SEC and Other Investigations of Illegal Trading

Top 131. Nov 8, 2004 2:39 PM

» Normxxx - Massive pre-9/11 'insider trading'

Massive pre-attack 'insider trading' offer authorities hottest trail to accomplices

by Kyle F. Hence | 6 November 2004

CRG's Global Outlook, premiere issue on "Stop the War" provides detailed documentation on the war and September 11 Order/subscribe. Consult Table of Contents
Part II -- Billions in Pre-911 Insider Trading Profits Leaves a Hot Trail: How Bush Administration Naysayers May Have Let it go Cold

Part I of Making a Killing provided a glimpse of a shadowy, legitimized global financial network that is employed by criminals of all kinds to carry out or manage the profits from all manner of nefarious activity. It documented how the Bush Administration in 2001 undermined, stalled and withdrew from a global effort to clamp down on money laundering. We learned that Enron had made intense lobbying efforts to defeat cooperation, which ultimately swayed the Administration. And how following the attacks of 9-11, Bush changed his tune and working with allies in the war on terrorism, and seized over $100 million linked to Al Qeada and other terrorist groups. Unfortunately, this is likely the tip of the iceberg of drug and terror money that is managed by the highest echelons of double-breasted gucci suited criminals.

In Part II, we examine what is likely the largest, most globalized and heinous case of insider trading in economic history and how it offered authorities a hot money trail to follow. If successful in tracking the perpetrators, authorities would not only be successful in implicating obvious accomplices in the 9-11 attacks, but also would be able to strike deeply into the infrastructure of a shadow financial network and hundreds of billions of dollars that flow through it.

As of mid-March, authorities said they have frozen over $100 million in terrorist assets. But how to strike deeper to prevent future attacks? Some believe the answer lies at the end of the paper trail that investigators are following from huge insider trading placed on carefully selected stocks in the days leading up to 9-11.

According to Phil Erlanger, a former Senior Technical Analyst with Fidelity , and founder of a Florida firm that tracks short selling and options trading, insiders made off with billions (not mere millions) in profits by betting on the fall of stocks they knew would tumble in the aftermath of the WTC and Pentagon attacks. [ http://www.erlangersqueezeplay.com ]

Andreas von Bulow, a former member of the German Parliament, once responsible for the oversight of the German secret services, estimated that profits by insider traders were $15 billion. CBS offered a far more conservative figure when it reported (Sept 26) that "at least seven countries are dissecting suspicious trades that may have netted more than $100 million in profits."

Regardless of estimates, to Dylan Ratigan of Bloomberg Business News, the evidence was compelling; "This is the worst case of insider trading ever." [Good Morning Texas, Sept. 20, 2001] The sheer scope, size and the uncanny timing of 9-11 insider trading demanded an aggressive investigation. But the stakes involved, with nearly 3000 dead, have never been higher for financial crimes investigators.

Suspicious trading was first identified by Japanese authorities. But soon concerns were raised and a pattern could be discerned in countries around the world including Singapore, Hong Kong, Italy, France, Switzerland, the Netherlands, Great Britain, Germany and Canada. Jonathan Winer, an ABC News Consultant said "it's absolutely unprecedented to see cases of insider trading covering the entire world from Japan to the US to North America to Europe." [World News Tonight, Sept. 20, 2001] Investigators were soon hot on the trail on a matter of obvious national security to many nations.

Bloomberg News reported that Former chief of Enforcement at the SEC; William McLucas said regulators will "certainly be able to track down every trade, where the trade cleared, where the trade was directed from." However, Treasury Secretary O'Neill downplayed hopes for a successful investigation by pointing out the challenge of penetrating veils of secrecy before a name can be attached to a suspicious trade; "You've got to go through ten veils before you get to the real source." [AP; September 20, testimony before Senate Banking Committee] . Talk about lowering the bar of expectations; very unsettling coming from someone who could help bring to justice those guilty of the worst terrorist attack history--the massacre of thousands.

In the months since these comments, tightlipped authorities have revealed few details. Any questions put to those prosecuting the war on terrorist funding cannot be answered. The familiar refrain is heard; "our investigation is ongoing." Though widely reported in September and October of last year, months have elapsed since the insider trading received attention. The unresolved crime of 9-11 insider trading is a dark cloud that hangs over this administration and its prosecution of the 'war on terrorism.' What is worse is that those who profited remain free to use those profits of death to finance their next attack.

For those who dismiss the whole phenomena, here's what we do know thus far from reports from major newspapers and television news outlets around the globe. Taken separately any of the following details or comments is notable, but taken together and placed in context, the evidence of unprecedented profiteering by terrorists and/or those with prior knowledge is clearly undeniable.

Massive Put Options spikes and 'Naked' calls

Bloomberg News reported that put options in UAL Corp (parent for United Airlines) surged 285 times the average volume and 75 times the total number of put options traded up until that time. This was the largest reported spike. In another observation of the same phenomena reported in the September 22nd Herald Sun, UAL put options contracts soared 90 times in one day over total from the previous three weeks. That's 90x not 90%. On September 10, put option contracts on AMR (parent for American Airlines) spiked 60 times the daily average and five times the total of all $30 put options traded before September 10. ["Pre-attack trading probed: Regulators in U.S., Europe and Asia check put options"; Judy Mathewson and Michael Nol, September 19]

"I saw put-call numbers higher than I've ever seen in 10 years of following the markets, particularly the options markets," said John Kinnucan, principal of Broadband Research quoted in The San Francisco Chronicle.

Bloomberg.com and Erlangersqeezeplay.com published reports identifying a clear pattern of highly unusual, and in some cases, massive spikes in put options in stocks that would have been deemed by those with detailed prior knowledge most likely hardest hit in the market aftermath of a WTC attack. These were primarily airline (UAL and AMR, notably not Delta), insurance, brokerage and hotel stocks. Phil Erlanger also noted a pattern of significant spikes in 'naked calls' in the same stocks. Naked calls are a high-risk form of short selling not backed up by stock position in the company at issue.

Thirty-eight companies were placed on a SEC list and circulated amongst brokerages that placed the put options on behalf of clients. These included among many others, TD Waterhouse, NFS (subsidiary of Fidelity of Boston), Alex Brown/Deutsche Bank, Goldman Sachs, and Lehman Brothers. [The San Francisco Chronicle; AP]. In the January 2002 Congressional record, an informal survey conducted by Levin-Grassley staffs, revealed that 10 of 22 responding securities and brokerage firms, managed accounts for 45,000 offshore clients.

Below are a few standouts on the SEC list [' *' indicates a WTC tenant; (-x) represents the multiple over average volume]: Airlines: UAL (285x), AMR (60x) Insurance sector: Marsh & McLennan (93x)*, Citigroup (45x), Swiss Re, XL Capital Brokers: Bear Stearns (60x), Morgan Stanley (27x)*, Merrill Lynch (12x)

Not included on the SEC list, but featured on the Erlangersqeezeplay.com report, were hotel chains Marriott, Hilton and Starwood Hotels. Most anomalous were the huge put option trading spikes placed in only two of the three major US airlines. Almost always, if investors believe the airline industry is due to drop, they will short all three major carriers. This was not the case here because Delta did not see spikes similar to UAL and AMR.

Analysts also noted that though the insurance sector was one of the strongest in a depressed stock market, there were huge spikes in put options in Marsh & McLennan and in Citigroup. Marsh & McLennan, the biggest insurance broker, was a World Trade Center tenant with 1,700 employees. It also saw, next to UAL, the highest spike in put options; thus you have a confluence of facts that, in the minds of many experienced traders and experts, amounts to unequivocal evidence of foul play. Clearly traders placed bets based on sure-fire insider prior knowledge. The odds against this happening randomly or coincidentally are astronomical; probably incalculable.

The put options, though they received the bulk of news coverage, were reportedly only one of several instruments used by the insiders. Suspicious trading in 5-year bonds and in oil and gold futures was also noted, and presumably investigated.

Oil and gold futures

The Associated Press reported on September 22nd that a German Central Bank study strongly points to "terrorism insider trading" not only in airline and insurance companies but also in gold and oil futures. These he said, "could not be chalked up to coincidence." Bundesbank President, Ernst Welteke, said that though it would be "extremely difficult to really verify" but he believed "in one or the other case it will be possible to pinpoint the source."

Unusual high volume in pre-attack 5 year bond trading

The Wall Street Journal reported on October 2 that the Secret Service had begun a probe into an unusually high volume of five-year US Treasury note purchases made prior to the attacks. The Treasury note transactions included a single $5 billion trade. The Journal noted that "Five-year Treasury notes are among the best investments in the event of a world crisis, especially one that hits the US. The notes are prized for their safety and their backing by the US government, and usually rally when investors flee riskier investments, such as stocks." The value of these notes, the Journal pointed out, has risen sharply after the events of September 11.

'Last hours' surge of financial activity at WTC

According to a Reuters report of December 16, German data retrieval experts, hired by WTC tenant firms, were mining data off damaged hard disks recovered from the ground zero. The goal is to discover who was responsible for the movement of unusually large sums of money through the computers of the WTC in the hours before the attack. Peter Henschel, director of Convar, the firm responsible, said, "not only the volume, but the size of the transactions was far higher than usual for a day like that." Richard Wagner, a data retrieval expert estimated that more than $100 million in illegal transactions appeared to have rushed through the WTC computers before and during the disaster.

The evidence and comments offered by traders, analysts, bankers and others in the immediate aftermath indicates there was, in fact, a carefully planned and sophisticated effort of massive profiteering from the precipitous fall of stocks that occurred when trading opened following the attack. This is expert documentation and observations based on years of experience. The implications are absolutely frightening. And all the more reason for authorities to pull out all the stops to identify and prosecute those responsible and shut down the global financial network facilitated the most heinous of crimes. Unfortunately, that's not exactly what's happened.

'Naysayers' raise suspicions; Enron diverts attention from dire National security issue

Months have passed since the launch of investigations by the SEC, NYSE, CBOE (Chicago Board of Options Exchange), Department of Justice, FBI, Secret Service, CIA, Department of Treasury, and the NSA. And yet there is no news, no suspects, no prosecutions, nothing. There are fears now that early 'naysayers' may have let a hot trail to go cold and allowed the terrorist insiders to cover their tracks. Despite all the evidence to the contrary, the FBI's Dennis Lormel said on October 3, 2001 before Congress that there were "no flags or indicators" referring to mere "rumors" about the pre-attack insider trading.

The Enron scandal, beginning in October, followed on the heels of the 9-11 attack and subsequent investigations into Enron began to divide and stretch the limited resources of the agencies and regulators involved. The media focus began to shift as well with six or eight Congressional committees holding hearings and providing all sorts of media drama. Congress began to look toward remedies to stave off a total crisis of confidence in our economic system, and justifiably so. Obviously, the largest bankruptcy in US history, affecting thousands of employees with 401k plans and millions of pensioners, merits serious attention. Ironically, it may lead them to crack down on the same infrastructure; employed by Enron's Andrew Fastow and terrorist alike.

However, a case could be made that the focus on Enron has diverted attention away from a matter of far greater national security. The insiders, possibly the masterminds behind the suicide attacks, have walked away with huge profits for their sophisticated pre-attack trading; estimated by some to be in the billions of dollars. More to the point, they are now planning and financing their next attack with these 9-11 takings, as yet unmolested by a genuinely aggressive U.S. effort to shut them down.

In light of the weighty and compelling evidence, Lormel's insistence there were "no flags or indicators" of possible terrorist insider trading, is blatantly wrong or worse, suspect. Most of the information above, including Bloomberg trading charts documenting massive put options spikes, was in the public domain prior to his testimony. Yet, Lormel claimed there was no indication of suspicious trading. Why then were investigations launched by over a dozen nations and 8 or 9 U.S. government agencies, exchanges and commissions? How does one account for supporting comments of the traders and analysts with years of hands-on experience in the markets?

Lormel's testimony, coming from an official charged with tracking down, and starving terrorists of funding to protect Americans does little to inspire confidence; especially in the wake of the worst intelligence failure in US history. On the contrary, such remarks only raise very uncomfortable suspicions and legitimate concern that the forces behind walls of financial secrecy are so powerful as to thwart or intimidate the highest echelon of those responsible for executing our nation's war on terrorism. Or on drug trafficking. Or on Enronomic tax evasion and corporate fraud for that matter.

The obvious challenge for authorities is to put these suspicions to rest and follow the money trail to those complicit in the attacks. To do so, requires investigators to break through the veils of bank secrecy in offshore tax havens that may protect terrorists and Enron profiteers alike. Unfortunately, thanks to the Bush Administrations withdrawal from FATF efforts, investigators may be having difficulty in doing so. And once again, the trail may have gone cold. And yet it is not unreasonable to expect that given such a matter of national security, Congress and the authorities would pull out ALL the stops. They would act quickly to force financial entities to divulge the names of those who placed the trades in question.

Surely, 'the most powerful nation in the world' can apply enough pressure on non-cooperating financial jurisdictions to force them to reveal the identities of terrorists who could attack again at any moment. The reality of the threat of more attacks precludes the use of past excuses and inaction. The Cayman Islands, Nauru, indeed most offshore havens lack standing armies. While it may be perhaps 'the hardest of nuts to crack,' the urgency and justification demands we do whatever is necessary to do so, at little risk to our nation's armed forces.

A real war on terrorism would lead to seizures of billions not millions. Nothing close to this level has yet occurred and the investigation has yielded little in five months. According to a statement by Representative LaFalce on the Congressional Record, the Treasury Department, as of late January had failed to exercise, even once, their new powers to pressure non-cooperating overseas and offshore financial facilities. Investigators into pre-attack trading have not implicated a single insider, terrorist or otherwise. UN efforts are creeping along ineffectively with many nations failing to fully cooperate or not cooperate at all, as divulged to the press by American UN Ambassador Negroponte at a February event aired on C-SPAN. There is a distressing and suspicious pattern here. The administration's will to pursue this matter is sorely lacking.

Another case in point: In December of 2000, the U.S. and Russia co-sponsored a UN Security Council resolution to freeze monies linked to designated terrorists. The list included five alleged close associates of Bin Laden--Amin al-Haq, Saqar al-Jadawi, Ahmad Sa'id Al-Kadr, Sa'd A-Sharif and Bilal bin Marwan. Inexplicably the U.S. Treasury did not officially place these five on the U.S. blacklist until October 12, 2001. Why the delay of ten months and who is responsible for it? Naturally, this case raises further suspicion, as it rightly should, regarding the intent and integrity of those charged with protecting our national interests and security.

[Normxxx Here: Maybe the war in Iraq proved too distracting. ]

-- posted by Normxxx

Top 132. Nov 10, 2004 6:19 AM

» Kirk - Wary of Regulators' Scrutiny, Reinsurer Ends Berkshire Deal

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Amazing how these "deals" keep popping up! It makes me extra fearful about my investing abroad where the accounting rules and SEC are not as effective.

November 10, 2004
Wary of Regulators' Scrutiny, Reinsurer Ends Berkshire Deal
By GRETCHEN MORGENSON
http://www.nytimes.com/2004/11/10/busine...

Responding to heightened scrutiny of a once-common insurance industry practice, Platinum Underwriters Holdings, a Bermuda-based provider of property and casualty reinsurance, said yesterday that it was scrapping an insurance contract it had bought from Berkshire Hathaway because the deal might not meet regulatory standards.

"We would rather publish pristine financial statements that are beyond this kind of unwelcome scrutiny," Michael Price, president and chief underwriting officer at Platinum, said in a conference call with analysts. The company conducted the call to release its third-quarter results.

The transaction unwound by Platinum is a type of insurance known broadly as finite or financial reinsurance, which is intended to limit companies' exposure to unknown liabilities. Such contracts became enormously popular in the late 1990's as costs related to litigation surged and companies had an increasingly difficult time assessing their potential liabilities. Adding to the appeal of finite insurance was its effect of smoothing volatile earnings, which many investors find distressing.

When used properly, finite insurance allows insurers or corporations to spread their risk of loss on an asset or business over time and spread it to other insurers willing to take on more risk in exchange for premiums. But for a policy to be considered true insurance, it must involve the transfer of some risk to the party receiving the premiums. If the insurer agrees to return the premiums paid at a later date, the policy resembles a loan, not insurance, and runs afoul of accounting rules.

Regulators have recently turned up cases of finite insurance that transferred no risk and were used to cover losses that occurred before the contracts were written. Last year, the Securities and Exchange Commission sued Brightpoint, a cellphone distributor in Indiana and the giant American International Group for misleading investors through the use of finite insurance.

The insurance, regulators said, helped Brightpoint hide $11.9 million in losses in 1998. Brightpoint and American International settled with the S.E.C. Federal prosecutors in Indiana are investigating the matter.

During the conference call yesterday, Platinum's executives said that increased regulatory interest in finite insurance compelled them to reexamine the deals they had struck, looking for "red flag'' issues, like insufficient risk transfer, insurance that covers known losses, and undisclosed side agreements. Platinum management said it was careful to avoid such problems with its finite insurance transactions.

Finite transactions accounted for 28 percent of Platinum's premium volume in the first three quarters of 2004, according to Jean-François Tremblay, an insurance analyst with Credit Suisse First Boston. Yesterday, the company said that the contract it had terminated with Berkshire Hathaway, headed by Warren E. Buffett, differed from the finite insurance it sells to other clients.

Gregory Morrison, chief executive of Platinum, said in the call that even though the contract bought from Berkshire Hathaway "contained ample risk transfer and was reviewed with our auditors at its inception," recent events might not have caused an economic loss to Berkshire. Therefore, the deal was scuttled.

Platinum had been scheduled to release its earnings last week, but delayed the announcement so it could get out of the reinsurance deal, executives said. Investors seemed relieved that it involved only an unwound contract, and Platinum Underwriters' stock closed at $29.60, up 8.4 percent. The company said termination of the Berkshire Hathaway deal would not affect its results.

-- posted by Kirk

Top 133. Jan 11, 2005 12:56 PM

» Kirk - Calandra settles SEC fraud charges

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Calandra settles SEC fraud charges
Ex-MarketWatch writer to pay $540,000
By Robert Schroeder, CBS MarketWatch
Last Update: 4:16 PM ET Jan. 10, 2005
http://www2.marketwatch.com/news/story.a...

WASHINGTON (CBS.MW) -- Former MarketWatch writer Thom Calandra will pay $540,000 to settle fraud charges with the Securities and Exchange Commission after the agency alleged he profited by selling stocks he recommended in his investment newsletter.

The agency said Calandra, one of the founders of MarketWatch (MKTW: news, chart, profile), made more than $400,000 in illegal profit by writing favorable profiles of small-cap companies and then selling their shares after they went up in price. MarketWatch is the publisher of this report.

Calandra followed this pattern for 23 different stocks he covered from March to December 2003, the SEC said. Calandra did not admit or deny the SEC's allegations.

Calandra stepped down from MarketWatch Jan. 22, 2004, after an internal probe into his trading activities that followed the SEC's request for records of his personal stock trades and e-mail messages.

In a statement released Monday, Calandra said, "I am happy to have finally reached settlement with the SEC on this matter" and noted that the settlement does not prohibit him from sitting on the boards of public companies.

SEC District Administrator Helane Morrison said in a press release that Calandra "betrayed his readers' trust" by using his newsletter to beef up his personal profits.

"Calandra's readers were entitled to know about his trading activity, so that they could evaluate the credibility and impartiality of Calandra's investment advice for themselves," Morrison said in a statement.

MarketWatch described the settlement as a matter between Calandra and securities regulators and said it would not comment on details. The company maintains a trading policy requiring employees to disclose the purchases or sales of securities.

Shares of MarketWatch fell 1 cent to close at $17.95.

Robert Schroeder is a reporter for CBS MarketWatch in Washington.

-- posted by Kirk

http://www.nytimes.com/2005/01/11/busine...

Top 134. Jan 11, 2005 1:06 PM

» Kirk - .Ex-Columnist Fined in Stock Trading Scheme

Ex-Columnist Fined in Stock Trading Scheme
By ERIC DASH

Published: January 11, 2005

hom Calandra, a former columnist for CBS MarketWatch.com, will pay more than $540,000 to settle federal regulators' charges that he used an investment newsletter to pump up the price of penny stocks he owned before selling them.

In a complaint filed yesterday, the Securities and Exchange Commission accused Mr. Calandra of using The Calandra Report, an Internet investment newsletter, to promote the thinly traded stocks of 23 companies, without disclosing that he owned them, and then went on to sell them for a gain of more than $405,000. Mr. Calandra also failed to tell his readers that he received heavily discounted shares in two mining companies when he recommended them in the newsletter before selling them for a large profit, the complaint said.

"It sends a message that people who speak directly to the investing public about securities should care about what they say, but also what they do," said Sahil W. Desai, a lawyer for the S.E.C. who helped lead the investigation.

Michael S. Dicke, a deputy assistant district administrator in the S.E.C.'s enforcement division, said: "It's not every day that you find a respected financial journalist, who has a large readership, and then find them selling stocks. It was a serious betrayal of Mr. Calandra's readership."

Mr. Calandra, without admitting or denying any wrongdoing, agreed to return more than $416,000 in trading profits and interest. He will also pay a civil penalty of $125,000.

"It has been a challenging year, to put it mildly, and I do not wish to expose my family to a protracted public dispute with the commission on this matter," Mr. Calandra said in a statement. "Now that we have a resolution, I am eager to move on with my life and pursue my first love, writing."

A spokesman said that Mr. Calandra was now writing research papers about biotechnology and pharmaceutical companies for LSG International, a consulting firm in San Francisco that offers research for the health care and life sciences industries. In his statement, Mr. Calandra said the settlement with the S.E.C. would allow him to sit on the boards of publicly traded companies.

Mr. Calandra, who helped found CBS MarketWatch in 1997 after covering the financial markets for more than 20 years, resigned as its chief commentator a year ago after the S.E.C. notified him of an informal inquiry into his trading practices.

MarketWatch said in a statement yesterday that as an investment commentator he was required to disclose to readers the trading of any investments discussed in his column, in accordance with company rules. "MarketWatch has cooperated fully with the S.E.C.'s investigation of Mr. Calandra," the company said. According to the S.E.C.'s complaint, Mr. Calandra defrauded investors between March 2003 and December 2003 by engaging in a practice known as scalping - buying shares of thinly traded companies whose prices can be easily manipulated, recommending them to his subscribers and then selling most of his shares when the increased demand he generated drove up the stock price.

Regulators said their investigation found more than 100 transactions in 23 different securities that were discussed in the newsletter, but the complaint highlighted two specific instances. In fall 2003, Mr. Calandra wrote that a company called Pacific Minerals was "at the beginning of its meteoric rise," then sold thousands of shares within days.

He made more than $113,000 by using the same technique to inflate the stock price of Goldmarca and IMC Ventures, two mining companies. He received substantially discounted shares in the companies from an unnamed Canadian stock promoter, the S.E.C. said.

I wonder if he had to disgorge all profits plus a fee or is this simply a settlement that lets him keep some of what he made?

-- posted by Kirk

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http://www.siliconinvestor.com/readmsg.a...

Top 135. Mar 4, 2005 8:08 AM

» Kirk - SEC Probes 'Squawk Box' Front-Running

TheStreet.com
SEC Probes 'Squawk Box' Front-Running
Thursday March 3, 2:34 pm ET
By Matthew Goldstein, Senior Writer

Securities regulators are investigating whether Wall Street brokers are giving big clients inappropriate access to internal strategy calls, permitting them to gather confidential trading information that is easy to profit from, people familiar with the inquiry say.
ADVERTISEMENT

The Securities and Exchange Commission probe, which began at least six months ago, centers on an allegation that brokers are deliberately providing a select group of investors with inside information. Specifically, the agency is trying to find out if clients have been tipped off about block trades.

The investigation remains broad-based with no single firm emerging to date as the prime target, the sources said.

Getting a tip about a planned block trade can be a major advantage to traders trying to cash in on sudden price movement in a stock. That's especially the case when it involves a small-cap stock with a relatively small number of shares outstanding.

A block trade generally is a trade involving 10,000 or more shares.

Sources say the SEC believes brokers are passing on this potential market-moving information to customers by permitting them to listen in on internal "squawk box" conversations.

A squawk box is the conduit for the internal morning call at brokerage houses, during which analysts and traders communicate with a firm's brokers about changing opinions on stocks and other market developments. The communications generally come through a desktop speaker system.

The systems also carry so-called trader calls in which information about block trades can be disseminated.

Sources say the SEC's regional office in New York already has issued a number of subpoenas in the case and has questioned several brokers and traders. Sources also say federal prosecutors in Brooklyn are looking into the matter.

SEC spokesman John Nester declined to comment. Robert Nardoza, a spokesman for Roslynn Mauskopf, the U.S. attorney for the Eastern District of New York, also declined to comment.

People familiar with the investigation have variously described the potential violation as insider trading or front-running. An unsavory practice, front-running occurs when a trader has advance knowledge that an investor intends to move a big block of shares and seeks to capitalize on that information advantage by buying or selling ahead of the transaction.

Ron Geffner, a former SEC enforcement attorney who is now a partner at the law firm of Sadis & Goldberg, said front-running is prohibited when the person making the trade is legally bound to the customer's interest.

"Front-running tends to involve trading activity where a person in violation of a fiduciary duty will trade in front of another trade," Geffner said, adding that it wasn't clear to him if a third party listening in on a sales call had such a duty.

It's not clear which Wall Street firms and institutional investors are the subject of the inquiry. Representatives for several Wall Street firms said they were not aware of any investigation.

But several securities lawyers and brokers say allegations of abuse surrounding squawk box calls have been around for years.

One attorney, who did not want to be identified, said a brokerage firm was privately reprimanded several years ago by regulators for allowing the inadvertent leak of inside information over a squawk box conversation.

In the past, institutional investors were interested in getting access to squawk box calls to get advance word on a potential ratings change on a stock by an analyst. But such communications became less valuable in the wake of the $1.3 billion tainted-research settlement because most brokerages now publish their research reports several hours before an analyst discusses them on the morning call.

A manager with a Midwestern hedge fund, who declined to be identified and was not aware of the investigation, said it's not uncommon for block trades to be discussed on squawk box calls. The manager said he is aware of situations in which brokers simply left telephones off the hook during the calls, allowing clients to hear what was said.

"You can hear them saying we need to buy or sell a block of this," the hedge fund manager said. "You do definitely pick up info on block trades."

But the manager is skeptical about how much wrongdoing regulators will find.

"You can't build a strategy around that," he said

-- posted by Kirk

http://www.siliconinvestor.com/readmsg.a...

Top 136. Mar 8, 2005 9:49 AM

» Kirk - Merrill Lynch Fined $13.5M for Violations

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They should be in jail, not fined $14M!

Merrill Lynch Fined $13.5M for Violations

Tuesday March 8, 11:33 am ET
New York Stock Exchange Fines Merrill Lynch $13.5 Million for Mutual Fund Violations

NEW YORK (AP) -- Merrill Lynch & Co. was fined $13.5 million by the New York Stock Exchange after a group of the company's brokers engaged in improper timing of mutual funds, the NYSE announced Tuesday.

In a hearing decision made Monday, the NYSE determined that a group of brokers in Fort Lee, N.J., made more than 3,700 short-term mutual fund transactions from January through April 2002. The brokers used multiple accounts, all of which were held for a single hedge fund client, the NYSE said, and the accounts were transferred outside the firm and back in later that year.

The transfers and other violations occurred until October 2003.

While Merrill Lynch told the brokers to stop the mutual fund trades in November 2002, but the brokers did not, and Merrill Lynch failed to follow up, the exchange said.

"When a firm discovers that brokers have engaged in misconduct, the exchange expects and demands that the firm will heighten supervision and take all necessary action to ensure that the conduct has ceased," said Susan Merrill, chief of regulatory enforcement at the NYSE.

According to the NYSE, $10 million of the fine will be paid to the state of New Jersey in a related settlement, and another $3.5 million to the state of Connecticut as part of settlement talks there.

In addition to the fine, the NYSE censured Merrill Lynch and required the brokerage review its procedures regarding the creation and retention of documents with regard to outside accounts.

A spokesman for Merrill Lynch was not immediately available for comment.

Shares of Merrill Lynch fell 22 cents to $60.97 in late morning trading on the New York Stock Exchange.

Why fines to BRIBE the government to settle and not restitution to the mutual fund clients who were screwed? It all reads like "legal extortion" by the government when there is no restitution to injured parties or jail time for the guilty.

-- posted by Kirk

Top 137. Mar 15, 2005 12:57 PM

» Kirk - Ex-WorldCom Chief Ebbers Convicted of Fraud

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Ex-WorldCom Chief Ebbers Convicted of Fraud
Tuesday March 15, 2:27 pm ET
By Erin Mcclam, Associated Press Writer
Former WorldCom Chief Ebbers Is Convicted on All Counts Related to Accounting Fraud

NEW YORK (AP) -- Bernard Ebbers, who built WorldCom from a humble Mississippi long-distance firm into one of the nation's biggest telecommunications conglomerates, was convicted Tuesday of engineering the colossal accounting fraud that sank the company.

A federal jury in Manhattan deliberated eight days before returning guilty verdicts on all counts -- one count of conspiracy, one count of securities fraud and seven counts of false regulatory filings. The crimes carry up to 85 years in prison.

When the verdict was read, Ebbers' face reddened. His wife, Kristie, and other family members broke into tears. Afterward, Ebbers and his wife hailed a taxi outside the courthouse and left without speaking to reporters.

"We're all devastated," said defense attorney Reid Weingarten. "It's very sad it came out the way it did."

Sentencing was set for June 13. Weingarten said an appeal was planned, adding: "We are obviously extremely disappointed with this verdict, but the fight will continue."

There was no immediate comment from any of the jurors. The judge offered jurors the chance to speak to reporters, but none accepted, and the judge instructed reporters not to badger the jury.

The conviction comes more than two years after an internal auditor began asking questions about curious accounting at WorldCom, touching off a scandal that eventually unearthed $11 billion in cooked books.

Prosecution testimony at the six-week trial portrayed Ebbers, 63, as obsessed with keeping WorldCom's stock price high, and panicked about $400 million in personal loans that were backed by his shares in the company.

Ebbers himself took the witness stand late in the trial, insisting that he was unfamiliar with the details of accounting and knew nothing about the fraud taking place on his watch.

The star witness against him was Scott Sullivan, the former finance chief, who claimed Ebbers repeatedly ordered him to "hit our numbers" -- a command, Sullivan said, to falsify the books to meet Wall Street expectations.

Sullivan, who himself has pleaded guilty to fraud, admitted to essentially masterminding the fraud -- but said he did it on the clear instructions of Ebbers, who ignored his repeated pleas that the adjustments were wrong.

With the entire telecom industry suffering a dot-com hangover, the fraud was driven by soaring "line costs" -- the fees WorldCom paid to smaller local telephone carriers to use their networks. Prosecutors said the fraud stretched from late 2000 until early 2002, sometimes amounting to nearly $1 billion per quarter in hidden expenses and improperly recognized revenue.

Pressure from the loans, the money he stood to lose and the power of the CEO's job combined to form a "perfect storm of corruption" that drove Ebbers to commit fraud, prosecutor William Johnson said in his closing argument.

"He was WorldCom, and WorldCom was Ebbers," the prosecutor told jurors. "He built the company. He ran it. Of course he directed this fraud."

Ebbers gambled by taking the witness stand. He directly disputed the testimony of Sullivan, saying he became aware of the fraud only in the summer of 2002, after he was asked to leave WorldCom.

"He's never told me he made an entry that wasn't right," Ebbers said of Sullivan. "If he had, we wouldn't be here today."

The conviction completes a staggering fall for Ebbers, who took a small long-distance company in Mississippi and merged with or acquired ever-larger companies, earning him accolades and the nickname Telecom Cowboy.

He still faces civil litigation, including from the company, which backed up his $400 million in personal loans when Bank of America demanded more and more collateral as the stock price fell.

WorldCom, which was based in Clinton, Miss., was driven into bankruptcy -- the largest in U.S. history -- in the summer of 2002. It has since re-emerged as MCI Inc., based in Ashburn, Va.

The company struck a $750 million settlement with federal regulators to repay aggrieved investors, a small sum compared to the tens of billions of dollars of market capitalization that evaporated in the scandal.

Twelve former directors of the company, plus some investment banks that underwrote WorldCom securities and auditing firm Arthur Andersen, also face a civil trial brought by angry investors. That trial is set for late March.

In winning a conviction against Ebbers, federal prosecutors in Manhattan rung up another victory in a remarkable string of white-collar prosecutions that began in the summer of 2002.

Martha Stewart, Adelphia Communications founder John Rigas and former dot-com banking star Frank Quattrone were all found guilty during that stretch -- with the same prosecutor, David Anders, handling both Quattrone and Ebbers.

The prosecutors have also wrung guilty pleas from countless other executives, including ImClone Systems Inc. founder Sam Waksal and five other former WorldCom officials who agreed to cooperate against Ebbers.

In the WorldCom case, five executives, including Sullivan, pleaded guilty and cooperated with prosecutors. They have yet to be sentenced.

-- posted by Kirk

Top 138. Apr 13, 2005 7:03 AM

» Kirk - NYSE Specialists Indicted for Fraud

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To borrow from a great movie:

"I'm shocked there is cheating going on here!!"

Kirk

NYSE Specialists Indicted for Fraud, Improper Trades (Update11)

April 12 (Bloomberg) -- The U.S. government charged 15 New York Stock Exchange specialists with fraud in the biggest crackdown on illegal trading at the Big Board, saying they manipulated orders for four years to pocket $19 million for their firms at clients' expense.

The NYSE itself was censured for self-regulatory failures and will submit to outside monitoring for the first time in its 213- year history as part of a $20 million settlement with the U.S. Securities and Exchange Commission today. The SEC also accused 20 specialists, including two former top officials at Spear Leeds & Kellogg, of filling orders for their own firms' accounts instead of executing trades for customers.

``To see criminal activity on the floor is really astounding,' said Jacob Zamansky, a New York lawyer who represents investors in arbitrations against brokers. ``This occurred under the watch of the NYSE. It raises questions about whether the NYSE can properly supervise the people there.'

The indictments and the SEC's civil suit stem from a two-year probe of specialists, the market makers who match buy and sell orders on the exchange floor and trade for their own accounts. U.S. Attorney David Kelley said the abuses occurred from 1999 through April 2003, during the tenure of former Chairman Richard Grasso. The NYSE initiated the investigation.

The indicted specialists are current and former employees of LaBranche & Co., Van der Moolen NV, Bear Stearns Cos. unit Bear Wagner Specialists, Goldman Sachs Group Inc.'s Spear Leeds unit and Banc of America Specialist, five of the NYSE's seven specialist firms.

Both Goldman Sachs spokesman Peter Rose and Bear Stearns spokeswoman Elizabeth Ventura declined to comment.

Fourteen of the 15 turned themselves in to authorities. One remains at large.

Abuses

The specialists were charged with abusing their positions as referees by seizing opportunities to profit instead of matching up compatible buy and sell orders. For example, when stock prices were falling, the specialists would first sell shares they owned and then execute customer sell orders at lower prices, according to the indictments.

As a specialist with Fleet Specialist Inc., David Finnerty, 38, handled NYSE trading of General Electric Co. shares.

``Finnerty bought or sold stock for Fleet's dealer account at the most advantageous price available, then, after proprietary trades, executed the agency orders with which he was entrusted at a less advantageous price than he received for the dealer account,' the indictment against him alleged.

Fleet Specialist is now known as Banc of America Specialist, a unit of Bank of America Corp.

Big Board Shares

Other indicted specialists made markets in shares of Eli Lilly and Co.; International Paper Co,; Pfizer Inc.; Nortel Networks Corp. and Hewlett-Packard Co.

Kelley said profits from the illegal trading were as high as $4.4 million. If convicted, the specialists face a maximum of 20 years in jail on each count of securities fraud and fines of $1 million to $5 million.

``These defendants broke the rules repeatedly,' Kelley said at a press conference.

Seven of the 15 specialists charged worked at Van der Moolen. Five, Joseph Bongiorno, 50; Michael Hayward, 51; Michael Stern, 54, Richard Volpe, 45; and Robert Scavone, 45, had supervisory roles at the exchange. Bongiorno was among the 20 senior NYSE officials known as floor governors.

$5.9 Million

The remaining two former Van der Moolen specialists charged are Patrick McGagh, 39, and Gerard Hayes, 44. Together, the seven conspired to break securities laws and their actions cost customers at least $5.9 million, according to the indictments.

In addition to Finnerty, Fleet employed three of the indicted specialists: Thomas Murphy Jr., 41; Scott Hunt, 36; and Donald Foley, 44. The remaining four specialists charged are Robert Johnson, 40, of Spear Leeds; Kevin Fee, 37, and Frank Delaney, 42, of Bear Wagner; and Freddy DeBoer, 43 of LaBranche.

``We are about to confirm that four former Fleet specialists were included in the indictments issued today by the U.S. Attorneys office,' said John Yiannacopoulos, spokesman for Bank of America. ``These four individuals left Fleet Specialist in 2003 through early 2004.'

Murphy and Finnerty pleaded not guilty and were released by a federal judge on separate $5 million bonds. Foley and Delaney pleaded not guilty and each were released on a $3 million bond.

Bongiorno, McGagh, Hayward, Volpe, Scavone and Hayes also pleaded not guilty.

Stern, Hunt, Johnson and Fee are scheduled to enter a plea. Fee's lawyer, Lawrence Robbins, said his client will fight the charges and expects to be ``fully exonerated.' Lawyers for the other three were not immediately available for comment.

DeBoer remains ``at large,' Kelley said. SEC lawyer David Markowitz said he believes DeBoer is in the Netherlands.

SEC Suit

The SEC's suit names the same 15 specialists, as well as five more not criminally charged. The five include Todd Christie, 40, and Robert Luckow, 57, both former CEOs of Spear Leeds, the specialist firm that Goldman acquired for more than $6.1 billion in 2000.

``Mr. Luckow does not believe he did anything wrong,' said Richard Morvillo, a lawyer representing him in the SEC suit. ``Todd Christie took his responsibility as a specialist very seriously and the SEC charges of wrongdoing are baseless,' said Paul Shechtman, a lawyer representing Christie.

Two more, James Parolisi, 42, and Patrick Murphy, 45, also worked at Spear Leeds. The third, Warren Turk, 36, worked at Van der Moolen.

Patrick Murphy's lawyer, Robert Katzberg, said his client ``has long enjoyed a well-deserved reputation for great skill and integrity as a specialist at the NYSE. Mr. Murphy fully expects that reputation will remain intact when the matter is over.'

Parolisi's lawyer, Paul F. McCurdy of Stamford, Connecticut, said he and his client ``look forward to defending the case and clearing his name.'

Turk's lawyer didn't immediately return a call for comment.

The SEC is seeking civil penalties including fines, forfeiture of ill-gotten profits, and bans against working in the brokerage industry.

Repeat Offender

The two remaining NYSE specialist firms, both of which aren't mentioned by name in the indictments or the SEC suit, are SIG Specialists Inc. and Performance Specialist Group.

The Big Board itself is a repeat offender. The SEC rebuked the exchange in 1999 for failing to properly oversee its floor trading. The following year, SEC inspectors visited the floor and found lingering deficiencies in surveillance, according to a 2001 agency report.

The U.S. government first targeted illegal trading on the NYSE in 1998, when it charged eight floor brokers and two executives of Oakford Corp.

Seven of those brokers pleaded guilty and were barred permanently from working for NYSE member firms. One received a 10- year ban. In all, dozens of floor brokers who were implicated or failed to cooperate received bans against working for NYSE member firms.

NYSE Probe

The exchange first said in April 2003 that it was investigating the seven specialists to determine whether they illegally traded stocks ahead of their clients. That probe was begun under Grasso, who was ousted five months later over his $140 million retirement package.

Eric Starkman, a spokesman for Grasso, declined to comment.

The seven specialist firms last year agreed to pay $247 million to settle allegations that they profited on trades at the expense of their customers. Kelley, the SEC and the NYSE have been investigating individuals in connection with the violations.

The SEC censured the NYSE today for failing to police specialist trading from 1999 through 2002. It required the exchange to submit to new outside oversight as part of a civil settlement.

The NYSE agreed to spend $20 million for independent ``regulatory audits' of its monitoring and enforcement operation every other year through 2011. The exchange also will submit to audio and video surveillance of its trading floor for at least 18 months, the SEC said.

Investigations Continue

The first audit will be conducted this year. Neither the SEC nor the NYSE said who will conduct the audits. The auditor must be approved by the agency.

The exchange neither admitted nor denied wrongdoing as part of the settlement. The SEC said its investigation into ``individual misconduct' at the NYSE continues, raising the prospect of further allegations.

Kelley said the Justice Department's probe also continues.

The main criminal case is: U.S. v. Bongiorno, U.S. District Court, Southern District of New York.

-- posted by Kirk

Top 139. Apr 27, 2005 9:52 AM

» Kirk - First Arrest in 'Squawk' Probe

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First Arrest in 'Squawk' Probe
By Matthew Goldstein
Senior Writer
4/26/2005 6:02 PM EDT
URL: http://www.thestreet.com/markets/matthew...

A former Merrill Lynch (MER:NYSE) broker was arrested last week in conjunction with a federal investigation into allegations that daytraders were permitted to eavesdrop on the internal communication systems of some of Wall Street's biggest brokerages.

The arrest is the first directly tied to the so-called squawk box investigation being conducted by federal prosecutors in New York and the Securities and Exchange Commission. Federal authorities confirmed the arrest, the details of which were revealed in a copy of the criminal complaint obtained by TheStreet.com

Federal prosecutors last Friday charged Timothy O'Connell, who had worked in Merrill's Garden City, N.Y., branch office up until February, with using "intimidation" to threaten and encourage a witness to lie to a federal grand jury about O'Connell's alleged role in the affair. The witness is identified in court papers as O'Connell's former broker assistant.

O'Connell was arraigned on the charges and released after posting $500,000 bail. His attorney Lee Richards could not be reached for comment.

A Merrill Lynch spokesman had no comment.

To date, prosecutors in the Eastern District of New York and the SEC have not officially commented on the squawk box investigation, which was first reported last month by TheStreet.com. But the 14-page criminal complaint in the case against O'Connell reveals some of the scope of the inquiry.

The complaint says that the investigation began last May and is being aided by two cooperating witnesses, who are former employees of separate daytrading shops. The former daytraders have told authorities that O'Connell permitted daytraders to listen in on the squawk box communications in order to gather information about large block trades.

The informants claim O'Connell enabled the daytraders to eavesdrop on the internal communications "through a telephone line that remained open between the Garden City branch and the daytrading firms throughout the course of the trading day." In return, the daytraders compensated O'Connell by making trades in a Merrill brokerage account and "generating substantial commissions" for the broker.

The complaint does not identify the daytrading firms that allegedly had access to Merrill's squawk box system. But TheStreet.com has reported that AB Watley (ABWG:OTCBB) is one of the daytrading firms caught in the cross hairs of the investigation.

Former Watley CEO John Amore, indicted last summer by federal prosecutors on an unrelated securities offense, is believed to be cooperating with the investigation. Sources familiar with Watley say the brokerage, at various times, offered elite daytraders access to squawk box communications from Merrill, Lehman Brothers (LEH:NYSE) and Citigroup's (C:NYSE) Smith Barney brokerage group.

Lehman, sources say, recently received a subpoena from federal authorities in conjunction with the probe. People familiar with the inquiry say investigators are focusing on the activities of at least one former Lehman broker. A Lehman spokeswoman declined to comment.
Get a Leg Up

Getting unauthorized access to a brokerage's squawk box system would give a daytrader a big leg up over other traders. That's because getting a tip about a block trade, a single trade of 10,000 or more shares, can be advantageous to traders trying to cash in on sudden price movement in a stock. Such tips could have permitted daytraders to engage in front-running, an illegal practice in which a person buys or sell shares ahead of a trade he suspects will move a stock's price.

In the criminal case involving O'Connell, investigators contend that the SEC has analyzed trading records from the two daytrading firms and "discovered numerous instances" in which daytraders "purchased and sold securities in front of large orders that were subsequently executed by Merrill Lynch's institutional customers," according to the complaint.

For his part, O'Connell, in an interview with federal investigators last June, denied providing daytraders with access to Merrill's squawk box system.

But O'Connell's former assistant, who is not identified by name in the complaint, told authorities earlier this month that O'Connell had indeed provided the daytrading firms with squawk box access.

Back in December, the assistant testified before a grand jury that O'Connell had not provided squawk box access to any daytraders. But in April, the assistant told investigators that the earlier testimony was a lie and that O'Connell had encouraged the assistant to lie to the grand jury.

The assistant said O'Connell said they needed to keep their stories "consistent," according to the complaint. When the assistant questioned the plan, O'Connell allegedly got angry and "slammed his hand against a wall."

The complaint claims the assistant agreed to permit investigators to tape record several phone calls with O'Connell, in which the broker appears to encourage the assistant to keep lying to investigators.

"If they think I lied about this, then they would know I knew about the front-running," O'Connell allegedly told the assistant. In another recorded conversation, O'Connell allegedly said, "If you just stay the course nothing happens. It's over. The only way something happens now is if you change."

-- posted by Kirk