insider trading and market manipulation: detection - FINREP
insider trading and market manipulation: detection - FINREP
insider trading and market manipulation: detection - FINREP
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<strong>FINREP</strong>Financial Sector Development ProjectINSIDER TRADING AND MARKETMANIPULATION:DETECTION – REVIEW ANDINVESTIGATION TECHNIQUES• INSIDER TRADING• MARKET MANIPULATION• OTHER TRADING ABUSESINSIDER TRADING• DETECTION- Surveillance Criteria generate Alerts – Critical Mass of Market Share- News Analysis- Trading History Analysis- Industry Analysis- Internet Review- Decision• INVESTIGATION- Trading: Request for Beneficial Owner <strong>and</strong> Other Information- Chronologies- Analysis of Publicly Available Sources on Officers & Directors- Use of Technology Maximized- Testimony- Sufficiency of the Evidence Gathered- Referrals2
MARKET MANIPULATION ANDOTHER TRADING ABUSES• DETECTION- Scenario Specific (One Trade vs. Pattern)- “At or Near-The-Close”- Portfolio- Intraday- Prearranged or “Wash” Trades- Frontrunning- “Pump <strong>and</strong> Dump”• INVESTIGATION- Aggressive Trading Pattern- Artificial Market – No Perceived Legitimate Economic Purpose- Purposefulness or Motive3INSIDER TRADING: CASE STUDY 1(an <strong>insider</strong> <strong>trading</strong> scheme generating USD 2 million)• TIPPING AND TRADING – several securities ahead of publicannouncements that they were targets in mergers or acquisitions• F. Gallucci: Did not trade. His wife was secretary to a Partner in aLaw firm representing the companies involved• R. A. Manzo: Owner of a NJ insurance company, friend of Gallucci –profited USD900,000• G. B. Taffet: Former Chief of Staff to the NJ Governor <strong>and</strong> owner ofa company advising local NJ governments – profited USD247,000• Manzo <strong>and</strong> Taffet also tipped others totaling illicit profits of USD1.8million• REGULATORY ACTION: MANZO PAID OVER USD1.3 MILLION;GALLUCCI BARRED FROM ASSOCIATING WITH ANY BROKEROR DEALER4
INSIDER TRADING: CASE STUDY 2(detected through use of illegal drugs)• MARISSA BARIDAS: NYSE Referred 6 merger deals exhibiting same Investment Banker<strong>and</strong> same Accounts <strong>trading</strong> in all 6 merger deals (no source identified)• NYSE investigator read in the NY Times that an individual was arrested <strong>and</strong> uncovered an<strong>insider</strong> <strong>trading</strong> network identifying the accounts referred <strong>and</strong> 5 stocks; 3 of which NYSEhad referred to the SEC• NYSE investigator recognized some of the accounts mentioned in the NY Times article asthose having been referred to the SEC• OUTCOME:- Baridas was the Control Room person at the Investment Banker involved in the 6deals- The individual mentioned in the NY Times as having been arrested was Baridasboyfriend- Baridas tipped her boyfriend who in turn tipped others; the Manhattan District Attorneyfound out about the <strong>insider</strong> <strong>trading</strong> scheme when they taped recorded the boyfriend resultingfrom a drug dealing investigation <strong>and</strong> had the boyfriend cooperate by having him wear a wirewhen speaking with Baridas about how she obtained her information- First case in the State of NY declaring <strong>insider</strong> <strong>trading</strong> to be Gr<strong>and</strong> larceny: Baridassentenced to jail; <strong>and</strong> her boyfriend sent to jail for the drug conviction at a reduced sentencefor cooperating5MARKET MANIPULATION: CASE 1(at the close of <strong>trading</strong>)• D. MEMMOT AND BRIAN RIGNEY: With the last sale in XYZ stock atUSD8.95, Memmot, a broker approved a customer facilitation for a blockof XYZ stock of approximately 4.8 million shares of XYZ at a price ofUSD9.00• Memmot purchased about 2.8 million shares for his firm’s ProprietaryAccount in the facilitation• Following the customer facilitation, the price of XYZ began to decline<strong>and</strong> Memmot directed his trader Rigney to buy the stock <strong>and</strong> close it atUSD9.00• REGULATORY ACTION BY THE NYSE: MEMMOT CENSURED,SUSPENDED FOR 6 WEEKS AND OREDERED TO PAY USD100,000;RIGNEY CENSURED AND ORDERED TO PAY USD75,0006
MARKET MANIPULATION: CASE 2involving USD 38 million (began as an <strong>insider</strong> case :alerted as <strong>market</strong> <strong>manipulation</strong> too)• THE STOCK: SOUTHERN UNION GAS (SUG): The investigation started as potential <strong>insider</strong> <strong>trading</strong>. SUGannounced acquisition of PENN ENTERPRISES (PNT) for USD35 in SUG cash <strong>and</strong> stock• Pricing formula called for the acquisition price to be determined by the average closing price of SUG at theNYSE for a period of 10 days as of a certain date – the lower the SUG price the more cash SUG would haveto pay for the acquisition• After the pricing period started SUG traded to its lowest price USD17.66• Baron Capital was a holder of a sizable position in SUG• Mr. R. S. Baron, acting on behalf of customer accounts, directed to start buying SUG at or near the close of<strong>trading</strong> to raise the average closing price of SUG• The Baron purchases caused SUG to move up in price <strong>and</strong> save SUG approximately USD38 million – theBaron purchases were effected <strong>and</strong> assisted by Trading Floor staff of SLK, another Broker/dealer• REGULATORY ACTIONS:- By SEC: Fined R.S Baron <strong>and</strong> Baron Capital USD2.7 million for <strong>market</strong> <strong>manipulation</strong>- By SEC <strong>and</strong> NYSE: Fined SLK USD500,000.00 for failure to supervise- By NYSE: One SLK Trading Floor Broker – Permanent Bar from the Trading Floor <strong>and</strong> 5 year Bar fromany employment with NYSE members for aiding <strong>and</strong> abetting; <strong>and</strong> A second SLK Trading FloorBroker – 1 year suspension from membership or employment with any member.7
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