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"The authors of the study offer two possible explanations — one benign and one decidedly not. Fund managers may simply know more about their old classmates, including which ones are likely to make good executives. The alternate explanation is that those executives may be passing along inside information to the fund managers. The researchers do not take a position about which explanation is more likely."

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"The investigation began as routine probe of suspicious high-volume trading prior to the acquisition of Catellas Development," said Friestad. The probe led to Eric Franklin, a hedge fund manager for Q Capital Investment Partners, LP, a Delaware limited partnership with offices in Fort Lee, N.J. "We linked those trades to Mr. Franklin and obtained trading records for Q Capital, and Mr. Franklin's own records for his personal account, and noticed that what they had in common was Morgan Stanley as the investment banker. We also noticed that a lot of the trading preceded upgrades and downgrades issued by UBS [Union Bank of Switzerland] and then the whole scheme began to unravel."

Labels: Andover Brokerage, Assent LLC, Banc of America, Bear Stearns, Catellas Development, Chelsea Capital, insider trading, Jasper Capital, Morgan Stanley, Q Capital, SEC, UBS

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Labels: insider trading

Bill Looks To Ban Insider Trading For Lawmakers and Their Aides

Posted by Peter Lattman
March 28, 2006, 8:58 am

Two Democratic lawmakers plan to introduce a bill that would prohibit members of Congress from trading stocks based on nonpublic information gathered on Capitol Hill, reports The Wall Street Journal’s Brody Mullins. Current securities law and ethics rules don’t prohibit congressmen or their staff from buying and selling securities based on information learned in the halls of Congress. The proposal would also require that lawmakers and their top aides publicly disclose stock trades within 30 days. Lastly, the bill also would require that firms that specialize in gathering “political intelligence” about the status of legislation on Capitol Hill to register with both houses of Congress.

If you’re asking yourself, “Wait a minute, members of Congress are allowed to commit insider trading?” you’re not alone. We asked the same question. But according to the WSJ story, here’s the current distinction between insider trading on Wall Street and Capitol Hill...

Labels: insider trading

Trader in insider dealing case not coming back, says GLG

By Gary Parkinson
City Editor
The Independent
February 27, 2006

Philippe Jabre, the GLG Partners star trader under investigation for alleged insider dealing, is unlikely to return to the hedge fund manager whether or not he is cleared of any wrongdoing. The founders of GLG - the Israeli-American Noam Gottesman and the Belgian Pierre Lagrange - are telling investors not to count on Mr Jabre's return no matter what the outcome of the Financial Services Authority inquiry.

The City watchdog is examining whether Mr Jabre traded in the Japanese company Sumitomo on inside information gleaned from the Goldman Sachs banker John Rustum. Separately, French financial regulators are looking into Mr Jabre's trading in the French company Alcatel.

The FSA's decision on Mr Jabre is expected soon, while the French are unlikely to arrive at findings for some time. Theirs is the more complex case. Should the FSA find against him, Mr Jabre faces suspension or even an outright ban from trading....

Labels: Financial Services Authority, insider trading, Philippw Jabre

Hedge fund star faces ban

The Sunday Times
February 05, 2006
By Peter Koening
and Louise Armitstead

One of Europe’s largest hedge funds and its star trader face censure by the City regulator as early as this week over an insider-trading scandal that has rocked the financial capital. Sources close to the Financial Services Authority (FSA) say Philippe Jabre, a fund manager at GLG Partners, may be fined and barred from trading after a two-year investigation. GLG, his employer, could be fined.

But people familiar with the investigation say GLG and Jabre are already considering appeals. So far the probe has taken place behind closed doors. An appeal would be held in public before The Financial Services and Markets Tribunal, a body that has been critical of the FSA in the past. An open hearing may prove embarrassing for the FSA as well as for Goldman Sachs, the US investment firm that managed the 2003 stock sale by Japan’s Sumitomo Mitsui bank, which is at the heart of the FSA’s investigation.

GLG and Jabre are expected to argue Goldman supplied privileged information about the stock sale in a way that left Jabre free to deal without breaking insider trading rules. GLG and Jabre are also expected to claim that Goldman and the FSA sat on evidence that supported this defence...

Labels: Financial Services Authority, insider trading, Philippw Jabre

Scandal at the heart of the City

The Sunday Times
January 22, 2006
By Peter Koenig and
Louise Armitstead

GLG Partners, Europe’s third-biggest hedge fund with $11.5bn under management, and its co-owner Philippe Jabre stand accused of insider dealing. Guilty or not, the case has focused attention on the hedge-fund industry and its relationship with investment banks...

...Nearly two years after the City regulator began investigating allegations of insider trading against him and his firm, GLG Partners, a London-based powerhouse, it was now the job of the FSA’s regulatory decisions committee (RDC) to hear the evidence before making a decision.

The case presented by the FSA’s investigators over the next two days centred on Jabre’s trading in the run-up to a $2.9 billion (£1.6 billion) sale of stock by Japan’s Sumitomo Mitsui bank in March 2003. The FSA’s investigators accused Jabre of receiving details of the stock sale from a banker at Goldman Sachs in London in advance of public disclosure. They alleged that Jabre illegally traded on this information to make about $5m for GLG.

City hedge funds and investment bankers are gripped by the drama. Hanging in the balance is the fate of GLG, Europe’s third-largest hedge fund with $11.5 billion under management. More dramatically, Jabre, co-owner and star trader of the fund with a personal fortune estimated at £180m — his assets include a ski chalet in Courchevel, France — could face a lifetime ban from working in the City if found in breach of FSA regulations.

Hedge-fund managers, bankers and regulators further afield are watching, too. The allegations and evidence produced against Jabre and GLG look like part of a general malaise in the City rather than the transgressions of a single fund. If this is the case, the reputation of Britain’s financial capital would suffer.

The sums involved could be huge. Last year’s insider-trading scandal, which led to the conviction of Daily Mirror City Slicker journalist James Hipwell, involved tens of thousands of pounds. If there is a magic circle of City hedge-fund traders and investment bankers operating within the wider investor and investment-banking community, it could involve millions of pounds.

City hedge funds and the investment-bank units serving them generate about £20 billion annually in profits. If 5% comes from trafficking in information unavailable to other investors, the figure might be as high as £1 billion. “The scandal could be the 21st- century London equivalent to what happened on Wall Street in the 1980s, when men like Ivan Boesky and Michael Milken traded tips on pending company mergers and acquisitions,” said one American banker...

Labels: Financial Services Authority, insider trading, Philippw Jabre

More Heat On Hedge Funds - Regulators are probing trades by managers with inside access

BusinessWeek
February 6, 2006
By Emily Thornton with
Amy Borrus in Washington
and Stanley Reed in London

As if there weren't enough controversy surrounding hedge funds, now the Securities & Exchange Commission is investigating suspicions that fund employees are engaging in insider trading. It's not the typical heard-it-from-a-friend-at-the-company stuff, either. In the last decade hedge funds have ventured into the deepest reaches of finance. They've gone from trading stocks and bonds to making loans, participating in private placements, sitting on bankruptcy committees, and agitating for positions on corporate boards. In the process they've obtained all sorts of nonpublic information -- and regulators are worried that many have been mismanaging it at best and illegally profiting from it at worst.

The SEC, NASD, and Financial Services Authority in London have launched a flurry of probes. So far the inquiries have resulted in only a handful of insider-trading charges against hedge fund managers. But regulators expect the improper handling of insider information to be a big focus of enforcement actions in 2006. "Hedge fund assets have grown significantly, and there is a lot more competition for returns," says Scott W. Friestad, an associate director at the SEC's Enforcement Div. "In this situation people sometimes cut corners. We are devoting substantial resources to these investigations." Steve Luparello, an executive vice-president for market regulation at NASD, agrees. "Hedge funds misusing nonpublic information is a growing issue," he says.

Perhaps the easiest avenue of abuse: private placements, or restricted shares of public companies that are sold directly to investors. Regulators are cracking down on funds that participate in private placements and then take advantage of the information they glean. The biggest case thus far has been that of Hillary L. Shane, the manager of hedge fund FNY Millennium Partners LP. The NASD and SEC charged her in May with fraud and insider trading for allegedly agreeing to buy unregistered shares as part of a private placement in Maryland security systems outfit CompuDyne Corp. (CDCY ) and then short-selling the registered stock, betting that it would fall in value.

Investment bank Friedman, Billings, Ramsey Group Inc. (FBR ) invited Shane to participate in the placement on the condition that she treat the information as confidential. Shane has paid a $1.45 million fine to settle charges brought by the SEC and the NASD. She never admitted or denied wrongdoing. Shane's lawyer declined to comment.

TIP OF THE ICEBERG

There's likely to be much more fallout from the CompuDyne case. NASD says it's still investigating individuals and entities. Regulators haven't accepted FBR's offer to pay $7.5 million to settle charges that it aided the hedge fund manager. FBR declined to comment.

Meanwhile, an investigation into Van D. Greenfield, the 60-year-old principal of New York-based broker-dealer Blue River Capital LLC, has brought the issue of mishandling of nonpublic information obtained from bankrupt companies' creditor committees to the forefront. In November, Greenfield paid the SEC $150,000 to settle charges that he failed to guard sufficiently against the potential for misuse of insider information he obtained while serving on the bankruptcy committees of WorldCom, Adelphia Communications, and Globalstar Telecommunications.

Greenfield had agreed to keep all information confidential and informed his employees that he couldn't trade in the securities of those issuers. But the Chinese wall separating him from his traders was porous. Greenfield frequently walked through his firm's trading room -- which consisted of four desks on the ground floor of his New York City townhouse -- and asked employees for stock quotes for Adelphia and WorldCom securities, according to the SEC complaint. Greenfield did not admit or deny the charges. And "there was no finding of any misuse of material nonpublic information," says Greenfield's attorney, Arthur S. Linker of Katten Muchin Rosenman LLP. "There was no finding of insider trading."

Nevertheless, the settlement has spurred other industry veterans to lodge complaints of possible insider trading by hedge funds and other creditor committee members. "We have heard that there's more insider trading and misrepresentation to get on creditors' committees than had been reported to us," says Alistaire Bambach, chief bankruptcy counsel in the SEC's Enforcement Div. "We are very concerned about these activities."

In London, the Financial Services Authority is investigating abuse of confidential borrower information. The case everyone is talking about: a probe into whether a trader at GLG Partners LP, a London hedge fund, improperly used information provided by Goldman, Sachs & Co. (GS ) in advance of a security offering by Sumitomo Mitsui Financial Group Inc. in 2003. "The FSA is concerned about any instances where parties who are made insiders then use that information to trade in related securities," says spokesman David Cliffe. The crackdown is just beginning.

Labels: Financial Services Authority, insider trading

Labels: insider trading, Joe Nacchio

Ex-Qwest exec pleads guilty to wire fraud

By JON SARCHE
Associated Press Writer
December 28 2005

Former Qwest Communications executive Marc Weisberg pleaded guilty Wednesday to wire fraud and agreed to cooperate with federal prosecutors trying to convict other company officials of wrongdoing, including former Chief Executive Joseph Nacchio.

Weisberg, a former senior vice president who oversaw investments, mergers and acquisitions for Denver-based Qwest Communications International Inc., pleaded guilty to a single count of fraud. He had faced eight counts of wire fraud and three counts of money laundering.

Prosecutors declined comment through U.S. Attorney's spokesman Jeff Dorschner. Weisberg's attorneys did not immediately return calls. He faces a March 3 sentencing hearing.

Labels: insider trading, Joe Nacchio, money laundering, Quest

Former Qwest CEO Joe Nacchio Is Indicted

By Don Mitchell
The Associated Press

DENVER Dec 20, 2005 — Joseph Nacchio, the former chief executive of Qwest Communications during its multibillion-dollar accounting scandal, was indicted Tuesday on 42 counts of insider trading accusing him of illegally selling off more than $100 million in stock.

The indictment includes the first criminal charges against Nacchio in the government's nearly four-year-old investigation into accounting practices at Qwest Communications International Inc., the Denver-based primary telephone service provider in 14 mostly Western states.

Nacchio, 56, was in custody and his initial court appearance was expected later Tuesday, said Jeff Dorschner, a prosecution spokesman. Nacchio's attorneys said he would plead not guilty "with perfect confidence in his exoneration"...

Labels: insider trading, Joe Nacchio, Quest

FT briefing: Italian insider trading scandal

by James Fontanella
December 16 2005

Arrest orders issued by investigative magistrates from Milan’s court of justice, obtained by the FT, accuse Gianpiero Fiorani, former president of Banca Popolare Italiana (Bpi), of criminal association related to financial fraud.

Together with Mr Fiorani, four other people have been charged: Gianfranco Boni, Financial director of Bpi; Silvano Spinelli, external consultant and former BPI manager; Paolo Marmont du Haut Champ, advisor to Bipielle Suisse; and Fabio Conti advisor to Bipielle Suisse.

The arrest orders contain revelations made by the suspects during preliminary interrogations as well as information obtained by the magistrates.

The investigation focuses on suspected irregularities concerning BPI’s takeover bid for Banca Antonveneta, and numerous other suspect transactions allegedly overseen by Mr Fiorani, other BPI executives and investors close to Mr Fiorani.

In addition, the magistrates are looking at the role played by Antonio Fazio, governor of the Bank of Italy, in alleged insider trading conducted by the suspects. On Friday, sources at the Milan courthouse said Mr Fazio was under criminal investigation for the alleged insider trading...

Labels: insider trading

More U.S. SEC book-cooking actions hit Fortune 500

By Kevin Drawbaugh
Reuters
Dec 7, 2005 4:33 PM ET

WASHINGTON - The U.S. Securities and Exchange Commission -- once hopelessly outgunned by big business -- each year is bringing more financial reporting actions involving the Fortune 500 corporate elite, officials said on Wednesday.

In fiscal 2005, 24 percent of SEC financial reporting actions hit Fortune 500 companies, their executives or those they do business with, like auditors and vendors, the SEC said. That proportion was up from 20 percent in 2004, 17 percent in 2003 and just 5 percent in 1998, it said.

"This increase is reflective of increased staff resources over the years, as well as our willingness and ability to take on some of the largest and most complex cases," SEC Enforcement Division Chief Accountant Susan Markel told Reuters.

The figures come at a time when corporate scandals are no longer splashed across the nation's front-pages as they were in 2001-2004 after the Enron scandal. Congressional pressure for greater SEC scrutiny of large companies has eased, as well. But the latest figures show a steady increase in SEC actions against the largest companies and related parties.

For instance, healthcare services group HealthSouth Corp. -- a Fortune 500 company until two years ago -- in June agreed to pay $100 million to settle an SEC action alleging a massive 1996-2002 accounting fraud.

Media giant Time Warner Inc. -- No. 32 on the 2005 Fortune list -- agreed in March to pay $300 million to settle SEC charges that, among other things, from 2000 to 2002 it overstated its AOL online advertising revenues.

Telecommunications group Qwest Communications International Inc. -- No. 154 on the 2005 list -- in October 2004 agreed to a $250-million fine to settle SEC allegations of fraudulently recognizing revenues between 1999 and 2002.

Increased frequency of SEC actions against major companies like these has more to do with the companies themselves than with the SEC, however, said Seth Taube, a partner at the law firm of Baker Botts and a former U.S. prosecutor and SEC attorney.

"In the post-Enron world, both the SEC and the Justice Department reward self-investigation and self-reporting," Taube said, referring to recent statements from both agencies on how companies can win the government's favor by voluntarily coming forward with problems and cooperating with investigators.

"That makes the job of the SEC easier because industry itself untangles the web and presents it neatly to the commission. This is a sign that corporate America has responded" to post-Enron legal reforms, Taube said.

In an example of how the SEC is widening its focus to take in more of what it calls financial reporting "gatekeepers," Big Four accounting firm KPMG in April agreed to pay $22 million to settle SEC charges over its 1997-2000 audits of Xerox Corp. , ranked No. 132 on the Fortune list.

In a similar action, Big Four firm Deloitte & Touche in the same month agreed to pay $50 million to settle with the SEC over past audits of cable company Adelphia Communications , No. 456 on 2002's list.

The SEC brought more than 600 enforcement actions in fiscal 2005. About 29 percent were financial fraud cases, making it the biggest class ahead of others like insider trading. Revenue recognition cases are the most common type of financial fraud.

The original article appears here.

-- MDT

Labels: Department of Justice, Enron, insider trading, KPMG

Hedge Fund Bankruptcy Role Seen Probed

Stephen Taub
November 29, 2005
CFO.com

The Securities and Exchange Commission is investigating the increasing role played by hedge funds in bankruptcy proceedings and whether fund representatives are lying about the size of their stakes to gain critical, sensitive information, according to Bloomberg.

Hedge funds that specialize in investing in the securities of distressed companies often try to buy up a large portion of a senior class of bonds so as to gain a position on the creditors' committee of a company. That committee typically has a huge say in the company's ultimate restructuring and is privy to insider information.

The SEC is looking into whether fund representatives overstated their bond positions to gain membership on creditors' committees, according to Bloomberg. Hedge funds — loosely regulated private partnerships — are among the most aggressive investors in the paper of companies in financial distress.

"We're very actively interested in this area,'' Alistaire Bambach, chief bankruptcy counsel in the SEC's enforcement division, told the news services. "These official committees in bankruptcy cases get tremendous amounts of confidential information, and there's clearly a risk that they're not all trading cleanly and by the book."

The SEC has already brought an enforcement action against one hedge fund. Earlier this month, the commission accused Van Greenfield, who manages Blue River LLC, of fraudulently misrepresenting to the U.S. trustee overseeing the WorldCom bankruptcy case that Blue River owned $400 million in bonds in order to gain a seat on WorldCom's bankruptcy creditors' committee.

The SEC also asserted that Blue River failed to install written procedures to prevent the misuse of material, nonpublic information obtained by Greenfield, general securities principal of Blue River Capital, while he served as Blue River's representative on the bankruptcy committees of WorldCom, Adelphia Communications Corp., and Globalstar LP...

Labels: insider trading

Labels: insider trading

Investment firm reaches settlement with SEC, avoids lengthy investigation

November 11, 2005
By Kairi Kurm
Baltic Times

TALLINN - Lohmus, Haavel & Viisemann, the Estonian investment firm whose employees were accused by the U.S. Securities and Exchange Commission of using insider information on stock trades, reached an out-of-court agreement with the market watchdog and thereby avoided a possible embarrassing hearing that had been scheduled for Nov. 8.

“Last night an agreement was made to cancel the court session and ease the arrest of assets,” Rain Tamm, LHV Group board chairman, said on Nov. 8, adding that a U.S. judge would have to approve the settlement. Tamm stressed that the agreement did not automatically imply LHV’s guilt.

Piret Loone, an Estonian representing LHV through Shearman & Sterling in the U.S. court, released a statement saying that the agreement was an important step forward but didn’t guarantee that the company’s accounts, arrested last week by a U.S. court, would be freed up. LHV officials said they wanted to cooperate with both the Estonian Financial Supervisory Authority and the U.S. SEC in order to clarify all accusations related to the firm.

The SEC has claimed that the firm’s employees profited from trade on U.S. public companies by using more than 360 confidential press releases belonging to Business Wire, a real-time business news agency used by brokers and traders around the world. The watchdog believes that the traders may have racked up some $7.8 million in profits on the illegal trades.

The employment contracts of Kristjan Lepik, Oliver Peek and three other employees suspected in the illegal trades, have been suspended. Peek was a member of LHV’s investments services team, and Lepik an LHV partner and head of the bank’s trading department. Rain Lohmus, one of the firm’s founders, and whose account was reportedly involved in illegal trading, stepped down from his position as chairman of the firm’s council.

Many were surprised to learn that Lohmus had also been a client of Oliver Peek. “Usually we do not comment on our customers’ data, but we found that it was important to say [Lohmus was involved],” said Tonis Haavel, one of the firm’s founders. Lohmus left for Moscow on Nov. 2, the morning news of the scandal broke, and didn’t return before Nov. 4. Haavel couldn’t say if Lohmus had been aware of possible illegal trading.

According to one report, Lohmus opened a $2-million account with LHV Trader in April this year, with the money eventually being deposited with U.S.-based Interactive Brokers. As a result of subsequent transactions, the size of his account swelled to $8.3 million by November.

According to the SEC, the illegal trading activity involved five different accounts, including those of Peek and Lepik. Peek reportedly received $2 million and Lepik $200,000 in nine months this year. “The in-house investigation is ongoing, and we are giving [the SEC] the information they request. It is very voluminous,” Haavel told The Baltic Times.

The firm LHV claims that young the men were trading as private individuals. In every statement, it emphasizes that the investment bank had nothing to do with any possible illegal trading of its former employees, and that the company has in no way profited from any such trading.

Still, the accusations have damaged the company’s reputation. Several customers have pulled their funds from LHV’s accounts, and Vilniaus Akropolis, Lithuania’s largest mall operator, cancelled its contract with LHV. Vilniaus Akropolis had been planning an IPO with the firm.

The SEC has frozen the accounts of about 180 LHV customers. Currently only those who used the LHV Trader investment services on the U.S. market through certain brokers cannot receive their money.

“Our lawyers have spoken to [the SEC]. The commission is in principle ready to unfreeze the accounts of our other clients. When it will happen, we don’t know,” Haavel said, adding that LHV has a total of 4,500 customers. “According to the securities’ act, companies like us keep clients’ assets totally separate.”

The firm’s partners have pledged to increase owners’ equity to $1 million if necessary to cover the claims. The SEC investigation was launched after a drug company, InKine, noticed a spike in trading on its shares on June 23, just before news was released about a planned merger. About 46 percent of the volume came from Estonian traders, who earned some $300,000 by selling the shares immediately after the merger was announced.

The same scheme was used in July when various earning announcements were released by eBay and Yahoo. In those cases, even larger sums were used. Business Wire made a statement defending the integrity of its data system, stating that traders could not have acquired secret access. Still, Tamm told the press that Peek and Lepik may have come across a security gap in Business Wire’s system.

Estonia’s Financial Supervision Authority has started a separate supervisory procedure into the matter. Meanwhile, a U.S.-based hedge fund manager, speaking on the condition of anonymity, told The Baltic Times that she had assumed on June 23 that whoever placed the order was related to InKine, Salix, one of the investment banks advising on the deal, or perhaps lawyers who had worked on the transaction.

“I just knew someone got very lucky that day, and I assumed it wasn’t luck that prompted them to take that big of a piece of some biotech firm in Philly no one had ever heard of before,” she said. “I had no idea who placed them. Just that someone sure was very timely and bold.” In the fund manager’s opinion, had the traders been “less greedy” on InKine, they never would have been caught, since the total share volume that day would have been within “normal” ranges.

She said that their other deals would have never aroused suspicion anywhere except among the inside compliance people of LHV and U.S. brokers Cyber Trader and InterActives. The latter are supposed to alert regulators if a client is making too many so-called “in-the-money-trades” ahead of major news stories, she said.

Jakob Frenkel, a former SEC enforcement lawyer and former U.S. federal criminal prosecutor, told The Baltic Times, “In cases like this, the SEC probably will demand penalties of $15 – 20 million, plus recovery of the profits from trading. But the SEC will first need to build its case and bring into the grasp of the U.S. courts the individuals charged.”

Frenkel, who is now with Shulman, Rogers, Gandal, Pordy & Ecker, added, “Of greater concern should be whether the SEC is working with U.S. federal or Estonian criminal prosecutors with the objective of criminal prosecutions and jail as the consequence. The allegations are of the type that would suggest the SEC will try to get criminal prosecutions too.”

The fund manager said that, if those traders cooperate, they might only pay a civil fine and avoid prosecution. “I think the Estonian securities regulators will deal with them, unless the Department of Justice wishes to make ‘examples’ of them.”

Other local investment bankers panicked about what the scandal could do to the industry’s reputation. Allan Martinson, managing partner of Martinson Trigon Venture Partners, said, “I can’t see a single person who won from this case. LHV lost, and the work of many years disappeared. Investors lost, Estonia lost, even the U.S.A. lost. This loss is a fact. What caused the loss, a crime or a work accident, is not that important. The effect of the LHV story is bigger than the conviction or justification of two boys,” he said.

As the U.S. fund manager said, “In a way, I respect how bright those boys were. I hope they cooperate - much more leniency is given to those who admit they made a mistake and clean up their act –at least over here [in the U.S.A.]. The regulators are overworked, and they hate it when people lie or refuse to cooperate. It makes them have to work much harder which means other matters get overlooked.”

Labels: database, Department of Justice, insider trading

SEC Looking at Hedge Funds in Stock Placements

By Matthew Goldstein
Senior Writer
October 6, 2005

A long-running investigation into allegations of manipulative trading in the market for private stock placements by small companies is about to heat up. The Securities and Exchange Commission is close to bringing enforcement actions against at least two hedge funds that have been active players in the $14 billion-a-year market for PIPEs, or private investments in public equity, people familiar with the inquiry say.

Within the past few months, the SEC formally notified one of the hedge funds that it is facing potential regulatory action by sending it a so-called Wells Notice. The other hedge fund has yet to receive a Wells Notice, but regulators are close to taking that next step, sources say. The identities of the hedge funds could not be confirmed. But the looming regulatory actions would be the first taken by the SEC against any hedge fund in the nearly 2-year-old inquiry into PIPEs, financing transactions that are often used by cash-strapped companies.

The probe is focusing on allegations of stock manipulation by hedge funds, which tend to be the biggest investors in these shadowy stock sales, and allegations of wrongdoing by the Wall Street firms that round up buyers. PIPEs are popular with hedge funds because the buyers usually get to buy shares at a steep discount to the current market price. Critics contend the ability of a hedge fund to purchase discounted stock makes the PIPEs market ripe for abuse by disreputable short-sellers, traders who place market bets that a stock will decline in price.

Some 18 months ago, the SEC, in conjunction with the NASD, began a broad inquiry into the PIPEs market. Regulators issued subpoenas and requests for documents to 20 brokerages that have arranged the majority of PIPE deals. The SEC issued subpoenas to about 10 hedge funds, several of which are big PIPE investors.

An attorney who represents several hedge funds contacted by regulators says the SEC is "looking at bringing a series of enforcement actions involving big PIPEs players." The attorney, who didn't want to be identified, says none of his hedge fund clients has received a Wells Notice from the SEC. A regulatory source who also did not want to be identified says the "SEC is very interested in this area." The source said he "expects some more cases" in the near future.

One notable hedge fund that has drawn scrutiny from regulators over the past several months is HBK Investments, a big $7 billion Dallas-based hedge fund, sources say. The multistrategy fund is perennially one of the biggest investors in PIPEs. During the first six months of this year, HBK sank $53 million into six different transactions. One particular PIPE deal involving HBK that regulators have looked into is a $3.4 million financing transaction for Plano, Texas outsourcing firm PFSweb (PFSW:Nasdaq) , say people familiar with the deal. HBK was the largest investor in the 2003 financing.

Jon Mosle, HBK's general counsel, declined to comment, noting the hedge fund has a policy of not talking to the press. PFSweb CFO Thomas Madden also declined to comment. To date, most of what is publicly known about the investigation has revolved around a 4-year-old PIPE deal for Compudyne (CDCY:Nasdaq) , a small security services firm. In May, the SEC and the NASD reached a $1.45 million settlement with former hedge fund manager Hilary Shane, charging her with fraud and insider trading. They charged Shane with illegally profiting from a series of short trades she made in Compudyne's stock.

As an investor in the PIPE, regulators say, Shane had advance knowledge that the private placement would price Compudyne's shares at a significant discount to the going market price. And relying on that inside information, the regulators say, she made improper short bets against the company's stock. They also allege Shane used some of the discounted shares she obtained in the PIPE to close out her short positions.

The investigation into the Compudyne transaction also led regulators to pursue a potential enforcement action against Friedman Billings Ramsey (FBR:NYSE) , the investment bank that lined up hedge funds to invest in the PIPE deal. For the past six months, regulators have been involved in settlement negotiations with Friedman Billings and three former executives, including Emanuel Friedman, the firm's co-founder and former co-CEO.

Friedman resigned as CEO in April, just one day before the SEC and NASD formally notified him that he could be charged with "aiding and abetting" insider trading in the Compudyne deal. Friedman Billings, however, isn't the only Wall Street firm to get ensnared in the PIPEs investigation.

This summer, Knight Capital (NITE:Nasdaq) disclosed that its Deephaven asset management group could face potential regulatory action over its trading in a series of PIPE deals from June 1999 through March 2004. Refco (RFX:NYSE) , meanwhile, has set aside $5 million to cover the cost of settling allegations that some of its brokers acted improperly in arranging trades for an investor in a PIPE transaction.

Labels: insider trading, PIPES, Refco

Confessions of a corporate crime-fighter

By Stephanie Kirchgaessner
September 5 2005
The Financial Times

David Kelley is, in many respects, the archetypal American crime-fighter. The outgoing US attorney for the southern district of New York, a cop-turned-prosecutor whose deadpan expression, sharp features and steady gaze give little away except the sense that he is not one to be negotiated with, has successfully prosecuted headline-grabbing criminals of every variety.

They include terrorists such as Ramzi Yousef, for his role in the 1993 World Trade Center bombing, and Bernie Ebbers, the former WorldCom boss who is serving 25 years for the multibillion-dollar fraud at the telecommunications company.

He prosecuted Mr Ebbers this year, on little more evidence than the testimony of Scott Sullivan, the former WorldCom chief financial officer who admitted his role in the fraud. There is also his high-profile indictment of Martha Stewart, the home design icon who was found guilty of obstruction of justice and lying during the investigation of a crime – insider trading – that she was never charged with.

The cases make Mr Kelley something of an anomaly within the US justice system, which sets a notoriously difficult standard of evidence for the successful prosecution of white-collar crime...

Labels: insider trading

Bribery probe for DaimlerChrysler

August 5, 2005
BBC News

The US Justice Department has begun an inquiry into allegations of bribery at DamilerChrysler's Mercedes unit, the German-US carmaker has confirmed.
DaimlerChrysler said it was co-operating fully, and has made all its accounts available. The criminal probe escalates a civil one by the US market watchdog, the Wall Street Journal reported on Friday. At issue is whether Mercedes staff paid bribes, and whether senior DaimlerChrysler executives knew.

DaimlerChrysler revealed last year it was being investigated by the US Securities and Exchange Commission. There are now two investigations. "We are working with the SEC and the Justice Department on the investigation. We have made all our accounts available," said a DaimlerChrysler spokesman following the Wall Street Journal on Friday.

In July, DaimlerChrysler said in its interim financial results statement that it had identified "accounts, transactions and related payments that are subject to special scrutiny". It said it was "voluntarily sharing....information from its own investigation" after subpoenas from US federal agencies. DaimlerChrysler said in July that it had not yet reached "any definitive conclusions" about whether the payments it had identified breached the US Foreign Corrupt Practices Act.

The latest embarrassment to hit the carmaker comes one day after the German financial market watchdog launched a probe into possible insider trading in the firm's shares. DaimlerChrysler's share price surged up 10% last week ahead of chief executive Juergen Schrempp's announcement that he was planning to step down two years early. Mr Schrempp will step down at the end of 2005. He had become a target of investor criticism, drawing fire over the firm's global expansion plans and problems at its flagship Mercedes division.

DaimlerChrysler has seen its earnings come under pressure as steel prices have increased and competitors have offered cut-price deals to lure customers.

Labels: bribery, DaimlerChrysler, Department of Justice, insider trading

Ex-HealthSouth COO Has Charges Dropped

Stephen Taub
CFO.com
July 20, 2005

Federal prosecutors moved to dismiss the indictment of former HealthSouth Corp. president and chief operating officer James P. Bennett for his role in the company's $2.7 billion accounting scandal, according to press reports. The one-sentence motion did not provide a reason for the request, according to the Associated Press.

Bennett was indicted in February — shortly after former chief executive officer Richard Scrushy went on trial — on 39 counts of insider trading; conspiracy to commit wire, mail, and securities fraud; making false statements to HealthSouth's auditor, Ernst & Young; money laundering; and lying to the Federal Bureau of Investigation, reported the Birmingham Business Journal.

According to the Journal, Bennett was the only former employee formally charged with insider trading in connection with the HealthSouth scandal. Knowing that fraud was taking place, the government alleged, Bennett sold 960,000 shares of HealthSouth stock, for $17.4 million, the newspaper reported...

The full CFO.com piece appears here.

-- MDT

Labels: 2006, Health South, insider trading, money laundering

Ex-Qwest CFO pleads guilty to insider trading

By SANDY SHORE
AP Business Writer

DENVER (AP) -- A former Qwest Communications finance chief pleaded guilty to a single count of insider trading Thursday, the highest-ranking one-time executive to admit wrongdoing in the telephone company's multibillion-dollar accounting scandal...

...The SEC has said the fraud at Qwest Communications International Inc., the dominant local phone provider for 14 mostly Western states, occurred between April 1999 and March 2002, allowing it to improperly report approximately $3 billion in revenue that helped its 2000 merger with U S West. Qwest later restated earnings from 2000 and 2001 to erase about $2.2 billion in revenue and then agreed last year to pay $250 million to settle SEC fraud charges in a deal that excluded individual officers. The company did not admit wrongdoing...

Flanked by two attorneys, Robin Szeliga spoke in a soft monotone, her voice breaking just once as she answered the judge's questions about netting $125,000 on a stock sale by using financial information intentionally withheld from the public....Szeliga, 44, faces up to 10 years in prison and a $1 million fine, though the plea agreement recommends a term of 15 to 21 months. She agreed to pay $125,000 in restitution and to cooperate with prosecutors, which could prove valuable in their three-year investigation into accounting irregularities that forced Qwest to restate billions in revenue.

Acting U.S. Attorney William Leone said he was pleased with Szeliga's plea but declined to discuss specifics of her case or the ongoing investigation. "I do feel like the charge we brought today or that she pleaded guilty to today, reflects a fair view of the evidence," he said. Securities attorney Andrew Stoltmann of Chicago said Szeliga's agreement was a significant victory for prosecutors. "Once the CFO flips, that is huge in any case that the Department of Justice is going after," Stoltmann said. "From the prosecutor's standpoint, they kind of use that CFO's knowledge to go after the CEO or anyone higher up than the CFO"...

...she and other senior executives knew in late April 2001 that some business units would fail to meet revenue targets for the first six months of that year. She said she and other executives also knew that Qwest improperly booked revenue from one-time sales of equipment and fiber-optic swaps as recurring to meet those targets. Szeliga sold 10,000 shares of stock at $41 per share on April 30, 2001, earning a net profit of $125,000...

Labels: insider trading, Quest, Robin Szeliga

Fears of hedge-fund meltdown prompt FSA to launch probe

By Jason Nissé
May 8, 2005

John Tiner, the chief executive of the Financial Services Authority, has launched a wide-ranging investigation into the workings of hedge funds in London which is expected to lead to a massive shake-up in the way they are regulated.

The probe was prompted by concerns that certain of the "cutting-edge" trading practices in the £500bn industry, much of which is based in London, could lead to market abuse and financial instability. There are also fears that a massive financial scandal could be brewing after what was described by an industry insider as "a few near misses".

Regulators from the FSA have been visiting scores of hedge funds in recent weeks, often sitting in with traders and checking dealing data. They have also been taking written submissions from leading hedge fund managers and talking to traders who deal with them at the large investment banks.

It is hoped that a report on the hedge fund industry, which will recommend new reporting and regulatory procedures, will be on Mr Tiner's desk by the end of next month. He is expected to send it out to the City for consultation before any new systems are put in place.

The FSA is concerned that hedge funds are having a disproportionate influence on the markets, increasing volatility and adding to trading risks. It has also been concerned that it is not up to speed with some of the highly sophisticated trading strategies that have been developed in this fast-moving sector.

Labels: Financial Services Authority, insider trading

Bristol-Myers agrees to settle shareholder suits

April 27, 2005

NEW YORK (Reuters)—Bristol-Myers Squibb Co. on Wednesday said it reached an agreement to settle shareholder lawsuits related to an accounting scandal and accusations that the company had misled investors about the safety of an experimental drug.

Bristol-Myers said that under the agreement to settle federal derivative lawsuits, it would adopt "certain governance enhancements," including the election of all directors to one-year terms instead of staggered terms. The settlement covers six lawsuits that had been consolidated into a single suit. Bristol-Myers continues to face a number of other shareholder lawsuits and two government investigations, a spokesman said. A federal court has given preliminary approval to the settlement.

The New York-based drugmaker, which previously admitted it boosted earnings over a three-year period by inflating revenue by $2.5 billion, said a final settlement hearing is scheduled for May 13 before Judge Loretta Preska of the U.S. District Court for the Southern District of New York.

The suits also accused the company of misleading investors about the safety of its experimental blood-pressure drug Vanlev, whose development was stopped after safety problems emerged, and by Bristol's investment in biotechnology company ImClone Systems Inc., whose former chief executive was later jailed in an insider-trading scandal. The suits also accused the company of trying to thwart generic competition for drugs to treat anxiety and cancer.

Labels: insider trading

Labels: insider trading

Railway tycoon Tsutsumi indicted over Seibu stock scandal

Yoshiaki Tsutsumi, the former boss of the Seibu Railway group and at one time the richest man in the world, was indicted Wednesday for false entry into the railway operator's report on stock ownership and insider trading, prosecutors said.

The Tokyo District Public Prosecutors Office also prosecuted Kokudo and Seibu Railway as entities for insider trading and false entry in the stock ownership report, respectively. After being charged, Tsutsumi, 70, asked the Tokyo District Court to release him on bail.

Tsutsumi conspired with then Seibu President Terumasa Koyanagi to falsely describe shares in the railway firm held by Kokudo as those owned by individuals in its stock ownership report, according to the indictment.

Labels: insider trading