13 Charged In Big Insider Trading Scam
Plots Touch 4 Elite Wall Street Firms

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.

"Each of the individuals we charged had a responsibility to protect investors and the integrity of the markets," said Scott W. Friestad, an SEC associate director of enforcement. "What's particularly insidious about this case is that the first instinct of each of these individuals was to try to find a way to personally benefit from the non-public information rather than to do the right thing."

A second alleged plot revolved around Randi E. Collotta, a former compliance unit officer at Morgan Stanley, who prosecutors say shared tips with her husband and other traders about coming corporate acquisitions involving bank clients from 2004 to 2005. Collotta, an attorney, violated Morgan Stanley policy by passing on word of Adobe Systems' looming acquisition of Macromedia and of UnitedHealth Group's purchase of PacifiCare Health Systems, among other deals, according to court papers.

The two rings converged with Franklin and another man, former Bear Stearns professional Robert D. Babcock. Babcock, who also processed trades for one of Franklin's hedge funds, received tips from a participant in the Morgan Stanley scheme. He allegedly shared that inside information with Franklin and others, authorities said.

SEC investigators found an avenue into the byzantine schemes more than six months ago after examining trades by Franklin's father-in-law in advance of a 2005 Morgan Stanley deal involving Catellus Development. SEC lawyers searched extensive trading records for patterns that led them to Franklin's doorstep.

In October, securities investigators flagged the issue for federal prosecutors and FBI agents in New York and expanded their probe from trades involving corporate mergers to transactions based on when UBS analysts had upgraded or downgraded stock ratings.

Franklin, who helped authorities unravel the scheme, pleaded guilty to conspiracy, securities fraud and bribery on Tuesday. Babcock pleaded guilty to similar charges a day later, but prosecutors kept both agreements secret until yesterday.

Eight of the defendants appeared in New York and another appeared in Florida for arraignment yesterday. Each pleaded not guilty, and all were released on bond.

Barry P. Barbash, a former securities regulator who now works at the law firm of Willkie, Farr & Gallagher, said the case reflects the fact that a generation of young professionals no longer recalls seeing Wall Street titans face perp walks and grueling trials for insider-trading crimes in the 1980s.

"This case is an unfortunate reminder to everybody in the business . . . It's sobering."

In recent months, prosecutors and securities regulators have focused on hedge funds and private-equity companies -- fast-growing investments designed for wealthy individuals and institutions -- that strive to gather bits of information to profit in advance of corporate announcements.

At a meeting yesterday in Texas with leaders of each of the SEC's regional offices, SEC Chairman Christopher Cox affirmed that policing possible insider trading by hedge funds would be a top regulatory priority over the next two years.

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