High-Frequency Din Rises as Trading Inquiries Evoke Market’s Past Scandals

From Bloomberg Business

“Scrutiny of high-frequency trading is stirring memories among investment veterans of earlier scandals when the government targeted price-fixing and fraud in U.S. equity markets.

Michael Lewis’s book “Flash Boys” and probes by the New York attorney general and Federal Bureau of Investigation are spurring outcry from Washington to Newport Beach, California, as investors and politicians ask if exchanges are rigged. Shares of Nasdaq OMX Group and Intercontinental Exchange Group have lost at least 8.8 percent in 2014 after each posted their best annual gains since 2007 and 2006, respectively.’

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Lessons from the Galleon Scandal

From American Banker

“The collapse of the Galleon Group hedge fund and criminal conviction of its founder, Raj Rajaratnam, is just the latest example of a cataclysmic about-face in the finance industry. Anita Raghavan, author of "Billionaire's Apprentice," a just-released book on Galleon, discusses why such scandals recur with such frequency and what cautionary lessons bankers and others can draw.”

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Former Banco Santander analyst agrees to settle insider trading charges

The Securities and Exchange Commission (SEC) has announced that former Banco Santander analyst Juan Jose Fernandez Garcia of Madrid, Spain, has agreed to pay more than $625,000 to settle insider trading charges against him. The SEC accused Garcia in August 2010 of illegally trading in advance of a corporate takeover by a company that Santander advised.

The settlement with Garcia requires the approval of US District Judge Marvin J. Aspen in the Northern District of Illinois.

“This concludes our emergency action against Garcia and demonstrates that the Commission will act swiftly to prevent foreign citizens who commit fraud in the US securities markets from reaping the profits of their illegal activity,” said Daniel M. Hawke, Chief of the Enforcement Division’s Market Abuse Unit.

The SEC filed an emergency court action on Aug. 20, 2010, against Garcia and another trader in Spain and obtained an ex parte temporary restraining order and asset freeze over the funds held in Garcia’s brokerage account at Interactive Brokers LLC. The SEC alleged that Garcia just days earlier had traded on the basis of material, nonpublic information about a multi-billion dollar cash tender offer by BHP Billiton Plc to acquire Potash Corp. of Saskatchewan Inc. At the time, Garcia was the head of a research arm at Santander, a Spanish banking group advising BHP on its bid. Garcia purchased 282 call option contracts for Potash stock in the days leading up to the public announcement, and immediately sold all of his options following the announcement for illicit profits of $576,033.

Without admitting or denying the SEC’s allegations, Garcia agreed to the entry of a final judgment permanently enjoining him from future violations of Sections 10(b) and 14(e) of the Exchange Act and Exchange Act Rules 10b-5 and 14e-3, and ordering him to pay disgorgement of $576,033 and a penalty of $50,000.

The SEC’s charges against the other trader, Luis Martin Caro Sanchez, remain pending.

Corporate attorney and Wall Street trader charged in $32 million insider trading ring

The Securities and Exchange Commission (SEC) has charged a corporate attorney and a Wall Street trader with insider trading in advance of at least 11 merger and acquisition announcements involving clients of the law firm where the attorney worked.

The SEC alleges that Matthew H. Kluger, who formerly worked at Wilson Sonsini Goodrich & Rosati, and Garrett D. Bauer did not have a direct relationship with each other, but were linked only through a mutual friend who acted as a middleman to facilitate the illegal scheme. Kluger and Bauer communicated with the middleman using public telephones and prepaid disposable mobile phones in order to avoid detection. According to the SEC’s complaint, Kluger accessed information on 11 mergers and acquisitions involving the law firm’s clients and then tipped the middleman. In at least nine instances, the middleman passed the information on to Bauer, who illegally traded for illicit profits totaling nearly $32 million.

In a parallel criminal action, the U.S. Attorney’s Office for the District of New Jersey announced the arrests of Kluger and Bauer.

“They plotted to fly under law enforcement radar by using disposable phones to hide their communications, cash withdrawals to obscure the flow of tainted money, and a middleman to conceal Kluger as the secret source of inside information,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Now, those same schemes and devices serve only to make it clear beyond any doubt that Kluger and Bauer were involved in an illegal scheme.”

Daniel M. Hawke, Chief of the SEC’s Market Abuse Unit and Director of its Philadelphia Regional Office, added “This was a brazen and deplorable scheme in which Kluger, a lawyer, repeatedly abused his access to confidential client information. As this and recent cases demonstrate, the Division of Enforcement is working aggressively to root out and identify hard-to-detect insider trading by connecting patterns of trading to sources of material non-public information - whether those sources are law firms or others who are under a duty to keep such information confidential.”

According to the SEC’s complaint filed in federal court in Newark, N.J., Kluger, Bauer and the middleman deliberately structured their communications and trading so that Kluger and the middleman could share in the insider trading proceeds while Bauer could illegally trade and profit without being connected to Kluger as a possible source of information. Bauer withdrew cash from his bank accounts and kicked back hundreds of thousands of dollars to the middleman, who in turn delivered at least $500,000 to Kluger for his role in the scheme.

According to the SEC’s complaint, over the past five years Kluger accessed and then tipped confidential information in advance of 11 mergers and acquisitions between April 2006 and March 2011:

The middleman traded in two deals on the basis of information that he received from Kluger and profited at least $690,000.

The SEC’s investigation is continuing.

Former Goldman Sachs board member charged in insider trading scheme

The Securities and Exchange Commission (SEC) has announced insider trading charges against Rajat K. Gupta a Westport-based business consultant who has served on the boards of directors at Goldman Sachs and Procter & Gamble for illegally tipping Galleon Management founder and hedge fund manager Raj Rajaratnam with inside information about the quarterly earnings at both firms as well as an impending $5 billion investment by Berkshire Hathaway in Goldman.

The SEC’s Division of Enforcement alleges that Gupta, a friend and business associate of Rajaratnam, provided him with confidential information learned during board calls and in other aspects of his duties on the Goldman and P&G boards. Rajaratnam used the inside information to trade on behalf of some of Galleon’s hedge funds, or shared the information with others at his firm who then traded on it ahead of public announcements by the firms. The insider trading by Rajaratnam and others generated more than $18 million in illicit profits and loss avoidance. Gupta was at the time a direct or indirect investor in at least some of these Galleon hedge funds, and had other potentially lucrative business interests with Rajaratnam.

Operational Risk - Securities and Exchange Commission charges hedge fund managers and traders in $30 million expert network insider trading scheme

The Securities and Exchange Commission (SEC) has charged a New York-based hedge fund and four hedge fund portfolio managers and analysts who illegally traded on confidential information obtained from technology company employees moonlighting as expert network consultants. The scheme netted more than $30 million from trades based on material, nonpublic information about such companies as AMD, Seagate Technology, Western Digital, Fairchild Semiconductor, and Marvell.

The charges are the first against traders in the SEC’s ongoing investigation of insider trading involving expert networks. The SEC filed its initial charges in the case last week against technology company employees who illegally tipped hedge funds and other investors with material nonpublic information about their companies in return for hundreds of thousands of dollars in sham consulting fees.

In its amended complaint filed last week in federal court in Manhattan, the SEC alleges that four hedge fund portfolio managers and analysts received illegal tips from the expert network consultants and then caused their hedge funds to trade on the inside information.

“It is illegal for company insiders who moonlight as consultants to sell confidential information about their companies to traders, and it is equally illegal to buy that corruptly obtained information and trade on it,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Instead of competing on a level playing field with other investors, these hedge fund managers sought to illegally trade today on what others would not learn until tomorrow.”

The SEC’s ongoing investigation is focusing on the activities of expert networks that purportedly provide professional investment research to their clients. While it is legal to obtain expert advice and analysis through expert networking arrangements, it is illegal to trade on material nonpublic information obtained in violation of a duty to keep that information confidential.

The technology company insiders who tipped the confidential information were expert network consultants to the firm Primary Global Research LLC (PGR).

Financial Services Authority bans and fines corporate finance advisor £150,000 for market abuse

The Upper Tribunal (Tax and Chancery Chamber) has directed the Financial Services Authority (FSA) to fine Mr. David Massey £150,000 and ban him from performing any role in regulated financial services for engaging in market abuse.

On 1 November 2007, Massey short sold 2.5million shares of Eicom, the then AIM-listed digital broadcaster, at 8p per share on the basis of the inside information that Eicom was intending to issue new shares at 3.5p per share. Within a matter of minutes he accepted an offer to subscribe for 2.6 million newly issued Eicom shares at 3.5p and used the shares he obtained to close his short position, making a net profit of over £100,000.

Massey, then a Corporate Finance Executive at Zimmerman Adams International, had also occasionally acted as a financial PR consultant for Eicom for approximately five years, sometimes receiving payment from Eicom for his services. In and after June 2007 Eicom was in discussion with Massey about its need for further funds for a possible acquisition. At the time of his short sale of Eicom shares, Massey knew that Eicom was prepared to issue up to 3million shares to him at a substantial discount.

Following the trading, Massey initially tried to book the transaction to the account of an associate and, when questioned about the deal by Zimmerman Adams International and its compliance advisors, he gave the impression that he hardly knew Eicom.

Margaret Cole, managing director of the enforcement and financial crime at the FSA, said:

“Massey’s actions were unacceptable. He abused his position as an FSA approved person by acting in a personal capacity and failing to inform the buyer that they would be buying new shares issued at a significant discount to the market price, keeping all the profit for himself.

“Massey used the trust invested in him by both parties to create the opportunity to trade on the basis of inside information and he distorted the truth to hide his actions, profiting at the expense of other market users. This type of conduct threatens the integrity of the market and will not be tolerated by the FSA.”

Securities and Exchange Commission to pay $755,000 damages to ex-lawyer

A former lawyer for the Securities and Exchange Commission (SEC) who claimed he was unjustly fired after trying to investigate an insider trading ring is to receive $755,000 in damages.

Gary Aguirre, who was fired by the SEC in September 2005, alleged that he was let go by the organization after attempting to probe trades made by hedge fund Pequot Capital Management.

The ex-lawyer claimed that senior officials at the regulator prevented him from interviewing John Mack, an executive who at the time was a candidate for the role of chief executive officer at Morgan Stanley.

It was alleged by the legal expert that his determination to pursue the investigation led to his eventual dismissal by the SEC. The SEC’s payout will include the cost of his legal fees and salary equivalent to that of four years and ten months.

John Nester, SEC spokesman, said: “The settlement resolves all outstanding litigation between the parties and reflects the agency’s determination to focus on its core mission of protecting investors.”

In May Pequot Capital and Arthur Samberg, the hedge fund’s founder and chairman, agreed to pay $28 million in fines to the SEC to settle charges of insider trading in relation to shares in Microsoft Corp.

Ex-Société Générale banker fined for insider trading

Jean-Pierre Mustier, former head of investment banking at Société Générale, has been fined €100,000 for insider trading by France’s financial regulator.

According to AMF, the trader was found to have used insider data to inform the sale of shares from Société Générale in August 2007. The sale was made before the start of the subprime mortgage crisis, which pre-empted the global financial crash. Mr Mustier, who resigned from his position with the bank in August 2009, is expected to file an appeal against the ruling by the AMF.

The AMF said in a statement that “the level of Mr Jean-Pierre Mustier’s responsibilities imposed on him” a duty to not to sell the shares when he did.

Mr Mustier was in charge of Société Générale’s investment banking unit during the period when Jerome Kerviel worked with the firm.