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UBS Banker Used Coded Email for Insider Trades: US

Using coded email messages referring to securities and money as "frequent flyer miles" and "potatoes," a high-ranking UBS investment banker and a trader made $870,000 in illegal profits from trades on tips about six UBS healthcare client acquisitions, U.S. prosecutors said.

gavel and money
gavel and money

A criminal complaint filed in Manhattan federal court on Wednesday said that from 2005 through February 2009, UBS banker Igor Poteroba agreed to leak confidential information about UBS and the six clients to trader Alexei Koval, assisted by another co-conspirator.

The criminal complaint and a parallel civil fraud complaint by the U.S. Securities and Exchange Commission cited the coded messages. The SEC identified the co-conspirator as their friend and trader Alexander Vorobiev, who purportedly traded ahead of four of the deals.

UBS, which said it is cooperating with authorities, has placed Poteroba on administrative leave, the investment bank told CNBC. The SEC complaint said Koval was employed by Northern Trust Bank in Chicago, but bank spokesman John O'Connell said in an email that Koval worked at Northern Trust for eight months from July 2009 to this month.

The complaints reproduced emails allegedly sent in July 2005 in which Poteroba said, "Keep me posted as to how many frequent flier miles you've got this far and how many you plan to get by Friday" and "Worst case we can get a refund by Monday, hopefully we do not."

An email by Koval the same month purportedly said, "As I mentioned, I just got into this frequent flyer program. I got five thousand of sign-in bonus miles but thinking maybe if I fly often, I will get additional three to five K miles."

The leaked information related to forthcoming announcements about mergers or acquisitions involving six publicly traded healthcare companies: Guilford Pharmaceuticals, Molecular Devices, Pharmanet, Via Cell, Millennium Pharmaceuticals and Indevus Pharmaceuticals.

"These words were code for nothing more than 'we are breaking the law,'" Robert Khuzami, director of the SEC's Division of Enforcement, said in a statement.

Poteroba, 36, of Darien, Connecticut, was arrested in New York on Wednesday and is expected to appear in court on Thursday, Manhattan U.S. Attorney Preet Bharara said in a statement. Koval, 36, of Chicago and Pasadena, California. was arrested at Chicago's O'Hare airport and was expected in court later Wednesday.

The SEC said Koval's employers from June 2000 included Citigroup Asset Management and Western Asset Management, a subsidiary of Legg Mason .

They are charged with conspiracy to commit securities fraud and securities fraud. If convicted, they could be imprisoned for up to 20 years and fined $5 million.

The SEC said Poteroba, Koval and Vorobiev are each Russian citizens who attended college in the 1990s at the University of New Haven in Connecticut. Poteroba joined UBS in its Healthcare Group in 1999 and was promoted into an executive director position in 2006.

The investigation appears to have no ties to the ongoing Galleon hedge fund insider trading case.