SEC – USAO Halt Serial Insider Trading Ring Despite Concealment Efforts

by Dorsey & Whitney LLP
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Trading repeatedly on inside information is likely to yield investigations by the SEC and the DOJ and charges by both even when steps are taken to carefully conceal your activity. That was the case for an insider trading ring composed of a law firm employee who obtained inside information on thirteen deals, a middleman and a registered representative at a brokerage firm who placed the trades. SEC v. Eydelman (D.N.J. Filed March 19, 2014). Parallel charges were brought in a criminal complaint filed by the U.S. Attorney for the District of New Jersey.

The defendants in the two cares are Steven Metro and Vladimir Eydelman. Mr. Metro was employed by Simpson Thacher & Bartlett LLP as a clerk, although he was a lawyer. Mr. Eydelman is a registered representative. From March 2001 through September 2012 he was employed at Oppenheimer & Co. Inc. He is currently employed at Morgan Stanley & Co. A third person, called “The Middleman” by the SEC (or CW for Cooperating Witness by the USAO) has not been charged and is cooperating with authorities. He is a longtime friend of Mr. Metro, whom he met in law school, and a client of Mr. Eydelman.

The scheme, which begin in early 2009, and continued to the present, traces to a conversation in February of that year between Mr. Metro and CW at a New York City bar. During one portion of the conversation the two men discussed stocks. CW expressed concern over his investment in Sirius XM Radio in view of its financial condition. Mr. Metro reassured his friend that the investment was safe based on documents he had seen at the law firm stating that Liberty Media Corp. planned to invest over $500 million in radio company.

CW later called Mr. Eydelman and instructed him to purchase shares of Sirius, assuring him that the then financially shaky firm would be fine in view of the reliable information he received from a law firm. Following the deal announcement CW assured Mr. Metro that he had set aside a portion of the trading profits, which totaled $212,814, as a thank you. Mr. Metro directed his friend to hold the funds for investment in future deals.

After the Sirius transaction Mr. Metro supplied inside information on twelve additional deals. Typically the group operated in a careful manner as follows:

1) Mr. Metro obtained inside information on a deal;

2) Mr. Metro and CW met at a designated location;

3) Mr. Metro typed the name or ticker symbol on his cell phone and showed it to CW; he also conveyed information about the timing of the deal and the price;

4) CW and Mr. Eydelman met at a designated location in Grand Central Station;

5) CW showed Mr. Eydelman a note with the ticker symbol on it and then destroyed the document by chewing it or eating it; and

6) Mr. Eydelman placed trades, typically for family accounts and up to 50 of his clients including CW.

Some of these meetings were taped.

Simpson Thatcher was counsel in each of the deals. In addition, to the Sirius financing, the deals included, and profits made from trading were:

Ø The acquisition of Brink’s Home Security Holdings, Inc. by Tyco International Ltd., announced on January 18, 2010 with profits of $773,154;

Ø The acquisition of CNA Surety Corporation by CNA Financial Corporation, announced on November 1, 2010 with profits of $241,141;

Ø The acquisition of Collective Brands, Inc. by Wolverine Worldwide, Blum Capital Partners and Golden Gate Capital, announced on May 1, 2012 with profits of $360,775;

Ø The acquisition of Graham Packaging Company Inc. by Silgan Holdings Inc., announced April 13, 2011 with profits of $105,964;

Ø The tender offer by Arch Coal, Inc. for Coal Group, Inc., announced on May 2, 2011 with profits of $231,276;

Ø The acquisition by Office Depot, Inc. of OfficeMax, Inc., announced on February 20, 2013 with profits of $573,332;

Ø The tender offer for PharMerica Corporation by Omnicare, Inc., announced on August 23, 2011 with profits of $$1,517,092;

Ø The acquisition of Sealy Corporation by Tempur-Pedic International Inc., announced on September 27, 2012 with profits of $$14,509;

Ø The acquisition of SMART Modular Technologies, Inc. by Silver Lake Partners and Silver Lake Sumeru, announced April 26, 2011 with profits of $1,575,382;

Ø The merger of Smithtown Bancorp Inc. and People’s United Financial, Inc., announced on July 15, 2010 with profits of $29,010;

Ø The tender offer by Toshiba Medical Systems Corporation for Vital Images, Inc., announced on April 27, 2011 with profits of $39,233; and

Ø A possible corporate transaction between Company A and another company which has not yet occurred.

After being tipped Mr. Eydelman generally returned to his office and gathered research regarding the target company. Trades were placed. Eventually that material was e-mailed to CW.

The scheme yielded over $5.6 million in illegal profits for the defendants, CW, their families and friends and Mr. Eydelman’s clients. Typically those trades were placed by Mr. Eydelman for his account and his family and clients. Mr. Metro personally traded in advance of two transactions while CW and Mr. Eydelman sometimes communicated the information to friends who also traded. CW held the profits of Mr. Metro. His share of the profits was over $168,000.

The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 14(e). The criminal complaint alleges one count of conspiracy to commit securities and tender offer fraud and multiple counts of securities fraud. Both cases are pending.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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