SEC expands hedge fund insider trading case 2009-11-05 21:09 ET - Street Wire Also Street Wire (U-*SEC) U.S. Securities and Exchange Commission
Also Street Wire (C-AXP) Axcan Pharma Inc
by Mike Caswell The U.S. Securities and Exchange Commission and New York prosecutors have charged nine more people in their investigation into insider trading at New York hedge funds. In an indictment released on Thursday, Nov. 5, 2009, prosecutors named nine defendants, who were part of a ring that made $20-million in illicit profits by buying four companies ahead of takeover bids. (All figures are in U.S. dollars.) One of the takeovers was that of Axcan Pharma Inc., a Quebec-based pharmaceutical company. The SEC says the men received tips from New York lawyer Arthur J. Cutillo, 33, who told them about pending takeovers of Axcan and other companies. Police arrested eight of the men on Thursday, including Mr. Cutillo. The case represents the second round of charges against what prosecutors say is the largest hedge fund insider trading ring in history. In the first round, prosecutors charged billionaire hedge fund manager Raj Rajaratnam, the founder of Galleon Management LP, on Oct. 16, 2009. They claimed that he received inside information about earnings from executives at Intel Corp. and other companies. He pled not guilty, and is free on $100-million bail. The same day, Oct. 16, prosecutors separately indicted five hedge fund managers and traders who received the same inside information as Mr. Rajaratnam. The five men, Steven Fortuna, Ali Far, Richard Choo-Beng Lee, Roomy Khan and Gautham Shankar, have since pleaded guilty to insider trading charges. SEC's complaint The SEC filed a complaint in the Southern District of New York against eight of the nine people charged today. In it, the regulator identifies Mr. Cutillo as a lawyer at prominent New York firm Ropes & Gray LLP. The SEC says he misappropriated material, non-public information from the firm, and passed it on to a network of hedge fund managers and traders. In addition to Mr. Cutillo, the complaint identifies the defendants as: Zvi Goffer, 32, a trader at New York brokerage Schottenfeld Group LLC; Craig Drimal, 53, who worked at Galleon Management; Gautham Shankar, 35, a trader at Schottenfeld; David Plate, 34, a trader at Schottenfeld; Emanuel Goffer, 31, a trader at Spectrum Trading (and Zvi Goffer's brother); Michael Kimelman, 38, a trader at Lighthouse Financial Group LLC; and Jason Goldfarb, 31, an assistant to Mr. Cutillo. According to the SEC, Mr. Cutillo relayed information to Zvi Goffer about pending takeovers four times in 2007. Zvi Goffer, in turn, passed the information to others in the group. The takeovers were for Alliance Data Systems Corp., Avaya Inc., 3Com Corp. and Axcan Pharma Inc. The complaint describes each takeover separately. With Axcan, the company had been seeking potential buyers since Aug. 9, 2007. An unspecified number of bidders privately submitted offers for the company, with the successful one being TPG Capital. On Oct. 26, 2007, Mr. Cutillo tipped Zvi Goffer about the upcoming acquisition of Axcan, the SEC says. Zvi Goffer relayed the tip to the other defendants, who began purchasing the stock both personally and for accounts they managed. On Nov. 29, 2007, Axcan announced a takeover bid from TPG Capital for $23.35 per share, a 28-per-cent premium over the prior day's price. By this time, the defendants held 1,743,023 shares of the company. They subsequently sold their stock, and realized more than $7-million in illicit profits, the SEC says. Shortly after the announcement, Mr. Drimal paid kickbacks to Zvi Goffer. He in turn paid kickbacks to Mr. Cutillo's assistant, Jason Goldfarb, the complaint states. Throughout the scheme, the men communicated by disposable cellphones in an attempt to conceal the tipping, the SEC says. For example, before the 3Com acquisition, Zvi Goffer gave one of his tippees a phone that had two numbers programmed into it, labelled "you" and "me." After the announcement, he destroyed the phone by removing the SIM card and biting it. He then broke the phone in half, threw half away and instructed the tippee to dispose of the other half, the complaint states. The SEC is seeking disgorgement of ill-gotten gains and appropriate civil penalties. In the parallel criminal cases, the men each face maximum jail terms of 20 years, on charges of securities fraud and conspiracy to commit securities fraud. Prior charges New York prosecutors and the SEC filed charges in the first round of the scheme on Oct. 16, 2009. In that complaint, the SEC claimed that the men received non-public information about takeovers and earnings announcements from a network of tippers that included senior executives at IBM Corp. and Intel Corp. The men made illicit gains of $33-million based on these tips, the complaint stated. The defendants in that are Mr. Rajaratnam and five others: Danielle Chesi, a portfolio manager at New Castle Funds; Rajiv Goel, a managing director at a subsidiary of Intel; Anil Kumar, a director of McKinsey & Company; Mark Kurland, a general partner at New Castle; and Robert Moffat, a senior vice-president at IBM. The SEC devoted most of the 51-page complaint to providing examples of the insider trading. In one example, the regulator said that Mr. Rajaratnam received information from Mr. Goel about Intel's third quarter 2007 earnings on Oct. 10, 2007. The complaint did not state exactly what Mr. Goel said, but it did say that two days later, Mr. Rajaratnam and Galleon bought 500,000 shares at an average price of $25.82. On Oct. 15, 2007, Mr. Goel again contacted Mr. Rajaratnam, who then purchased another 450,000 shares, the complaint stated. After the markets closed that day, Intel released positive third quarter 2007 earnings, and the stock rose to $26.79. Mr. Rajaratnam and Galleon sold the 950,000 shares, realizing $690,000 in profits, the SEC said. The SEC sought disgorgement of ill-gotten gains, as well as appropriate civil penalties in that case. SEC adds defendants In addition to filing the case against Zvi Goffer and others on Thursday, the SEC amended the complaint against Mr. Rajaratnam to include some of today's defendants in the initial case. The additions were Zvi Goffer, Mr. Plate, Mr. Shankar and Ms. Khan. According to the amended complaint, some of the tips Mr. Rajaratnam received ended up in Zvi Goffer's ring. The SEC claimed that an unidentified tipper relayed information from Mr. Rajaratnam to Mr. Shankar. Mr. Shankar, in turn, shared it with Zvi Goffer. One of the tips informed Mr. Goffer that Hilton Hotels would receive a takeover offer. The SEC said that Zvi Goffer bought 5,000 Hilton shares and 510 call option contracts on July 3, 2007, based on that tip. According to the complaint, he sold those shares and contracts after the takeover announcement, for $329,000 in profits. The SEC said he paid the tipper $10,000. The SEC is also seeking disgorgement of ill-gotten gains, and appropriate civil penalties, against the four added defendants. |
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