U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20022 / March 1, 2007
SEC v. Mitchel S. Guttenberg, Erik R. Franklin, David M. Tavdy, Mark E. Lenowitz, Robert D. Babcock, Andrew A. Srebnik, Ken Okada, David A. Glass, Marc R. Jurman, Randi E. Collotta, Christopher K. Collotta, Q Capital Investment Partners, LP, DSJ International Resources Ltd. (d/b/a Chelsey Capital), and Jasper Capital LLC, C.A. No. 07 CV 1774 (S.D.N.Y) (PKC)
SEC Charges 14 Defendants in Wall Street Insider Trading Ring, Including Personnel at UBS Securities LLC, Morgan Stanley & Co., Inc. and Bear, Stearns & Co., Inc.
The Securities and Exchange Commission today announced insider trading charges against fourteen defendants in connection with two related insider trading schemes in which Wall Street professionals serially traded on material, nonpublic information tipped, in exchange for cash kickbacks, by insiders at UBS Securities LLC and Morgan Stanley & Co., Inc. The complaint alleges that in the first scheme, which has been ongoing since 2001, at least eight securities industry professionals, three hedge funds, two broker-dealers and a day-trading firm, made thousands of illegal trades and millions of dollars in illicit profits using inside information misappropriated by a UBS executive to trade ahead of UBS analyst recommendations (the "UBS Scheme"). The complaint alleges that in the second scheme, several securities industry professionals and a hedge fund made dozens of illegal trades and hundreds of thousands of dollars in illicit profits using inside information misappropriated by an attorney at Morgan Stanley to trade ahead of corporate acquisition announcements (the "Morgan Stanley Scheme"). Collectively, the complaint alleges, the defendants made at least $15 million in illicit profits from these two insider trading schemes.
The Commission's complaint alleges that in the UBS Scheme, from at least 2001 through 2006, Mitchel S. Guttenberg, an executive director in the equity research department of UBS, illegally tipped material, nonpublic information concerning upcoming UBS analyst upgrades and downgrades to at least two Wall Street traders, Erik R. Franklin and David M. Tavdy, in exchange for sharing in the illicit profits from their trading on that information.
According to the complaint, Franklin illegally traded on inside information in his personal accounts and for two hedge funds he managed: Lyford Cay Capital, LP, a hedge fund at Bear, Stearns & Co., Inc. and Q Capital Investment Partners, LP. Franklin also traded in his and his father-in-law's personal accounts. The complaint alleges that to avoid detection of this scheme, Guttenberg used coded text messages on disposable cell phones to communicate the tips to Franklin and arrange meeting places where Franklin would pay Guttenberg his share of illegal profits in cash. The complaint further alleges that Tavdy illegally traded on this inside information for Andover Brokerage, LLC and Assent LLC, registered broker-dealers where Tavdy was a proprietary trader. According to the complaint, Tavdy also traded on this inside information stolen from UBS in his personal account, the accounts of a relative and friend, and the accounts of Jasper Capital LLC, a day-trading firm with which Tavdy was associated.
The Commission further alleges that Franklin and Tavdy also had downstream tippees who traded on the UBS tips. Franklin tipped Mark E. Lenowitz, who illegally traded on this inside information for DSJ International Resources Ltd. (doing business as "Chelsey Capital"), a private hedge fund where Lenowitz was a portfolio manager, and in his personal accounts. As alleged in the complaint, three registered representatives at Bear Stearns who knew of Franklin's UBS tips (Robert D. Babcock, Andrew A. Srebnik, and Ken Okada) also illegally traded on this inside information in their personal accounts and, in the case of Babcock, for the Lyford Cay hedge fund. Additionally, the complaint alleges, David A. Glass, the owner of Jasper Capital, a day-trading firm that operated from the New York City offices of Assent, also traded on Tavdy's UBS tips for Jasper Capital. According to the complaint, Glass and Tavdy paid kickbacks to supervisory personnel at Assent to not disclose this trading scheme. Collectively, the complaint alleges, Guttenberg, Franklin, Tavdy, and their tippees made at least $14 million in illegal profits from the UBS Scheme.
The complaint alleges that, in the Morgan Stanley Scheme, several of the participants in the UBS Scheme, and others, traded ahead of corporate acquisition announcements using inside information stolen by an in-house lawyer at Morgan Stanley. In this scheme, according to the complaint, Randi Collotta, an attorney who worked in the global compliance department of Morgan Stanley, together with her husband, Christopher Collotta, an attorney in private practice, tipped material, nonpublic information concerning upcoming corporate acquisitions involving Morgan Stanley's investment banking clients, to Marc Jurman, a registered representative in Florida, in exchange for sharing in Jurman's illicit profits from trading on this information. The complaint alleges that Jurman illegally traded on this inside information, and had several downstream tippees who also traded, including Franklin and the Q Capital hedge fund, and two registered representatives at Bear Stearns, Babcock and Okada, who also were involved in the UBS Scheme. According to the complaint, the Collottas, Jurman and their tippees made over $600,000 in illegal profits from the Morgan Stanley Scheme.
The Commission's complaint names the defendants and includes the allegations set forth below:
- Mitchel S. Guttenberg, age 41, who is a registered representative at UBS, and is an executive director and institutional client manager in the firm's equity research department. Guttenberg illegally tipped material, nonpublic information in connection with the UBS Scheme, in exchange for sharing in the illicit trading profits.
- Erik R. Franklin, age 39, who, at times during the relevant period, was a portfolio manager for the Lyford Cay hedge fund and an employee of Bear Stearns in New York, New York, an analyst for the Chelsey Capital hedge fund in New York, New York, and a portfolio manager for the Q Capital hedge fund. Franklin illegally traded on and tipped material, nonpublic information in connection with the UBS and Morgan Stanley Schemes.
- David S. Tavdy, age 38, who, at times during the relevant period, was a proprietary trader and registered representative at Andover in New York, New York, a proprietary trader and registered representative at Assent in New York, York, and a trader at Jasper Capital. Tavdy illegally traded on and tipped material, nonpublic information in connection with the UBS Scheme.
- Mark E. Lenowitz, age 43, who, at times during the relevant period, was a portfolio manager for the Chelsey Capital hedge fund in New York, New York, and a limited partner in the Q Capital hedge fund. Lenowitz illegally traded on material, nonpublic information in connection with the UBS Scheme.
- Robert D. Babcock, age 33, who is a registered representative at Suntrust Capital Markets, Inc. and, during the relevant time period, was a registered representative at Bear Stearns in New York, New York, and was associated with the Lyford Cay hedge fund. Babcock illegally traded on and/or tipped material, nonpublic information in connection with the UBS and Morgan Stanley Schemes.
- Andrew A. Srebnik, age 35, who is a registered representative at Jefferies & Company, Inc. and, during the relevant time period, was a registered representative at Bear Stearns in New York, New York. Srebnik illegally traded on material, nonpublic information in connection with the UBS Scheme.
- Ken Okada, age 31, who is a registered representative at Cathay Financial, Inc. and, during the relevant time period, was a registered representative with Bear Stearns in New York, New York. Okada illegally traded on and/or tipped material, nonpublic information in connection with the UBS and Morgan Stanley Schemes.
- David A. Glass, age 32, who is the owner and president of Jasper Capital and, at times during the relevant period, also was a registered representative at Assent. Glass traded on material, nonpublic information in connection with the UBS Scheme.
- Randi E. Collotta, age 30, who is an attorney and the Director of Securities Operations at The Garden City Group, Inc. and, during the relevant time period, was an attorney in the global compliance department of Morgan Stanley in New York, New York. Randi Collotta illegally tipped material, nonpublic information in connection with the Morgan Stanley Scheme, in exchange for sharing in the illicit trading profits.
- Christopher K. Collotta, age 34, who is an attorney in private practice. Christopher Collotta illegally tipped material, nonpublic information in connection with the Morgan Stanley Scheme, in exchange for sharing in the illicit trading profits.
- Marc R. Jurman, age 31, who, at times during the relevant period, was a registered representative at the Boca Raton, Florida branch office of Marlins Capital, LLC, and a registered representative at the Boca Raton, Florida branch office of Finance 500, Inc. Jurman traded on and tipped material, nonpublic information in connection with the Morgan Stanley Scheme.
- Q Capital Investment Partners, LP, which is a Delaware limited partnership with offices in Fort Lee, New Jersey. During the relevant time period, Q Capital operated as a hedge fund. Q Capital traded on material, nonpublic information in connection with the UBS and Morgan Stanley Schemes.
- DSJ International Resources Ltd., which does business as Chelsey Capital, and is a New York corporation with offices in New York, New York. During the relevant time period, Chelsey Capital operated as a private hedge fund. Chelsey Capital traded on material, nonpublic information in connection with the UBS Scheme.
- Jasper Capital LLC, which is a New York limited liability company owned by Glass. During the relevant time period, Jasper Capital operated as a day-trading firm from the offices of Assent in New York, New York. Jasper Capital traded on material, nonpublic information in connection with the UBS Scheme.
As a result of the conduct described in the complaint, the Commission alleges that each of the Defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and that Defendants Q Capital, Chelsey Capital, Jasper Capital, Guttenberg, Franklin, Tavdy, Lenowitz, Babcock, Srebnik, and Glass also violated Section 17(a) of the Securities Act of 1933. The Commission's complaint seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and the imposition of civil monetary penalties.
In a related criminal case, the U.S. Attorney's Office for the Southern District of New York announced today criminal charges against Guttenberg, Franklin, Tavdy, Lenowitz, Babcock, Okada, Glass, Randi Collotta, Christopher Collotta, Jurman, and others in connection with these two insider trading schemes. The Commission wishes to thank the U.S. Attorney's Office and the Federal Bureau of Investigation for its assistance in connection with this matter.
The Commission's investigation is continuing.
