A new wave of insider trading

By Michael Brush

If crime doesn't pay, then it shouldn't come as a big surprise that criminal stupidity has its limits as a moneymaking enterprise.

Yet Wall Street appears to be awash in it.

In the past three months, the Securities and Exchange Commission has filed more than half a dozen cases that charge professionals at top brokerage houses, hedge funds and even some top accounting firms with insider-trading plots. The schemes could have earned more than $35 million.

Any gains weren't ill-gotten for long, though, mostly because of some outlandishly dumb moves. Among the allegations:

• A vice president at Morgan Stanley used her mother's brokerage account to buy companies targeted for acquisition before the deals were announced.

• A Hong Kong couple increased the size of their brokerage account 25-fold -- and made two wire transfers totaling $6.9 million -- just before making a massive illegal trade.

• An investment banker made calls to Pakistan from his office phone to place trades driven by inside information.

"You have to be a moron to make a call from your office phone," says James Angel, a professor of finance at Georgetown University's McDonough School of Business in Washington, D.C. "It seems like there is an awful lot of stupidity going around, maybe because greed went to their heads."

Many of these folks are anything but amateurs. They include senior managers, hedge-fund partners, investment bankers, lawyers and traders from prestigious brokerage firms such as UBS AG (UBS, news, msgs), Credit Suisse (CS, news, msgs), Morgan Stanley (MS, news, msgs) and Bear Stearns (BSC, news, msgs). Some are lawyers from top law firms in New York and Los Angeles, or accountants who worked at PricewaterhouseCoopers and Ernst & Young.

What's driving the trend is a huge spike in takeover deals, such as Alcoa's (AA, news, msgs) recent bid for Canada's Alcan (AL, news, msgs) and News Corp.'s (NWS, news, msgs) bid for Dow Jones (DJ, news, msgs).

"Unfortunately, one of the things that naturally follows when there are big deals in the making is that you get a lot of pilot fish out there squirming around," says Michael Malloy, a former SEC enforcement attorney who teaches at the University of the Pacific's McGeorge School of Law in Sacramento, Calif.

Here's a taste of the brazen behavior in the recent insider-trading schemes -- all culled from the SEC cases filed in the past three months. Several of the accused have pleaded guilty to criminal charges, and a few have pleaded not guilty.

A debt-elimination plan gone bad?

In 2001, an employee of UBS Securities was said to be wondering how he would settle a $25,000 personal loan from a friend. Then, the SEC says, he came up with a bright idea: Why not pay it off in stock tips? After all, as a manager in the equity-research department at UBS, he knew about upcoming changes in stock recommendations by UBS analysts before they became public. So, according to the SEC, he hatched the plan with his creditor-friend, and they agreed to split after-tax profits.

The arrangement went on for years, the SEC says, as the two exchanged coded text messages on disposable cell phones to swap stock tips and set up meeting places to share the winnings. Before the scheme unraveled last year, according to the SEC, it had brought in more than $5 million on trades placed ahead of UBS ratings changes on several widely traded stocks, including Whole Foods Market (WFMI, news, msgs) and Amgen (AMGN, news, msgs).

The trades were carried out in private accounts, two hedge funds and an account in the name of the father-in-law of one of the men. The UBS manager has pleaded not guilty, but the friend who lent him money has pleaded guilty. An assistant who placed many of the trades -- an employee of Bear Stearns at the time -- caught on and placed piggyback trades in his own account. He was busted, too, and has pleaded guilty.

A fox, a henhouse and a bust

A Morgan Stanley compliance lawyer in charge of preventing leaks was allegedly profiting from them.

During 2004 and 2005, the attorney gave undisclosed takeover news to her husband, who passed it along to a broker in Florida, and they shared the profits from illicit trades made using these tips. The compliance officer, her husband and the broker have pleaded guilty to securities fraud.

All in the family

In a family-run operation, a father and three sons set up a hedge fund to trade on illegal inside information, perhaps hoping the fund would cover their tracks. The sons and a friend linked to the plot had worked at prominent law firms and the accounting firms PricewaterhouseCoopers and Ernst & Young.

They obtained insider information from their father, who had a senior management position at Taro Pharmaceutical Industries (TAROF, news, msgs). The SEC says he provided advance knowledge of earnings news and of Food and Drug Administration approval of new drugs. The scheme netted the group $3.7 million. The father, his sons and a friend who helped with the plot have pleaded guilty to securities fraud.

Continued: Our man in Pakistan

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