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UPDATE 1-Two charged in U.S. insider case involving chewed-up napkins

(Recasts first paragraph; adds allegations, background, case citations, byline)

March 19 (Reuters) - A Morgan Stanley stockbroker and a clerk at a major New York law firm were charged with insider trading in corporate mergers, in an alleged four-year scheme involving a middleman who would chew up napkins on which he passed illegal tips.

Authorities said Steven Metro, 40, a managing clerk and non-practicing attorney at Simpson Thacher & Bartlett, would pass tips about corporate transactions involving the firm's clients through the middleman to stockbroker Vladimir Eydelman, 42, who would trade for himself, family, the middleman and customers.

They alleged that the scheme resulted in more than $5.6 million of illegal profit and $33 million of illegal trades, with some profits being kicked back to Metro, and other profits spent by Eydelman on a home, jewelry and a $118,000 Maserati.

It was uncovered after the middleman, who had become friends with Metro after meeting him in 1995 in their first year of law school, began cooperating with the FBI in December.

U.S. Attorney Paul Fishman in New Jersey said transactions covered by the criminal complaint included a 2009 investment in Sirius XM Radio by Liberty Media Corp, and a 2013 merger of Office Depot Inc and OfficeMax Inc.

The U.S. Securities and Exchange Commission filed a related civil lawsuit against Eydelman and Metro.

"Law firms are sanctuaries for the confidential treatment of client information," Daniel Hawke, chief of the SEC enforcement division's market abuse unit, said in a statement. "This scheme victimized not only a law firm but also its corporate clients and ultimately the investors in those companies."

Eydelman, 42, of Colts Neck, New Jersey, was charged with eight counts of securities fraud, and Metro, 40, of Katonah, New York, was charged with nine counts. Each was also charged with four counts of tender offer fraud and one count of conspiracy.

Both are expected to appear in a Newark, New Jersey federal court on Wednesday.

William Silverman, a lawyer for Eydelman, declined to comment. Metro's lawyer could not immediately be located.

Morgan Stanley spokesman James Wiggins said the company has put Eydelman on leave, will cooperate with authorities, and does not tolerate insider trading.

Simpson Thacher did not respond to requests for comment.

HUNGRY FOR TIPS

The middleman is identified in court papers as a confidential witness, or "CW".

Prosecutors said he would get a tip from Metro, and then meet Eydelman near the central clock in Grand Central Station.

They said the middleman would show Eydelman a napkin or piece of paper, such as a post-it note, containing the ticker symbol of the stock that was to be purchased.

Once Eydelman memorized the tip, "the CW then would fold up the paper or napkin with the ticker symbol(s) written on it, place it into his mouth, and chew the paper or napkin to destroy it," the criminal complaint said.

Authorities said the middleman this year began recording conversations with the defendants, including on Feb. 20 when Eydelman gave him a cigar box containing $7,000 meant for Metro, who wanted money to buy and renovate a new home.

"Take these cigars, put it to good use," Eydelman told the middleman, according to the criminal complaint.

The case resembles a scheme that federal prosecutors in New Jersey said ran from 1994 to 2011, netted over $37 million of profit, and also involved a middleman who later cooperated.

There, the lawyer Matthew Kluger was charged with passing merger tips to the trader Garrett Bauer, with the help of middleman Kenneth Robinson. Kluger was sentenced to 12 years in prison, Bauer to nine years, and Robinson to 2-1/4 years.

The cases are U.S. v. Metro et al, U.S. District Court, District of New Jersey, No. 14-cr-08079; and SEC v. Eydelman et al in the same court.

(Reporting by Jonathan Stempel in New York; Editing by Stephen Powell)

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