Wiretaps Catch 14 More Insider Traders
Preet Bharara, the United States Attorney for the Southern District of New York, has announced charges against 14 additional Wall Street professionals and attorneys arising out of their ongoing investigation of insider trading at hedge funds and stock trading firms. The charged defendants include hedge fund managers and trading firm executives, lawyers, and corporate insiders. Five of the charged defendants previously pleaded guilty to insider trading charges in Manhattan federal court. The defendants collectively are charged with allegedly participating in insider trading schemes that generated more than $20 million in illegal profits.
The alleged ringleader, Zvi Goffer, who formerly worked at New York broker/dealer The Schottenfeld Group and currently operates a trading firm in New York called Incremental Capital, is charged with operating an insider trading network through which he obtained, passed to others, and traded on material, nonpublic information regarding mergers and acquisitions of public companies. Goffer is said to have paid sources for this information. The group is said to have tried to cover up their scheme by using prepaid cell phones (for one of which Goffer is said to have bit the SIM card and broken the phone in half to destroy the evidence). However, as we reported October 27, the FBI's wiretapping program can cover any type of phone, wireless or land line.
The following eight defendants were arrested yesterday: Zvi Goffer; Arthur Cutillo, an attorney at the New York law firm of Ropes & Gray; Jason Goldfarb, a New York attorney; Craig Drimal, who worked in the New York offices of the Galleon Group but is not employed by Galleon; Emanuel Goffer, who formerly worked at Spectrum Trading, a New York trading firm, and currently is associated with Incremental; Michael Kimelman, currently associated with Incremental; David Plate, formerly employed by Schottenfeld, and currently associated with Incremental; and Ali Hariri, a vice president of Atheros Communications in California. A ninth charged defendant, Deep Shah, who was formerly employed by Moody's Investors Service, New York, remains at large.
Zvi Goffer, Jason Goldfarb, Emanuel Goffer, and David Plate were arrested at their homes in New York; Arthur Cutillo at his home in Ridgewood, New Jersey; Craig Drimal at his home in Weston, Connecticut; Michael Kimelman at home in Larchmont, New York; Ali Hariri was arrested in San Francisco, California.
The five defendants who were previously charged and have pleaded guilty in Manhattan federal court to insider trading crimes are: Steven Fortuna, formerly a Managing Director of S2 Capital, a hedge fund based in Boston; Ali Far, founder of Spherix Capital, a hedge fund based in California; Richard Choo-Beng Lee, former President of Spherix; Roomy Khan, a California trader who served at certain times as a paid consultant to a hedge fund based in New York; and Gautham Shankar, a proprietary trader at Schottenfeld.
One of Goffer's sources of inside information is said to have been Ropes & Gray attorney Cutillo, who allegedly stole inside information from clients about acquisitions by Avaya; 3Com and Axcan Pharma and provided it to Jason Goldfarb, another New York attorney, who in turn passed the information to Zvi Goffer and other co-conspirators. Cutillo and Goldfarb are said to have received cash payments. Zvi Goffer and his co-conspirators are alleged to have obtained inside information from another co-conspirator about the acquisition of Kronos and Hilton Hotels prior to the public announcements of those deals.
During the course of the government's investigation, the government used wiretaps to obtain critical evidence against Zvi Goffer and his illegal insider trading network. Some of the intercepted calls show that Goffer and his co-conspirators used prepaid telephones and that they tried to disguise their criminal conduct by collecting research reports and other publicly available data to justify their transactions in the event that they were scrutinized by regulators. For example, during a February 18, 2008, intercepted call, Goffer instructed Michael Kimelman: "PF Changs just had earnings and they all put out research reports the next day. There's like eight of them out there . . . . So you know you print all those out . . . get everything printed out, because if we're going to make a big trade and make a big bet and it works . . . it's always good to have that on file why you did it."
According to the government, wire interceptions also showed that Goffer and his co-conspirators were conscious of the fact that they would go to jail if they were caught. For example, during a February 20, 2008, intercepted call with Goldfarb, Goffer expressed concern over someone's purchase of a large number of options on a particular stock: "[T]hey paid a nickel for them. . . . You know what that means? Someone's going to jail, going directly to jail so don't let it be you, okay?" Later, he reiterated: "That's a ticket right to the [expletive] big house." Goldfarb confirmed to Goffer that he had not purchased the options, and Goffer responded: "Good, better that way. Better that way. Perfect. All right then, you know what? All it does is give me more cover."
The U.S. Attorney for Manhattan says these alleged insider traders earned profits of at least approximately $11 million for themselves and their firms.
Between 2008 and March 2009, Ali Hariri, a vice president at Atheros, is said to have provided Inside Information to a cooperating witness who managed a hedge fund in California in exchange for advice received from that cooperating witness about the purchase and sale of other securities. The cooperating witness caused the hedge fund to execute securities transactions in Atheros stock based on the Inside Information, realizing hundreds of thousands of dollars of profits.
The government claims that between 2006 and July 2007, former Moody's analyst Deep Shah provided inside information concerning Hilton, a client of Moody's, to a cooperating witness in exchange for a cash payment of $10,000, with the understanding that the cooperating witness would use the Inside Information to engage in securities transactions. Specifically, on July 2, 2007, prosecutors say Shah told the cooperating witness that Hilton was going to be taken private the following day. The cooperating witness purchased Hilton securities the day Shah provided that information and the next day, and later sold those securities for a profit of $630,000. The cooperating witness then arranged to pay Shah $10,000 in cash. In 2006 and 2007, Shah allegedly provided Inside Information concerning Adesa and Kronos to the cooperating witness.
The cooperating witness realized profits of approximately $37,000 from the inside information concerning Kronos, according to the government.
Five defendants have pleaded guilty. Steven Fortuna pleaded guilty on October 20 to a three counts of conspiracy to commit securities fraud and one count of securities fraud. Between July 2008 and March 2009, Fortuna, formerly the managing director of hedge fund S2 Capital, in three separate conspiracies, is said to have conspired with the managing director of a hedge fund based in New York; a managing director of S2 Capital; an analyst for a hedge fund based in Chicago; and the manager of a hedge fund based in Boston. Fortuna is said to have obtained Inside Information concerning the quarterly earnings of a technology company and the plans of a semiconductor company to spin off its manufacturing operations into a separate entity.
Based on that Inside Information, Fortuna executed trades that netted profits of approximately $2.4 million for S2 Capital. Fortuna obtained the inside information from a co-conspirator who provided the information, the government says, because s/he was his friend and because Fortuna provided him/her with trading advice about other technology companies.
On October 13 and 19, respectively, Richard Choo-Beng Lee, former president of California-based hedge fund Spherix, and Ali Far, founder of Spherix, pleaded guilty to one count each of conspiracy to commit securities fraud and wire fraud and a substantive count of securities fraud. Far and Lee both admitted to conspiring with each other as well as employees of several publicly traded technology companies and individuals employed by hedge funds in New York and elsewhere. Lee also admitted to conspiring to commit insider trading with an employee of a California investor relations firm and individuals associated with three other hedge funds. Far and Lee compensated certain of their sources of inside information with cash payments each fiscal quarter and with inside information about other companies, the government says.
Prosecutors say Far and Lee used the Inside Information that they received to earn profits and/or avoid losses in excess of approximately $5 million in one or more brokerage accounts affiliated with Spherix.
On October 19, Roomy Khan pleaded guilty to one count each of conspiracy to commit securities fraud, securities fraud, and obstruction of justice. Khan lived in California, where she traded securities on her own behalf, and also served as a paid consultant to a hedge fund located in New York, New York. From 2004 through November 2007, Khan is said to have conspired with, among others: an executive at a technology company headquartered in California; an analyst at a credit ratings agency located in New York, an individual who worked at an investor relations firm located in California; the manager of a hedge fund located in New York, New York; the manager of another hedge fund located in New York, New York; a portfolio manager for a hedge fund; the president and principal portfolio manager of a hedge fund located in California; and the managing director at a hedge fund located in New York. Khan compensated certain of her sources of Inside Information by giving them other Inside Information, cash, and/or by executing trades in their personal brokerage accounts. Khan also admitted to deleting an incriminating e-mail that she had received from a co-conspirator and attempted to deter other co-conspirators from sending incriminating e-mails or instant messages in light of the then-pending SEC investigation. Khan profited approximately $1.6 million as a result of her insider trading.
Gautham Shankar pleaded guilty on October 20 to conspiracy to commit securities fraud and securities fraud. Shankar received Inside Information from a friend in advance of the publicly announced acquisitions of Kronos and Hilton.
Shankar also received Inside Information from a proprietary trader at Schottenfeld in advance of the publicly announced acquisitions of Avaya, 3Com, and Axcan. Shankar shared the inside information, collected cash payments for certain of the inside information, and, along with his co-conspirators, used the information to execute profitable securities transactions.
United States Attorney Preet Bharara said the investigation is continuing. "When we announced our first arrests three weeks ago, I said this case should be a wake-up call for Wall Street. Today the alarm bells have only grown louder. Over the last three weeks, we have charged 20 defendants with more than $40 million worth of alleged insider trading, and our investigation is ongoing. When criminal activity is your business model, business as usual has to stop."
FBI Assistant Director Joseph M. Demarest Jr. stated: "Insider trading is like betting on a game when you already know the outcome. But if you traffic in inside information, there's always a chance the person you conspire with is working for us. If you talk on the phone, we may be listening. Insider trading provides an illegal competitive edge over honest players in the hedge fund business. Our job is to ensure a level playing field through enforcement and deterrence."
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