Prosecutors Crack Insider-Trading Ring

Shielded by his attorney former broker and dealer at Bank of America Securities Paul Risoli exits Manhattan federal court following his arraignment, Thursday, March 1, 2007, in New York. Thirteen former brokerage house employees were indicted and charged in a massive insider trading scheme. (AP Photo/ Louis Lanzano) (Louis Lanzano - AP)

NEW YORK -- The defendants included husband-and-wife lawyers, registered representatives, compliance personnel and hedge fund portfolio managers who improperly relied on hundreds of tips during five years of illegal trading.

Investigators have broken up what they call one of the biggest Wall Street insider-trading rings since the 1980s _ a sweeping, $15 million scandal that involved power brokers at some of the nation's top financial firms and two lawyers.

In announcing the case Thursday, authorities described a criminal operation that used insiders at Morgan Stanley and Co. and UBS Securities LLC to steal valuable secrets from the companies. Prosecutors also alleged a Banc of America Securities LLC broker accepted cash kickbacks and two former representatives of Bear Stearns & Co. obtained UBS inside information.

"This conduct didn't occur in obscure boiler rooms _ but rather at what are commonly considered `top tier' Wall Street firms," said Linda Chatman Thomsen, director of the Division of Enforcement for the Securities and Exchange Commission.

She said "there is hardly a duty on Wall Street that the defendants charged today didn't breach."

U.S. Attorney Michael Garcia said Wall Street professionals repeatedly traded on secrets revealed to them by insiders at UBS and Morgan Stanley.

The case alleges that people were tipped off about stock upgrades and downgrades by UBS and impending corporate acquisitions involving Morgan Stanley clients, allowing investors to cash in before the news hit the market.

The SEC said the ringleaders of the UBS part of the scheme went to great lengths to hide their illegal conduct, with tactics including a clandestine meeting at Manhattan's famed Oyster Bar and eventually the use of disposable cell phones, secret codes and cash kickbacks.

In all, 13 people have been arrested in the criminal case. The SEC brought civil charges against 11 individuals and three entities.

Among financial professionals charged criminally in U.S. District Court in Manhattan was Mitchel Guttenberg, an executive director and institutional client manager at UBS.

Garcia said Guttenberg, who worked in UBS's equity research department, accepted hundreds of thousands of dollars as he sold nonpublic information to two men regarding upcoming upgrades and downgrades by UBS analysts.

The men, David Tavdy and Erik Franklin, used the UBS inside information to each earn more than $4 million by executing profitable trades in various brokerage accounts they controlled, Garcia said.