommending there was no need for greater regulation of hedge funds and other private investment pools. The report was roundly criticized by those who believe the investing public needs better safeguards from the trading activities of hedge funds, including big leveraged bets that could roil markets if they unraveled.
The SEC, which filed civil charges, described two related schemes that featured kickbacks and extortion and methods used to disguise detection, including meetings at a storied New York City restaurant, disposable cellphones, secret codes and clandestine computer monitoring.
"No matter how clever you are, no matter how hard you try to avoid detection, you underestimate us at your peril," said SEC Enforcement Director Linda Chatman Thomsen in a statement Thursday.
In the first scheme, a UBS Securities executive is accused of tipping off two traders to upcoming UBS stock research upgrades and downgrades, sharing the profits of trading on that nonpublic material information.
In the second scheme, a former compliance lawyer for Morgan Stanley and her husband, a private practice lawyer, tipped a trader about upcoming mergers and acquisitions being handled by the bank in exchange for a cut of the profits from trading ahead of the event.
The two cases are intertwined because some of the traders in the second case wind up tipping the traders in the first case.
Mitchel Guttenberg, 41, an institutional client manager at UBS Securities, was charged with passing material--nonpublic information--to traders Erik Franklin, 39, formerly of Bear Stearns, and David Tavdy, 38, formerly of Assent, a New York broker-dealer.
Guttenberg hatched the scheme with Franklin in New York's Oyster Bar restaurant, according to the SEC complaint. He tipped the traders on UBS analyst recommendation upgrades or downgrades, using secret codes sent on disposable cellphones. The tips allowed them to trade ahead of the announcements. He shared profits with each on the trades, using the first profits of the trades by Franklin to pay off a $25,000 personal loan.
The stocks in question included Allstate (nyse: ALL - news - people ), Lexmark (nyse: LXK - news - people ), U.S. Bancorp (nyse: USB - news - people ), Union Pacific (nyse: UNP - news - people ), Ivax, Principal Financial (nyse: PFG - news - people ), Whole Foods (nasdaq: WFMI - news - people ), Marsh & McLennan (nyse: MMC - news - people ), Mercury Interactive, Mellon Financial (nyse: MEL - news - people ), CVS (nyse: CVS - news - people ), Amgen (nasdaq: AMGN - news - people ), Humana (nyse: HUM - news - people ) and UST (nyse: UST - news - people ).
Franklin traded for his own accounts and that of Lyford Cay, a hedge fund he managed at Bear Stearns whose investors were several senior managers of the firm, according to the SEC. While he was trading on the information for himself and Lyford Cay fund, a Bear Stearns colleague, Robert Babcock, 33, figured out the trading patterns and began to mimic Franklin's trading for his own account.
Two others on Babcock's trading desk figured out the patterns and started mimicking the trades as well.
Franklin left Bear Stearns in early 2002 to join Chelsey Capital as an analyst, where he told portfolio manager Mark Lenowitz, 43, about his arrangement with Guttenberg to get the recommendation changes in advance. The SEC said Lenowitz used the information to trade for the firm and his own accounts and continued to trade using the tips from Franklin after he left Chelsey Capital in 2003.
In March 2003, Franklin left Chelsey and started Q Fund, in which Lenowitz was an investor and limited partner. They continued to use the UBS analyst tips to trade, according to the SEC.
Tavdy was a proprietary trader at Andover, a registered broker-dealer that was acquired by Assent in March 2003. David Glass ran a day-trading operation called Jasper Capital out of Assent's New York office and at some point paid an Assent employee to give him access to Tavdy's computer so he could monitor his trading. Glass figured out the patterns and traded what Tavdy traded.
Tavdy was asked to leave Assent in 2005 for reasons the SEC didn't specify, but Glass recruited him to Jasper Capital and let him trade at a remote location using accounts in other names. Eventually, the SEC says, Tavdy told Glass about the arrangement with Guttenberg.
In August 2006, the Assent employee who had given Glass the unauthorized access to Tavdy's computer bribed Glass and Tavdy for $150,000 to keep quiet. The U.S. attorney identified those Assent employees as Laurence McKeever and Samuel Childs.
All of this was going on while a Morgan Stanley compliance lawyer, Randi Collotta, 30, and her husband, Christopher Collotta, 34, another attorney, were tipping a friend who was a broker in Florida about deals being done by Morgan Stanley's investment banking clients, including Penn National (nasdaq: PENN - news - people ), Johnson & Johnson (nyse: JNJ - news - people ), Adobe Systems (nasdaq: ADBE - news - people ) and UnitedHealth Group (nyse: UNH - news - people ).
The Collottas arranged with Marc Jurman, 31, to trade on upcoming deals from 2004 to 2005 and share in the profits. Jurman happened to know Babcock and was tipping him too. Babcock tipped the info to Franklin and Okada.
The Justice Department also named Banc of America Securities, which it says allocated to Q Capital from IPOs and secondary offerings in exchange for kickbacks.
Confused? Well, it's not over yet. The SEC says its investigation is continuing. "We will do everything possible to make sure that, in addition to any other remedies or sanctions imposed, none of these individuals ever works in the securities industry again," said Scott Friestad, the SEC's associate director of enforcement.
Liz Moyer for forbes.com
The Securities and Exchange Commission and the U.S. attorney in Manhattan announced charges against 14 individuals, including current and former employees of UBS (nyse: UBS - news - people ), Morgan Stanley (nyse: MS - news - people ) and Bear Stearns (nyse: BSC - news - people ), and three hedge funds, in an elaborate trading and bribery ring that is being billed as one of the biggest insider trading cases since the Ivan Boesky scandal of the late-1980s.
The SEC has already been probing whether some employees at investment banks are tipping favored hedge fund clients with nonpublic details of upcoming transactions to keep or win more business.
SEC Chairman Christopher Cox said Thursday the agency was being anything but complacent in its oversight of Wall Street. "Our action today is one of several that will make very clear the SEC is targeting hedge fund insider trading as a top priority," Cox said in a statement.
But many say insider trading is hard to detect, and the big cases of the last few years haven't put a stop to the practice.
Case in point, last year's SEC charges against two former employees of Goldman Sachs (nyse: GS - news - people ), Eugene Plotkin and David Pajcin, who were accused of getting an analyst at Merrill Lynch (nyse: MER - news - people ) to give them tips on upcoming mergers in return for a cut of the trading profits. The two also got people to steal advance copies of Businessweek so they could trade on companies mentioned in a regular column.
William Coates, an attorney and past chairman of the Corporate Integrity and White Collar Crime Committee of the DRI (which is the association of defense lawyers), says the latest case might ignite a "hew and cry" about more regulation, but will likely end up with things pretty much as they are.
Detecting insider trading is tricky, he said. "It takes an awful lot of manpower and investment and work," Coates said. "If you don't have someone inside the scheme helping you, you have data and no roadmap."
Four individuals appear to be cooperating with the latest case. They pleaded guilty earlier this week to a variety of charges, including securities fraud and conspiracy. Nine other defendants were to be arraigned in New York and Florida courts late Thursday.
The case unfolds as the SEC faces harsh criticism and Congressional investigations into its handling of allegations by a former SEC staffer, Gary Aguirre, that his probe two years ago into possible insider trading by a prominent hedge fund and a leading investment banker were squelched by the agency because of political favoritism.
It also comes one week after a group led by U.S. Treasury Secretary Henry Paulson published a report recommending there was no need for greater regulation of hedge funds and other private investment pools. The report was roundly criticized by those who believe the investing public needs better safeguards from the trading activities of hedge funds, including big leveraged bets that could roil markets if they unraveled.
The SEC, which filed civil charges, described two related schemes that featured kickbacks and extortion and methods used to disguise detection, including meetings at a storied New York City restaurant, disposable cellphones, secret codes and clandestine computer monitoring.
"No matter how clever you are, no matter how hard you try to avoid detection, you underestimate us at your peril," said SEC Enforcement Director Linda Chatman Thomsen in a statement Thursday.
In the first scheme, a UBS Securities executive is accused of tipping off two traders to upcoming UBS stock research upgrades and downgrades, sharing the profits of trading on that nonpublic material information.
In the second scheme, a former compliance lawyer for Morgan Stanley and her husband, a private practice lawyer, tipped a trader about upcoming mergers and acquisitions being handled by the bank in exchange for a cut of the profits from trading ahead of the event.
The two cases are intertwined because some of the traders in the second case wind up tipping the traders in the first case.
Mitchel Guttenberg, 41, an institutional client manager at UBS Securities, was charged with passing material--nonpublic information--to traders Erik Franklin, 39, formerly of Bear Stearns, and David Tavdy, 38, formerly of Assent, a New York broker-dealer.
Guttenberg hatched the scheme with Franklin in New York's Oyster Bar restaurant, according to the SEC complaint. He tipped the traders on UBS analyst recommendation upgrades or downgrades, using secret codes sent on disposable cellphones. The tips allowed them to trade ahead of the announcements. He shared profits with each on the trades, using the first profits of the trades by Franklin to pay off a $25,000 personal loan.
The stocks in question included Allstate (nyse: ALL - news - people ), Lexmark (nyse: LXK - news - people ), U.S. Bancorp (nyse: USB - news - people ), Union Pacific (nyse: UNP - news - people ), Ivax, Principal Financial (nyse: PFG - news - people ), Whole Foods (nasdaq: WFMI - news - people ), Marsh & McLennan (nyse: MMC - news - people ), Mercury Interactive, Mellon Financial (nyse: MEL - news - people ), CVS (nyse: CVS - news - people ), Amgen (nasdaq: AMGN - news - people ), Humana (nyse: HUM - news - people ) and UST (nyse: UST - news - people ).
Franklin traded for his own accounts and that of Lyford Cay, a hedge fund he managed at Bear Stearns whose investors were several senior managers of the firm, according to the SEC. While he was trading on the information for himself and Lyford Cay fund, a Bear Stearns colleague, Robert Babcock, 33, figured out the trading patterns and began to mimic Franklin's trading for his own account.
Two others on Babcock's trading desk figured out the patterns and started mimicking the trades as well.
Franklin left Bear Stearns in early 2002 to join Chelsey Capital as an analyst, where he told portfolio manager Mark Lenowitz, 43, about his arrangement with Guttenberg to get the recommendation changes in advance. The SEC said Lenowitz used the information to trade for the firm and his own accounts and continued to trade using the tips from Franklin after he left Chelsey Capital in 2003.
In March 2003, Franklin left Chelsey and started Q Fund, in which Lenowitz was an investor and limited partner. They continued to use the UBS analyst tips to trade, according to the SEC.
Tavdy was a proprietary trader at Andover, a registered broker-dealer that was acquired by Assent in March 2003. David Glass ran a day-trading operation called Jasper Capital out of Assent's New York office and at some point paid an Assent employee to give him access to Tavdy's computer so he could monitor his trading. Glass figured out the patterns and traded what Tavdy traded.
Tavdy was asked to leave Assent in 2005 for reasons the SEC didn't specify, but Glass recruited him to Jasper Capital and let him trade at a remote location using accounts in other names. Eventually, the SEC says, Tavdy told Glass about the arrangement with Guttenberg.
In August 2006, the Assent employee who had given Glass the unauthorized access to Tavdy's computer bribed Glass and Tavdy for $150,000 to keep quiet. The U.S. attorney identified those Assent employees as Laurence McKeever and Samuel Childs.
All of this was going on while a Morgan Stanley compliance lawyer, Randi Collotta, 30, and her husband, Christopher Collotta, 34, another attorney, were tipping a friend who was a broker in Florida about deals being done by Morgan Stanley's investment banking clients, including Penn National (nasdaq: PENN - news - people ), Johnson & Johnson (nyse: JNJ - news - people ), Adobe Systems (nasdaq: ADBE - news - people ) and UnitedHealth Group (nyse: UNH - news - people ).
The Collottas arranged with Marc Jurman, 31, to trade on upcoming deals from 2004 to 2005 and share in the profits. Jurman happened to know Babcock and was tipping him too. Babcock tipped the info to Franklin and Okada.
The Justice Department also named Banc of America Securities, which it says allocated to Q Capital from IPOs and secondary offerings in exchange for kickbacks.
Confused? Well, it's not over yet. The SEC says its investigation is continuing. "We will do everything possible to make sure that, in addition to any other remedies or sanctions imposed, none of these individuals ever works in the securities industry again," said Scott Friestad, the SEC's associate director of enforcement.
Liz Moyer for forbes.com
