13 Charged In Big Insider Trading Scam

By Carrie Johnson
Washington Post Staff Writer
Friday, March 2, 2007

Federal prosecutors unsealed criminal charges against more than a dozen people, including former executives at four of Wall Street's elite institutions, accused of engaging in thousands of improper trades in two schemes that netted more than $15 million in profit.

A grand jury in Manhattan indicted nine people on conspiracy, fraud and bribery charges. Among them were lawyers and officials responsible for protecting the integrity of the firms and the market, who instead became perpetrators, prosecutors said. They worked for such top-tier firms as UBS, Morgan Stanley, Bank of America Securities and Bear Stearns.

Four others, who agreed to plea bargains, helped investigators crack open the massive, six-year insider-trading plot and will provide testimony against their onetime associates, government officials said.

Together, the charges and guilty pleas mark one of the biggest and most prominent insider-trading busts since the era of Ivan Boesky and Dennis Levine, when handcuffed executives were marched out of investment firms two decades ago.

"It is particularly pernicious when Wall Street insiders . . . shamelessly compromise the markets' integrity and investors' trust for a quick buck," said Linda Chatman Thomsen, the enforcement chief at the Securities and Exchange Commission.

The six-month probe unearthed furtive meetings among the alleged conspirators, who used disposable cellphones and coded text messages to evade detection and paid kickbacks in the form of cash-filled envelopes. Investigators said they shook their heads at times as the case increasingly resembled the greed on display in the 1987 film "Wall Street."

The charges come as federal authorities are accelerating their efforts to stanch the improper flow of information among a select group of insiders on Wall Street -- a tactic that allows insiders to reap handsome profits at the expense of average investors.

Among those charged is Mitchel S. Guttenberg, a manager in UBS's equity research department, who prosecutors say tipped off traders to forthcoming upgrades and downgrades in specific stocks in exchange for a share of the profit. Guttenberg was arrested at home yesterday morning, said FBI official Teresa L. Carlson.

In 2001, as part of his job, Guttenberg gained access to a daily list of UBS analyst recommendations before it was distributed to the public, government officials said. He first exploited the information to repay a $25,000 personal loan owed to Erik R. Franklin, a former employee of Bear Stearns who has worked at three hedge funds in recent years, according to court papers.

The pair initially met at New York's fabled Oyster Bar, in the bowels of Grand Central Terminal. But finding that arrangement nettlesome, they bought disposable cellphones and sent each other coded text messages before UBS analysts downgraded their ratings on such stocks as Allstate and CVS.

The scheme involved thousands of trades, according to SEC officials. Guttenberg and Franklin invited others to join them, including relatives and executives who had worked at Bear Stearns, regulators said. The men traded in their personal accounts as well as in Franklin's hedge fund accounts.

Brokers at the New York firm Assent discovered the scheme by monitoring an account that some of the participants used. Instead of reporting the problem to law enforcement officials, however, the Assent brokers "blackmailed" the traders for more than $180,000 in cash to keep quiet, U.S. Attorney Michael J. Garcia said at a news conference in New York.

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