3 Accused of Running Big Insider-Trading Scheme

By Brooke A. Masters
Washington Post Staff Writer
Wednesday, April 12, 2006

NEW YORK, April 11 -- The first warning came when the Securities and Exchange Commission noticed unusual options trading in Reebok International Ltd. stock right before the sneaker firm announced its takeover by Adidas-Salomon AG last August.

The alarms really started ringing when it turned out that a big winner was a 63-year-old Croatian seamstress who had made $2 million in two days through an online trading account in the United States.

Federal authorities announced Tuesday that her nephew, David Pajcin, 29, and two junior employees of top Wall Street firms Goldman Sachs Group Inc. and Merrill Lynch & Co. had been charged with orchestrating one of the most extensive insider-trading schemes uncovered in decades.

According to a 24-page complaint unsealed Tuesday, Merrill Lynch investment banking analyst Stanislav Shpigelman, 23, passed information about six pending mergers to Pajcin, a former Goldman employee, and Goldman associate Eugene Plotkin, 26, who then traded on the information and tipped others who kicked back part of their trading profit.

Pajcin and Plotkin, who met in 2000 when they were new at Goldman, also concocted a second scheme to trade ahead of Business Week magazine's market-moving "Inside Wall Street" column, federal prosecutors said. The indictment alleges they recruited two people to apply for jobs at the Hartford, Wisc., plant where the magazine is printed and to then pass on the names of the stocks that would be mentioned favorably.

The plotters also took out loans to fund their trading and were exploring the possibility of hiring exotic dancers to coax secrets from their investment banking clients, a parallel SEC civil complaint said.

"This one of the most widespread, varied and premeditated insider-trading schemes that we have ever prosecuted," said Mark K. Schonfeld, SEC regional director, noting that the schemes netted a total of $6.7 million. "This case demonstrates that businesses remain as vulnerable to infiltration as the individuals they employ."

Pajcin, who was first arrested in November, is cooperating with authorities, said Andrew Arena, the FBI special agent in charge. The two other men have not entered pleas.

According to the SEC complaint, Plotkin first met Shpigelman when the latter was still in college and assisted him in preparing for interviews with Wall Street firms. Shpigelman eventually landed a job at Merrill and started work in July 2004. Within months, the two were meeting with Pajcin at Spa 88, a New York day spa and Russian sauna, and setting up plans for Shpigelman to pass on information about his work at Merrill. The group allegedly got advance word on such deals as Proctor & Gamble's purchase of Gillette and Novartis AG's acquisition of Eon Labs.

Merrill Lynch has placed Shpigelman on leave, and spokesman Mark Herr called the allegations "a serious breach of trust and violation" of the firm's fundamental principles. "We do not tolerate or condone insider trading," Herr said. "This conduct victimizes the company and the clients alike. It is outrageous, if true."

Pajcin left Goldman within months of his arrival in 2000, and Plotkin has been placed on leave, firm spokesman Lucas van Praag said. Prosecutors said that both Wall Street firms have fully cooperated with the eight-month probe and that there was no evidence that anyone at Business Week was in on the scheme.

Pajcin and Plotkin were thorough in their planning. They adopted aliases and served as references for the two people they had recruited to work at the printing plant, the criminal complaint said. While Pajcin initially traded in his own name, he also opened accounts in his Croatian aunt's name and that of an exotic dancer in New York. Plotkin allegedly passed on information to his father, Mikhail Plotkin, the SEC complaint said.

While the plot was unusual for its audacity and range, the individual schemes were not particularly original. At least three other groups of people have faced criminal charges for obtaining the Business Week column early and trading on the information, and the "Yuppie Five" insider-trading ring featured young lawyers and Wall Street professionals who traded on information about pending takeovers.

"Insider trading will never go away," said John C. Coffee, a Columbia University law professor. "There's always a probability that you will escape detection, and some people will take that risk. Maybe it's the kind of risk young kids will take."

But federal authorities and other outside legal analysts noted that computer surveillance programs and improved international cooperation have made it much easier for authorities to detect improper trading when it yields significant profits.

"The greater your success, the greater likelihood you are going to get caught," said Steven Cohen, a former federal prosecutor who helped represent John M. Youngdahl, a Goldman Sachs economist who was sentenced to 33 months in prison for passing on a confidential advance warning that the U.S. government was going to stop selling 30-year Treasury bonds.

If convicted on eight counts of conspiracy and securities fraud, Plotkin would face up to 70 years in prison. Shpigelman, who was not involved in the Business Week allegations, faces six counts and up to 55 years in prison. One of the printing plant employees, Juan Renteria, 20, faces two counts and up to 15 years. Pajcin faces one count each of conspiracy and securities fraud. The other alleged participants have not been charged criminally.

U.S. Attorney Michael Garcia, whose Manhattan office is prosecuting the case, said the indictment should serve as a reminder to Wall Street at a time when mergers and acquisitions are in a hot period. "We are still here. We are still watching and we have every intention of policing the market," Garcia said.

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