Parallel Insider Trading Charges Filed Against 13 Individuals

            Yesterday, the SEC charged 13 individuals with insider trading in stocks that were the subject of research by UBS Financial Services, and takeover deals in the works at Morgan Stanley. [1]  Collectively, the complaint alleges, the defendants made at least $15 million in illicit profits from these two insider trading schemes. The case primarily alleges that UBS executive Mitchel Guttenberg agreed to tip Bear Stearns Cos. hedge fund manager Erik Franklin.  According to the SEC, the fund, “Lyford Cay,” earned substantial profits, including earning $10,000 by selling “short” the shares of Allstate Corp. prior to a UBS downgrade of that insurer.   After leaving Bear Stearns, Franklin allegedly provided UBS tips to the portfolio manager of another hedge fund, Chelsey Capital, which realized $2 million in illicit profits through the scheme.  Further, one of Guttenberg’s friends, David Tavdy, earned $6 million in illicit profits for himself, a friend and a relative. 

            The SEC’s complaint secondarily alleged a scheme under which certain participants in the UBS scheme traded on stock tips provided by Randi Collotta, a former Morgan Stanley lawyer charged with monitoring compliance with securities rules.  Among others, Collata allegedly tipped a Florida broker who was a friend of Ms. Collotta’s husband. In turn, the broker also tipped Bear Stearns broker Robert Babcock regarding Adobe Systems’ proposed acquisition of Macromedia and other transactions.   

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[1] See litigation release available at http://www.sec.gov/litigation/litreleases/2007/lr20022.htm

            On the same date, the U.S. Attorney’s Office filed criminal charges against the individuals who were named in the SEC’s complaint.

            The SEC’s case illustrates several current enforcement themes.  First, the SEC is actively pursuing insider trading violations (as illustrated by today’s case filed against anonymous purchasers of TXU Corp. call options).  Second, the SEC is continuing to conduct parallel investigations with the criminal authorities.  Third, and perhaps most importantly, the fact that Ms. Collata was an attorney did not shield her from liability.  To the contrary, her law license will likely prove to be an aggravating factor in future litigation.  Her prosecution tends to support the perhaps obvious point that, as previously noted by the SEC’s then General Counsel, the agency “ should not have any reservations about instituting an enforcement action against that lawyer, simply because of his or her status as a member of the bar. A similar outcome can be expected for other securities law violations as well.”  See http://www.sec.gov/news/speech/spch042805gpp.htm