"I was desperate" - Insider-trading Informant says

Story first appeared on USA Today -

A key informant at the heart of the largest insider-trading case in U.S. history has asked a federal judge for lenient sentencing on her own crimes, explaining that soaring monthly bills and crumbling finances pressured her into a return to law-breaking.

Roomy Khan, a former Intel executive who went from Wall Street success to vilified federal prosecution source, wrote in a newly filed sentencing letter that she engaged in insider trading from 2004-2007 because she faced roughly $72,000 in monthly housing and other expenses.

She also faced a threatened bank lawsuit, a separate legal case filed by her former housekeeper and a decimated investment portfolio, she wrote.

"I was getting desperate to make ends meet," Khan wrote in the letter to Manhattan U.S. District Court Judge Jed Rakoff, who is scheduled to sentence her on Thursday. "Slowly, the immorality and unlawfulness of insider trading was replaced by the desperate need to make money and pay my mounting bills. Also, the pervasiveness of this habit within most of the Wall Street professionals I came across made my decision/choices less dubious in my own mind."

Khan, who has a prior conviction for wire fraud, could face a maximum prison term of 20 years or more plus millions of dollars in fines based on her 2009 guilty plea to charges of insider trading, conspiracy and obstruction. But prosecutors are seeking leniency for the India-born informant, even though they noted in a Jan. 24 sentencing memorandum that she at times lied to investigators, tipped off suspected co-conspirators and destroyed evidence while she aided the government.

The prosecution memo cited Khan's major role in helping the government win the insider-trading conviction of former hedge fund billionaire Raj Rajaratnam by recording conversations in which the Galleon Group founder incriminated himself. He's now serving an 11-year prison term. Khan also testified against Douglas Whitman, a California hedge fund portfolio manager who was sentenced last week to two years in federal prison for his insider trading conviction.

The continuing federal probe has generated more than 70 arrests, convictions or guilty pleas to date.

In a separate defense sentencing memo, Khan attorney Stanislao German echoed prosecutors by citing his client's "extremely valuable" cooperation. Khan was deeply involved in aiding government cases that produced more than $250 million in fines, forfeitures and settlements, along with multiple convictions, German wrote.

He asked that Khan be sentenced to five years' probation, with no prison time. Media accounts have referred to her as a "rat," wrote German. In contrast with the government's victories, the India-born informant "has lost all of her money, her home, her friends and acquaintances, the value of her education, and has become an outcast within her own family," German wrote.

Ironically, Khan cited some of those same consequences as among the fears that led her to insider trading.

She said she was living in a costly Atherton, Calif., home with two mortgages.

"Over time, the shame and ignominy of losing my house and status in this society became more important than the unlawfulness of insider trading and the fear of getting caught," she wrote.

Khan reaped approximately $1,525,000 in profits by trading on illegal insider information in the stocks of Google, Polycom, Hilton Hotels and Kronos, prosecutors wrote in their sentencing memorandum. Rajaratnam and others to whom she passed the illegal information collectively gained more than $25 million.

Confronted by the FBI in 2007, she began cooperating. But she wrote that her financial and personal situation continued a downslide.

She lost a job as a consultant with Trivium Capital Management, a hedge fund investment adviser. She was sued for alleged back wages by a former housekeeper, a case which she fabricated a document to help her defense. Federal investigators discovered that she lied to them about suspected co-conspirators and destroyed evidence — actions Khan said she took to protect associates and a relative.

Finally, she suffered a serious leg injury when she was struck by a taxi that jumped a curb in 2011. The leg still hasn't healed properly, German wrote.

"Nothing can defend my decisions through that time," wrote Khan. "All I can say is that I was in the middle of this massive storm that completely destroyed my life."

Today, she and her family have started over in a town where "no one really knew us," she wrote, describing her new life in a rental home as days of cooking, cleaning and other household chores.

"I treat my life now as part of my dues," Khan concluded, adding she hopes to "gain my self-respect and dignity back."

How Wall Street Lawyer Turned Insider Trader Eluded FBI

Original article by Bloomberg News

Every dawn in the early spring of 2011, Matthew Kluger peered out his window, wondering when federal agents would knock at his door. Kluger, a mergers-and- acquisitions lawyer, says he worried that authorities were closing in on him as the source of illegal tips in a three-man insider-trading ring that had eluded detection for 17 years.

The knock came on April 6. U.S. agents handcuffed Kluger, hustled him into a Dodge Intrepid, drove to the Federal Bureau of Investigation office in Manassas, Virginia, and laid out the case against him. The evidence included tape recordings of Kluger telling the man he tipped to get rid of a cellular phone that could lead back to him -- and to do it carefully because the authorities had dogs that can sniff out mobiles.

“I really would like to see this phone go bye-bye ASAP,” Kluger said, adding: “Do you want this to be our undoing?”

Kluger’s account offers a unique view of insider trading by a mid-level lawyer who moved from one powerful firm to another, exploiting his access to partners and confidential documents. It shows how difficult it is to police such activity when conspirators take care to conceal their crimes and trade with discipline. The trio’s downfall came only when one of them changed the routine after almost two decades.

Their stealth masked Kluger’s ability to steal secrets from some of the most prominent U.S. law firms, including Wilson Sonsini Goodrich & Rosati PC and Skadden, Arps, Slate, Meagher & Flom LLP. The three men made $37 million in profit on deals involving some of the largest technology companies, including Oracle Corp. (ORCL), Adobe Systems Inc. (ADBE), Hewlett-Packard Co. (HPQ) and Intel Corp.

The Confession

Kluger began confessing his crimes to federal authorities the day of his arrest. He first detailed them to Bloomberg News nine days later, after posting bail in Newark, New Jersey, when he needed a ride back to a jail to pick up his heart medicine. He offered additional details in interviews over the next year.

His biggest surprise, he said, was this: At the FBI, he discovered that one of his partners had kept more than 90 percent of the profit. He said he thought they were splitting the money equally.

“Maybe you want to laugh and say of course there’s no honor among thieves,” Kluger said. “But even when you’re doing something you’re not supposed to do, I trusted that they were honoring the commitments that they had made.”

Simple Plan

The plan was simple. Kluger, 51, gleaned details of mergers at four of the six law firms where he worked. He discussed the most promising deals with Kenneth Robinson, a mortgage broker and old friend. Robinson then alerted his friend Garrett Bauer, a day trader who bought shares of companies in play. After the deals went public, Bauer sold the stock at a profit. Then Bauer withdrew $50 bills at automated teller machines and paid Robinson, who split it with Kluger. The arrangement worked 30 times between 1994 and 2011.

In the most lucrative one, Bauer bought 4.5 million shares of Sun Microsystems Inc. based on Kluger’s tip that the company would be bought by Oracle. Bauer sold shares for an $11.4 million profit after the deal’s announcement in April 2009.

All three men pleaded guilty last year in federal court in Newark, where prosecutors built the case. The government said it was one of the longest-running insider trading schemes ever, with Bauer making $32 million in illicit profit. Kluger, who made less than $1 million, was sentenced last month to 12 years in prison, the longest insider-trading term in U.S. history. By contrast, Raj Rajaratnam, the Galleon Group LLC co-founder convicted of masterminding a much bigger, more profitable insider-trading ring last year, received an 11-year sentence.

Nine Years

Bauer got nine years. He began serving his term this month at the Federal Prison Camp in Montgomery, Alabama. Robinson will serve 27 months, a reward for cooperating with authorities. Both Kluger and Bauer are appealing their sentences.

In the interviews, Kluger recounted why he broke the law and what steps the trio took to conceal the scheme. He discussed two earlier investigations by the U.S. Securities and Exchange Commission, and how he was prepared to give up Robinson in 1997. The scheme was addictive, Kluger said.

“There was an excitement on finding a deal that looked promising,” Kluger said. “It was excitement and relief to get in on the stock and know the train wasn’t leaving without you. There was an excitement on reading what the profits were. The final excitement was picking up a bag of cash.”

Kluger stares intently with brown eyes and speaks in torrents of expressive words. He is 5-feet, 7-inches tall and has been bald since he was 20. His rise as a lawyer and downward spiral followed a troubled adolescence, an Ivy League education and nearly a decade in restaurant management and car sales before law school.

Pulitzer-Prize Winner

As an infant he lived for several months in a foster home in the Bronx, New York. He was adopted by Phyllis and Richard Kluger, a Pulitzer Prize-winning social historian. He attended ninth grade at the Kent School in Connecticut until being treated for a year in a psychiatric facility affiliated with Yale University. He said he received therapy for “adolescent adjustment issues” stemming from his adoption and homosexuality.

Kluger finished high school at the Hammonasset School in Connecticut and graduated in 1984 from Cornell University, where he studied hotel administration. After working in restaurants in Texas, he sold Toyotas in California, then moved to New York to work in residential real estate. For a few weeks in 1991, his co-worker was Robinson. The two remained friends.

Car Salesman

While selling cars in Roslyn, New York, Kluger decided to pursue a career as a lawyer. He started at Brooklyn Law School, then transferred to New York University. After his second year, he became a summer associate at Cravath, Swaine & Moore LLP, a prominent New York firm, assigned to mergers and acquisitions.

“It was exciting,” Kluger said. “There was a sense of urgency, of fast work, of making the front page of the newspaper.”

During that summer, he talked on the phone to Robinson, Kluger said. Robinson was intrigued by the material, non-public information on public companies that Kluger saw daily.

“He said, ‘So what you’re telling me is you get to know what’s going to happen before the rest of the world does,’” Kluger said. “I said, ‘Yeah, I guess.’ He said, ‘You could make a lot of money with that information.’ I remember saying, ‘Yeah, but it’s really risky. You could end up going to jail.’”

Robinson, who will report to prison after the Sept. 3 Labor Day holiday, declined to comment last week at his home.

After working with Kluger, Robinson took a job at Weiss, Peck & Greer, a New York venture capital firm where he met Bauer. Robinson and Bauer, a native of Melville, New York, became fast friends. Robinson told Kluger he should meet Bauer, who bought and sold so many shares that any tainted trades would not arouse suspicion by the SEC.

’Stupidest Decision’

“That was the moment when I should have said, ‘Just kidding, let me go on with my life,’” Kluger said. “That was when I made the stupidest decision of my entire life.”

Both Bauer and Kluger lived on East 87th Street in Manhattan. Robinson arranged for them to meet in June 1994 on the street outside of Bauer’s apartment building. Kluger leaned against a pay-phone enclosure, smoking cigarettes and sizing up Bauer.

“He was trying to demonstrate to me that he was a big stock trader,” Kluger said. “His attitude was arrogant and know-it-all. He was trying to make it seem that I needed him more than he needed me.”
Still, the men agreed to try trading on inside information and split the money three ways, Kluger said.

First Tip

Kluger’s first tip involved the proposed merger of QVC Inc. and CBS Corp. (CBS), a Cravath client. The deal never happened. Kluger then passed information about the acquisition of Neutrogena by Johnson & Johnson (JNJ), another Cravath client. Each man made about $8,000, Kluger said.

“I had no idea that we were launching a scheme that was going to go on and on and on,” Kluger said. “All that I was doing at that point was a very small insider-trading deal.”

The men made about $16,000 each from J&J’s acquisition of Mitek Surgical Products Inc., he said. Kluger stayed at Cravath after graduating cum laude from NYU. By 1995, the trio had their first big score when International Business Machines Corp. (IBM) bought Lotus Development Corp. They split profits of about $213,000.

Kluger said that greed motivated his actions. He justified them to himself by saying that corporate executives “feathered their own nests” through insider trading and other methods, he said.

Rampant Insider Trading

“I knew insider trading was rampant,” he said. “None of that makes it OK. You’re asking how an otherwise honest and law- abiding person did something that was really, really bad. I’m greedy. I deluded myself into believing that what I was doing wasn’t all that bad. I wasn’t stealing from anybody, lots of people were doing it, and I was doing it on such a small scale as to not have a material impact on any markets or people.”

Kluger said he met Bauer or spoke on the phone with him several times, even as each man took pains to avoid association with the other.

Bauer’s profits began to grow, while Kluger said he personally never made more than $50,000 or $60,000 on any deal in those years. In court documents, prosecutors said the illicit profits were about $423,000 when J&J bought Cordis Corp. in November 1995. In 1997, the profits were $490,000 when NationsBank bought Barnett Banks Inc. in the largest banking acquisition ever at the time. 

Most of the money went to Bauer, Kluger said he learned later.

Leaked Information

Kluger left Cravath and worked for a few weeks at Milbank, Tweed, Hadley & McCloy LLP, another New York firm. The men later had their first run-in with investigators. An SEC lawyer called Kluger, asking about three transactions on which he had leaked inside information.

Regulators subpoenaed bank and phone records. Kluger hired a lawyer.

“I was ready to sell Robinson up the river, like he ultimately did to me,” Kluger said.

The probe fizzled without the SEC suing anyone or prosecutors filing charges. Kluger and Robinson agreed to be more careful by speaking only on pay phones.

“They had us in the crosshairs and backed off,” Kluger said. “They were incompetent all the way through. We were emboldened, somewhat.”

They were unable to outsmart the SEC a decade later.

Skadden Arps

Kluger began work in 1998 at another prominent firm in New York, Skadden Arps. Based on his tips, the illicit profits were more than $1 million on inside information that Intel would buy DSP Communications Inc., according to prosecutors. Kluger said he made about $50,000 on that deal, and Robinson told him the three made a total of $150,000 after Bauer paid taxes. In any deal, Bauer would take out about 45 percent for taxes and fees, Kluger said.

Kluger left Skadden Arps in 2001, and the scheme continued while he worked at Fried Frank Harris Shriver & Jacobson LLP in New York. After a year, he was fired. In 2002, Kluger filed a sex-discrimination lawsuit against the firm, claiming he was harassed and fired because he was gay. 

The case was settled confidentially in 2004 in state court in New York.

The scheme took a hiatus when Kluger left Fried Frank. From 2002 until early 2004, he worked at Sills Cummis & Gross PC, a firm in Newark. He then joined Asbury Automotive Group as the associate general counsel. After conflict with his boss, he went to Tampa to run a Pontiac-GMC dealership.

Final Shot

Kluger got his final shot at the action of big mergers when Wilson Sonsini hired him at its office in Reston, Virginia, in December 2005. The firm later moved to a Washington office, and his salary eventually rose to $300,000 a year. In April 2006, Bauer bought 477,600 shares of Advanced Digital Information Corp. before its acquisition by Quantum Corp. (QTM) The illicit profit was $1.7 million.
Ten more insider trades followed during Kluger’s time at Wilson Sonsini, including the Sun Microsystems deal that made $11.4 million in illicit profit.

In the scheme’s early years, when Kluger lived in New York, Robinson met him at his office or a street corner to hand him cash. When Kluger was at Wilson Sonsini, he drove from Washington to New York several times to get the cash in small, cheap gym bags.

The men employed several techniques to avoid detection, such as disposable cellular phones. Kluger was adept at searching the titles of documents in Wilson Sonsini’s computer system to determine how far a merger had progressed. He didn’t want to open documents and leave an electronic fingerprint. 

He listened closely to what his colleagues said around the office. Sometimes he overheard conversations about deals and confirmed them in the documents.

‘Big Mouth’

“People at law firms yap about things they’re not supposed to yap about,” he said. “Ninety percent of what I learned about the Sun Microsystems deal came from my hearing about it from an antitrust partner who had a big mouth.”

Alicia Towler White, a spokeswoman for Wilson Sonsini, declined to comment.

After picking up merger intelligence, Kluger would discuss it with Robinson to decide if they should present it to Bauer. While they successfully executed 30 insider trades, they talked about another 120 possible deals over the 17 years, he said.

“It was pretty clear these had to be big-name companies that were trading at 1 million shares a day to even discuss it with Bauer,” he said. “I would call Robinson on every deal I got my hands on, even on deals that didn’t make sense.”

The men tried to time Bauer’s buying to avoid the eve of merger announcements.

Board Meeting

“It was like a board meeting,” he said.

Kluger said the cash payments helped him to build a house in Easthampton, New York, eat at better restaurants and pay for the surrogate mother for his three adopted children.

“I was living a somewhat more lavish lifestyle than my salary alone would have allowed,” he said. “This was not a constant thing, with money flowing in every 10 seconds. This was twice a year where I would take in 50 or 60 grand.”

Bauer was becoming increasingly aggressive in the stock market. He moved $8.4 billion through his account in 2010, prosecutors said. Bauer made $32 million on the nine Wilson Sonsini deals, prosecutors and the SEC said.

Bauer weathered a 2007 SEC investigation into his activities, Kluger said. He said he oversaw an SEC document requesting information from a Wilson Sonsini partner regarding possible insider trading involving Bauer.

Wilson Sonsini told Kluger in the fall of 2010 to get a new job. It was the sixth law firm since 1994 at which he didn’t become a partner. He did no work at the firm for the last few months as he looked for other employment.

’Job Hopper’

“It’s hard enough to be a 49-year-old guy and a bit of a job hopper,” he said. “Obviously, nobody knew that I was a bit of a crook.”

Kluger was relieved to leave the scheme at last, he said.

“I wasn’t going to be subject to Ken saying, ‘Oh please, please, please,’” he said. “I had the sense that we had pushed our luck beyond where we should have pushed it. It was never intended to be this ongoing, forever thing. It needed to have an end.”

Kluger and Robinson had talked about one last score, for $1 million or $2 million, that would have allowed them to walk away, Kluger said.

“I would have happily called it quits,” Kluger said.

In March 2011, Kluger started a new job as president of a transportation company. He lived with his children and a partner in Oakton, Virginia, 24 miles west of Washington. Still, he needed to collect his final cut of $88,000 from Robinson.

SEC Lurking

Kluger had no way of knowing that the SEC never ended its 2007 investigation. The agency was using new technology to confirm its suspicions that Bauer had an inside source on Wilson Sonsini merger deals. The Philadelphia office covertly monitored Bauer’s trades for three years to find the source, according to a person familiar with the matter.

In 2009, an investigator noticed that Robinson and Bauer often traded in the same stocks, although Robinson avoided the Wilson Sonsini deals. Then the SEC got a break. Robinson himself bought shares of 3Com Inc. before its acquisition by Hewlett- Packard, a deal handled by Wilson Sonsini. Investigators concluded that Robinson and Bauer had a common source, the person said, asking not to be identified because the investigation was confidential.

“The SEC’s use of automated trading and relationship analysis in this case was critical to establishing that Robinson and Bauer were part of the same trading scheme and had a common source -- Kluger,” said Daniel M. Hawke, chief of the SEC’s market-abuse unit and director of the Philadelphia Regional Office.

Regulator Moves

In the summer of 2010, the SEC went to the U.S. Attorney’s Office in New Jersey with its evidence. Prosecutors took up the case, working with federal agents who approached Robinson in March 2011. Within days, Robinson agreed to cooperate.

He told prosecutors how the scheme worked, identified Kluger as the source and gave them a gym bag with $175,000 in Bauer’s cash he was supposed to split with Kluger, who never got the money. Most important, Robinson agreed to secretly record his friends making incriminating statements.
When Kluger called Robinson on March 13, Robinson dropped a bomb: The FBI and Internal Revenue Service had searched his house in Long Beach, New York, six days earlier.

Robinson said agents knew he traded on information from Wilson Sonsini and could link him to Bauer. He said his wife wanted him to cooperate with authorities. Robinson didn’t say he had already chosen to betray Kluger and Bauer.

Mr. G

Kluger and Bauer, known to his partners as Mr. G, fell into the trap. In calls over the next three weeks, Kluger said he destroyed a computer and iPhone used in the scheme. Kluger counseled silence.

“As long as Mr. G keeps his mouth shut and I keep mine and you keep yours, I don’t think they’re gonna find enough of anything,” he said.

By April 6, agents found enough evidence. They showed up at Kluger’s Colonial home at 6:50 a.m. to arrest him. At the same time, other agents handcuffed Bauer in his $6.7 million condominium in New York’s Upper East Side.

Prosecutors charged Kluger and Bauer with securities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering and obstruction of justice. Robinson pleaded guilty a few days later.

Both Bauer and Kluger pleaded guilty last December. Kluger has also settled an SEC lawsuit, agreeing to pay $516,510 for his illicit profit while he worked at Wilson Sonsini.

Lecture Circuit

Before his sentencing, Bauer hit the lecture circuit with a talk sometimes titled “Confessions of an Inside Trader.”

He occasionally discussed the recorded conversations with Robinson, including one in which he discussed laundering the $175,000 in cash -- literally. He laundered it in a washing machine, to remove fingerprints.

Bauer gave the talk 147 times at universities all over the U.S., including the NYU law school Kluger had attended.

“I feel remorse,” he told the NYU students. “That’s why I’m here.”

In a bid for leniency, Bauer’s lawyers presented 200 letters on his behalf at his sentencing
.
“No ’Scared Straight’ program could hope to be as effective as the one Garrett provided my two classes,” wrote Mark Brennan, an adjunct professor at NYU’s business school.

Sentenced

Kluger and Bauer were sentenced by U.S. District Judge Katharine Hayden on June 4. Assistant U.S. Attorney Judith Germano, who oversaw the prosecution, argued that Kluger was liable for the $37 million in illicit profit as the “mastermind.” Under federal sentencing guidelines, she said, he deserved 11 to 14 years in prison.

At the hearing, Kluger’s attorney Alan Zegas argued that he shouldn’t be judged on the basis of $37 million in profits because he saw so little of it.

“I was not the mastermind,” Kluger said later in an interview. “I’m not saying I was a good guy. I was definitely a very bad guy. These two guys were definitely manipulating me to keep me alive as a source.”

Judge Hayden was not persuaded. She said Kluger engaged in “thuggish” behavior that helped undermine investor confidence in the market.

Simplicity

The scheme succeeded for so long, she said, because of its simplicity, the discipline of its limited number of people and its “essential amoral nature, where anything and everything involving trust and honor was thrown out of the window because of that blissful access to information that Mr. Kluger enjoyed.”

She also said his actions were particularly egregious because he was a lawyer who had taken oaths of integrity. Kluger fully deserved 12 years in prison, she said.

“People stay out of the market in part because they think it’s skewed toward the insiders,” she said. “These people may be right.”

She recommended that Kluger report to the federal prison in Butner, North Carolina, where Bernard Madoff is serving 150 years. The date hasn’t been set.

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Insider Trading Evidence Not Applicable

Story first appeared in The Wall Street Journal.

Lawyers for the former Goldman Sachs Group Inc. director, who is facing a criminal trial on insider trading charges, urged the court late Friday evening to bar from evidence three wiretapped conversations that federal prosecutors said were crucial to their case.

In the calls, the Galleon Group hedge-fund founder, who was convicted and sentenced in an insider trial last year, talks about getting inside stock tips from someone at Goldman.

Prosecutors say he was referring to the director, and recently filed a motion that referred to those wiretaps as invaluable to their case. The importance of this evidence cannot be overstated.

But in a 34-page memorandum filed close to midnight Friday evening, the defense team said those conversations are nothing but third hand information passed on by a felon.

The government's application is an act of desperation, breathtaking in its procedural audacity, seeking to rescue a weak case by asking the Court to do something that is both unprecedented and unwarranted. In order to make the logical journey the government will suggest, the jury will have to ignore contrary evidence—detailed above—at every step of the way.

The three wiretaps are some of the government's most provocative pieces of evidence, even though the director's name never comes up. The defense attorney says that is exactly why it shouldn't be allowed in—because it would unfairly prejudice the jury.

The other calls occurred on Sept. 24, the day after Goldman announced it would receive a $5 billion investment from Berkshire Hathaway Inc. Galleon earned more than $800,000 trading on the tip.

Government prosecutors have argued the tapes should be allowed in the trial because they meet a very specific legal standard: stating that the director and the convicted hedge-fund founder are co-conspirators in a crime and the phone calls are a furtherance of that conspiracy. Well-established legal precedent allows statements of co-conspirators into evidence in trials, even if those statements might otherwise be considered inadmissible hearsay.

However, the defense lawyers say the government hasn't provided enough evidence to suggest they conspired together to commit a crime. Absent a showing of the director's involvement in those activities—which the government cannot make—whatever the convictd founder may have done with other people and other securities has no probative value in this case.

In addition, the defense lawyer said in the brief that the conversations on the wire taps—which occurred after the trades in question—had nothing to do with furthering the conspiracy.


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INSIDER TRADING CASE COMING TO A CLOSE

Story First Appeared in Bloomberg Law - Legal News

Former Primary Global Research LLC executive James Fleishman, charged with participating in an insider-trading scheme, won’t testify in his own defense at a trial after prosecutors finished their case, said a Winston-Salem Security Lawyer.

Fleishman, of Santa Clara, California, is charged with two counts of conspiracy for his role in what prosecutors said was a scheme in which technology-company employees, working as consultants for the company passed secret tips to hedge fund managers.


Rakoff said Fleishman’s lawyers may submit some written evidence without calling witnesses to testify. After court, Ethan Balogh, Fleishman’s lawyer, said his client wouldn’t testify. If convicted, Fleishman faces as long as 25 years in prison claimed a Frankfurt Securities Lawyer.

The Mountain View, California-based firm, also known as PGR, matches employees of public companies with fund managers for a fee. Of the 15 people charged in the probe, 12 have pleaded guilty. Fleishman and Winifred Jiau, a former PGR consultant convicted in June, were the only ones who have gone to trial.

KARUNATILAKA SENTENCED

Also yesterday, former Taiwan Semiconductor Manufacturing Co. manager Manosha Karunatilaka was sentenced by Rakoff to 18 months in prison for his role in the scheme involving PGR. Some say this situation could have avoided if he taken anti bribery training.

Karunatilaka, 37, of Marlborough, Massachusetts, worked as an account manager for Taiwan Semiconductor. He pleaded guilty in May to accepting about $35,000 to pass material, nonpublic information about the company’s orders while also working as a consultant for PGR.

His lawyer, Brad Bailey, had asked Rakoff for a one-year sentence, with six months to be served in prison and six months of home confinement.

An analyst at an unidentified New York-based hedge fund, which used PGR’s services, spoke to Karunatilaka frequently from 2008 to 2010, prosecutors said in court papers. In May 2009, acting on a recommendation from Karunatilaka to bet that Taiwan Semiconductor shares would fall, the fund made a profit of about $1.7 million, the U.S. said.

EX-SAMSUNG MANAGER

At Fleishman’s trial yesterday, Balogh cross-examined Suk- Joo Hwang, a former Samsung Electronics Co. manager who said he worked as a consultant for PGR for seven years. Hwang said he sometimes passed confidential information to PGR clients. This is not a good procedure according to a Budapest securities lawyer.

Answering prosecutors’ questions on Sept. 14, Hwang said he gave Fleishman and a fund manager confidential information about Samsung’s shipment of liquid crystal display screens that it was supplying to Apple Inc. Hwang said he disclosed the information to Fleishman and the manager, who he identified as “Greg,” during lunch at a Mountain View restaurant in December 2009, four months before Apple released the iPad in the U.S.

Under questioning by Balogh, Hwang said that while he agreed to be truthful in his discussions with investigators, he didn’t initially tell them that he had continued to provide information about Samsung to a fund manager after he had stopped his consulting work with PGR.

CROSSED LINE

Hwang said he initially told Federal Bureau of Investigation agents that he only spoke to analysts during calls for PGR. Later, he told investigators he knew at the time that he was speaking to fund managers on PGR calls. This may have been prevented if he had taken insider trading compliance training.

Hwang testified after Rakoff granted him immunity from prosecution for his testimony. Hwang, who met with prosecutors and FBI agents beginning in October and as recently as August, doesn’t have a cooperation agreement with the U.S. According to the immunity order, Hwang can be prosecuted if the U.S. decides he’s committed perjury while on the witness stand.

Lawmaker Vows to Outlaw Insider Trading on the Hill

The Wall Street Journal

Rep. Brian Baird and Sen. Susan Collins in January 

at the World Economic Forum in Davos, Switzerland.

 

 

A congressman vowed to renew his efforts to outlaw insider trading by Capitol Hill members and their staffs, following a Wall Street Journal investigation showing that congressional aides traded in companies overseen by their bosses.

Rep. Brian Baird (D., Wash.) and a handful of other lawmakers including Rep. Louise Slaughter (D., N.Y.) have for years supported legislation that would explicitly make it illegal for members and their aides to trade stocks and other securities based on non-public information gleaned from the legislative process. Mr. Baird, however, retires at the end of this year.

When the bill—the Stop Trading on Congressional Knowledge Act, or Stock Act—was introduced nearly five years ago, just 14 other lawmakers endorsed it.

A current version of the bill has fared worse, with support from just nine lawmakers. There is no companion legislation in the Senate.

"Members of Congress and their staffs have access to information worth millions of dollars if used for personal gain," Mr. Baird said in an interview on Monday. "The public expects us to adhere to at least as high a standard as we impose on other people, and we don't in this case."

In a page-one story Monday based on an examination of more than 3,000 financial disclosure forms of congressional aides, the Journal reported that hundreds of aides traded stocks during 2008 and 2009. At least 72 of them traded the shares of companies overseen by their bosses' committees.

The aides said they didn't profit by making trades based on any information gathered in the halls of Congress.

Congress is immune from insider-trading laws; federal regulators have never brought an insider-trading case against either congressional members of their staffs. Unlike many executive branch employees, lawmakers and aides don't have restrictions on their stock holdings and ownership interests in companies they oversee.

About 1,700 of the highest-paid congressional aides must disclose information once a year on their finances, such as their assets, debts, spouses' employment and other sources of income, including capital gains from trading securities.

Rather than passing legislation, Mr. Baird said he has come to believe in recent months Congress should simply amend its official ethics guidelines and rules. The next House majority, for example, could easily add the new rules as part of the process of convening the new Congress in 2011, he said.

Mr. Baird also said the new rules should require disclosures of all trades within 48 hours, as the Stock Act states, instead of a year afterward, as current rules require. He said any improper trading would then be more easily detected, because observers would be attuned to congressional activities at the time their trades were made.

Mr. Baird said he trained his staff members to avoid profiting from non-public information, but said the majority of the members of Congress and their aides don't receive similar training from the best lawyers.

Some legislators remain undecided about supporting the legislation. That includes House Speaker Nancy Pelosi of California. The Journal reported Monday that a top aide to Ms. Pelosi profited by the trading of shares of Freddie Mac and Fannie Mae in a brokerage account with her husband two days before the government authorized emergency funding for the companies.

The aide said she had no knowledge of the trades when they were made, and the husband said he bought the stock after reading a news article.

The House Financial Services Committee has "already begun to examine ways of preventing any unfair trading by government officials in both the executive and legislative branches," said Drew Hammill, a spokesman for Ms. Pelosi. "This includes assessing the implications for the constitutional protections of speech or debate."

Mr. Hammill was referring to a July 2009 hearing at a House subcommittee. "Should government officials trade on information that they have access to that the general public does not?," asked Rep. Dennis Moore (D., Kan.), who chaired the hearing of the House Financial Services subcommittee on oversight and investigations. "If not, what additional rules, regulations or laws are required to address this concern?"

Lawmakers said there was no followup hearing on the issue planned for the near future.

Disney Secretary and Boyfriend Charged with Insider Trading

LA Times

 

A secretary — who works for Walt Disney Co.'s head of corporate communications — and her boyfriend are accused of sending anonymous letters to hedge funds offering advance notice of the company's earnings reports.

A secretary to a high-ranking Walt Disney Co. executive thought she and her boyfriend were about to pull off an alleged insider-trading scheme — and she wanted to celebrate with a Stella McCartney handbag from Neiman Marcus.

"Here is the bag that you are going to get for me," Bonnie Jean Hoxie, a secretary for Zenia Mucha, Disney's head of corporate communications, allegedly wrote in an e-mail to her boyfriend this month.

After the boyfriend, Yonni Sebbag, replied that they may reap a windfall from their plot, Hoxie added to her wish list, according to court documents. "In that case, I also love love [sic] these shoes," she wrote.

Their alleged caper never got off the ground as the hedge fund managers to whom the pair thought they were selling inside information on Disney's quarterly earnings were actually undercover FBI agents on a sting operation.Federal authorities arrested the couple early Wednesday morning and charged them with criminal wire fraud in what experts described as one of the more ham-handed attempts at insider trading in memory.

"Disney's top comedians could not have written a better insider-trading script," said Jacob Frenkel, a former prosecutor now at Shulman Rogers Gandal Pordy & Ecker in Rockville, Md.

Hoxie, 33, and Sebbag, 29, both of L.A., were each charged with one count of wire fraud and one count of conspiracy to commit securities fraud and wire fraud. They face up to 20 years in prison on the wire fraud charge and up to five years on the conspiracy charge.

Hoxie, who appeared composed during her arraignment in federal court in Los Angeles on Wednesday afternoon, was released on $50,000 bail and ordered to appear June 3 in federal court in Manhattan, N.Y.

Sebbag, speaking in heavily accented English, was deemed a flight risk and ordered detained by Judge Patrick Walsh.

The hearing was for bail purposes only, and pleas were not entered. Neither the defendants nor their lawyers commented on the charges.

Disney issued a statement saying it is cooperating with the investigation.

Insider-trading networks are typically close-knit groups that go to great lengths to shield their activities. Hoxie and Sebbag, by contrast, allegedly sent anonymous letters offering early peeks at earnings reports to nearly three dozen hedge funds, which promptly tipped off the authorities.

"This is the insider trading equivalent of the bank robber who drops off the demand note and comes back in an hour to pick up the money," said Robert A. Mintz, a former federal prosecutor who is a partner at McCarter & English in Newark, N.J. "It's mind-boggling that somebody would even try to get away with something like this."

The FBI set up a meeting May 14 in which agents posing as hedge fund traders gave Sebbag $15,000 as payment for a 107-page confidential document on Disney's quarterly earnings.

The arrest shocked Hoxie's father, who said her Disney job was the best one she'd had in a decade of living in Los Angeles.

"It can't be for financial reasons that I could understand. It's got to be, for lack of a better word, for love or a relationship with this guy," said Patrick Hoxie, contacted in Jackson, Mich. "She lives in a dinky apartment, drives an old car. She has a real basic lifestyle."

The alleged scheme is spelled out in a series of e-mail messages released by the Justice Department and Securities and Exchange Commission.

Sebbag told undercover agents that he was "looking to build a strong business relationship" and that "I don't think we will get caught if we stay discrete [sic] and careful."

In a meeting arranged by the agents, Sebbag allegedly said he wanted "to make a lot of money" and asked for their guidance in opening an offshore bank account to avoid detection. He told the agents he "didn't want to go to jail," the SEC said.

Other e-mails show the tensions that arose when Hoxie couldn't get Disney's earnings report as quickly as Sebbag wanted.

"What would you suggest I do," she wrote to him. "If I could wave my magic wand and give you what you want — I would. However, since that is not going to happen I suggest you call on you inner Buddhist — and CHILL … out."

To prove his legitimacy, Sebbag proffered the tip that Disney Chief Executive Bob Iger was "in serious and advanced negotiations with two private equity firms to sell the ABC network."

Disney issued a rare statement, saying any reference to conversations about the sale of ABC "were and are false."

The e-mail exchange came four days after Disney's annual shareholders' meeting March 11, where Iger was asked if he would ever contemplate selling ABC or its news division. The executive responded that "there are no guarantees in terms of what will remain part of our company," sparking speculation that the network might be on the block.

At the time, a network spokesman said the comments had been misinterpreted, and that the network was not for sale.

As insider-trading cases go, this was an easy one to crack, experts said.

"Most criminals make stupid mistakes," said Seth Taube, a former SEC enforcement lawyer now at Baker Botts in New York. "But some are stupider than others, and this one ranks pretty high on that scale."