Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

Insider Trading Alleged At UBS and Morgan Stanley

On Thursday March 1st 2007, the United States federal regulators filed civil (and unspecified criminal) charges against 11 individuals and three entities in connection with two insider-trading schemes in which insiders (employees) at UBS Securities LLC and Morgan Stanley allegedly provided inside (non-public) information that helped hedge funds, brokers and others make at least $15 million in illicit profits. According to Reuters, "eight Wall Street professionals, two broker dealers, a day-trading firm, and three hedge funds are accused of participating in a scheme that used information stolen from UBS and Morgan Stanley."

[Update: The SEC has now released a press release entitled SEC Charges 14 in Wall Street Insider Trading Ring; Defendants Include Hedge Funds, Lawyers and Professionals at UBS, Bear Stearns, and Morgan Stanley with more information on the participants. Those charged include: Mitchel S. Guttenberg; Erik R. Franklin; David S. Tavdy; Mark E. Lenowitz; Robert D. Babcock; Andrew A. Srebnik; Ken Okada; David A. Glass; Randi E. Collotta; Christopher K. Collotta; Marc R. Jurman; Q Capital Investment Partners, LP; DSJ International Resources Ltd., which does business as Chelsey Capital; and Jasper Capital LLC.]

According to The Wall Street Journal, "The Securities and Exchange Commission said that in one scheme, which was ongoing since 2001, a UBS executive director, Mitchel Guttenberg, illegally tipped off at least two traders to information about upcoming UBS analyst stock upgrades in exchange for sharing in the illicit profits. One of the traders illegally traded on the information for two hedge funds and in his and his father-in-law's personal accounts, the SEC said."

The other scheme was said to involve Randi Collota, an attorney in Morgan Stanley's global compliance department, and her husband. They apparently provided information about upcoming corporate actions to a Florida broker in exchange for sharing in the some portion of the illicit profits that resulted.

The WSJ continues: "Today's action is one of the largest SEC insider trading cases against Wall Street professionals since the days of Ivan Boesky and Dennis Levine," SEC associate enforcement director Scott Friestad said in a statement. "It involves fraud by employees of some of the biggest brokerage and investment banking firms in the country. 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."

Bloomberg News adds more details including that three Bear Stearns Co. employees were part of the fraud conspiracy. "Guttenberg, a member of UBS's investment review committee, sold bank inside information on ratings changes to David Tavdy and Erik Franklin for ``hundreds of thousands of dollars,'' prosecutors claimed. The two men, in turn, used the data to earn more than $4 million by making trades through brokerage accounts they controlled. Franklin traded on behalf of a series of hedge funds, including Lyford Cay Capital, Chelsea Capital and Q Capital Investment Partners LP with which he was associated, prosecutors said."

Bloomberg News also reveals that "[Randi] Collotta leaked inside information on pending acquisitions to her husband Christopher [Collotta] and a colleague, Marc Jurman, prosecutors said. The deals included Penn National Gaming Inc.'s acquisition of Argosy Gaming Co., which was announced in 2004, and Adobe Systems Inc.'s purchase of Macromedia Inc., announced in 2005. Jurman traded on the data and passed it on to others, generating profits of ``hundreds of thousands of dollars'' that were passed back to the Collottas and others."

"Also charged in a related case are a broker at Assent LLC, who's accused of collecting tens of thousands of dollars to hide the UBS insider scheme, and a Banc of America Securities broker who's accused of pocketing kickbacks in exchange for shares in stock offerings. Four of the 13 defendants have already pleaded guilty to securities fraud and related charges, Garcia said in a statement."

Perhaps most ominously, as reported by, is the statement by S.E.C. Chairman Christopher Cox, "Our action today is one of several that will make very clear the SEC is targeting hedge fund insider trading as a top priority."

Toomre Capital Markets LLC ("TCM") strongly suspects that more forthcoming enforcement actions will be filed in connection with the use of credit-default swaps and the use of inside information. The SEC's unprecedented sweep of Wall Street's equity trading records for the last two weeks of third quarter of 2006 coupled with information requests about prime brokerage funding activities during that period strongly suggests that certain leverage players (i.e. hedge funds) are going to have to explain why they were trading in certain securities just ahead of market moving corporate actions. TCM has no idea whom exactly is involved. However, CDS spreads have been moving too much ahead of unusual corporate events. Reader comments and thoughts are welcome.