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Tag: insider trading

  • BULLETIN: ‘Bags Of Cash And A Rolex’: KPMG Auditor Charged In Alleged Insider-Trading Scheme Involving Herbalife, Others; SEC Says Tips Went To Auditor’s Golfing Buddy In The Jewelry Business

    The FBI has a photo of Scott London accepting cash in an insider-trading sting. Source: Exhibit A from FBI criminal complaint.
    The FBI has a photo of Scott London, left, accepting cash in an insider-trading sting. Source: “Exhibit A” from FBI criminal complaint filed today against London.

    BULLETIN: (UPDATED 4:44 P.M. EDT U.S.A.) The SEC has gone to federal court in the Central District of California, accusing a former KPMG “lead partner” and auditor of KPMG’s Herbalife account of insider trading by providing nonpublic information on Herbalife and other companies to a golfing buddy.

    Scott London, 50, of Agoura Hills, Calif., was fired last week by KPMG. He now stands formally accused of passing information unlawfully to Bryan Shaw, who also has been charged.  Shaw, 52, lives in Lake Sherwood, Calif., and operates a jewelry business in Encino, the SEC said.

    The men met at a country club and became close friends, the SEC charged.

    London has claimed he wanted to help Shaw because Shaw’s business was struggling, the SEC said.

    At a minimum, however, London’s alleged misdeeds have resulted in civil and criminal liability for himself, while creating a PR crisis for KPMG. At the same time, it put KPMG client Herbalife in the awkward position of having to explain why its stock stopped trading briefly Tuesday morning while its auditor was handling fallout from London’s actions and why it suddenly had no auditor.

    At 2:58 p.m. EDT today, Herbalife’s stock was showing a gain of 3.68 percent. The company said on Tuesday that KPMG had resigned its account  after “it had concluded it was not independent because of alleged insider trading in Herbalife’s securities by one of KPMG’s former partners.”

    Among the SEC’s alarming allegations is that Shaw paid London “at least $50,000 in cash that was usually delivered in bags outside of his Encino, Calif. jewelry store.”

    For good measure, the SEC alleged, Shaw also provided London “an expensive Rolex watch as well as other jewelry, meals, and tickets to entertainment events.”

    “London was honored with the highest trust of public companies, and he crassly betrayed that trust for bags of cash and a Rolex,” said George S. Canellos, acting director of the SEC’s Division of Enforcement.

    Using information provided by London, Shaw made more “more than $1.2 million in illicit profits trading ahead of earnings or merger announcements,” the SEC said.

    And, the SEC said, London has been charged criminally. (See photo above from FBI criminal complaint filed today against London, who is charged with criminal conspiracy to commit securities fraud through insider trading. Link to the complaint is in the Comments thread below.)

    On at least one occasion, “London disclosed nonpublic information in the presence of others during a golf outing,” the SEC charged.

    “Prior to public announcements, Shaw received material non-public information from London about numerous earnings announcements and releases of financial results for Herbalife, Skechers [USA Inc.] and Deckers [Outdoor Corp.],” the SEC charged.

    Shaw “grossed profits of more than $714,000 from trading based on confidential financial data about Herbalife, Skechers, and Deckers,” the SEC alleged.

    But the abuse didn’t stop there, the SEC alleged.

    London “also gained access to inside information about impending mergers involving two former KPMG clients – RSC Holdings [Inc.] and Pacific Capital [Bancorp],” the SEC alleged. “London tipped Shaw with the confidential details. Shaw made nearly $192,000 by purchasing RSC Holdings stock the day before its Dec. 15, 2011, merger announcement. He made more than $365,000 in illicit profits from his well-timed purchase of Pacific Capital securities prior to a merger announcement on March 9, 2012.”

    “As a leader at a major accounting firm, London’s conduct was an egregious violation of his ethical and professional duties,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office.

    “KPMG advised the Company it resigned as Herbalife’s independent accountant solely due to the impairment of KPMG’s independence resulting from its now former partner’s alleged unlawful activities and not for any reason related to Herbalife’s financial statements, its accounting practices, the integrity of Herbalife’s management or for any other reason,” Herbalife said on Tuesday.

    Herbalife has been the subject of a battle between titans Carl Icahn, who is bullish on the company, and Bill Ackman, who claims Herbalife is a pyramid scheme. On its website, Herbalife denies it is either a pyramid scheme or a Ponzi scheme.

     

  • BULLETIN: KPMG Discloses Chicanery In Its ‘Los Angeles Business Unit’; Shares Of Herbalife Temporarily Halted; MLM Firm Says KPMG Told It That KPMG-Employed Auditor Was Engaging In ‘Insider Trading’ Of Herbalife Stock

    Shares of MLM company  Herbalife were halted this morning after its auditor — KPMG — issued a statement yesterday that it was informed “late last week” that “the partner in charge of KPMG’s audit practice in our Los Angeles business unit was involved in providing non-public client information to a third party, who then used that information in stock trades involving several West Coast companies.”

    KPMG did not specifically mention Herbalife in its statement. Nor did the auditing firm say who informed it that its “partner in charge” was involved in chicanery. KPMG did, however, say that it had fired the partner and was “resigning” two clients.

    The Wall Street Journal is reporting that Herbalife shares were “halted minutes after the opening bell due to news pending.”

    Separately, the New York Times is reporting that Herbalife “is poised to disclose on Tuesday that KPMG will have to resign as the company’s auditor.”

    That disclosure now has occurred — and trading in Herbalife shares has resumed.

    Herbalife said this morning in a statement that KPMG wallked away from the company after stating “it had concluded it was not independent because of alleged insider trading in Herbalife’s securities by one of KPMG’s former partners.”

    That former partner was the KPMG engagement partner on Herbalife’s audit until April 5, Herbalife said.

    “KPMG advised the Company it resigned as Herbalife’s independent accountant solely due to the impairment of KPMG’s independence resulting from its now former partner’s alleged unlawful activities and not for any reason related to Herbalife’s financial statements, its accounting practices, the integrity of Herbalife’s management or for any other reason,” Herbalife said.

    Herbalife has been the subject of a battle between titans Carl Icahn, who is bullish on the company, and Bill Ackman, who claims Herbalife is a pyramid scheme. On its website, Herbalife denies it is either a pyramid scheme or a Ponzi scheme.

     

  • URGENT >> BULLETIN >> MOVING: FDA Chemist Cheng Yi Liang Pleads Guilty In Insider Trading Case; ‘Shocking Abuse Of Trust,’ Feds Say Of Schemer’s Plot To Use Database To Harvest Illegal Profits

    >> BULLETIN >> MOVING: Cheng Yi Liang, the FDA chemist accused in March of mining the agency’s database for drug approvals or denials and using the information to make insider trades, has pleaded guilty to securities fraud and failing to disclose illicit profits.

    Liang, 57, of Gaithersburg, Md., faces a maximum term of 25 years in federal prison. Sentencing is scheduled for Jan. 9. The case was one that embarrassed the FDA and its employees, but one that exposed the corruption of a federal worker who used the tools of government to line his own pockets.

    The SEC simultaneously charged Liang civilly in March, opening up a second litigation front.

    As part of a plea agreement in the Feds’ criminal case, Liang will forfeit $3.7 million, a home and condominium in Maryland and funds  in 10 bank or investment accounts, federal prosecutors said.

    The FDA is a branch of the U.S. Department of Health and Human Services (HHS).

    “Profiting based on sensitive, insider information is not only illegal, but taints the image of thousands of hard-working government employees,” said Elton Malone,  special agent in charge of the HHS-Office of Inspector General Special Investigations Branch.  “We will continue to insist that federal government employee conduct be held to the highest of standards.”

    “Mr. Liang used inside information about pharmaceutical companies — information he had access to solely because of his position at the FDA — to pocket millions in illicit profits,” said Assistant Attorney General Lanny Breuer. “In a shocking abuse of trust, Mr. Liang exploited his position as a chemist in the FDA’s Office of New Drug Quality Assessment to cash in, using the accounts of relatives and acquaintances to hide his illegal trading.  Now, like many others on Wall Street and elsewhere, he is facing the significant consequences of trading stocks on inside information.”

    Breuer is head of the Justice Department’s Criminal Division.

    While employed at FDA, Liang “was required to file a Confidential Financial Disclosure form disclosing, among other things, investment assets with a value greater than $1,000 and sources of income greater than $200.,” investigators said. “During the time period of his insider trading scheme, Liang annually filed these forms and failed to disclose using the controlled accounts or his income from the illicit securities trading.”

    The FBI participated in the criminal probe.

    “Those who use privileged and valuable information for personal gain, break the trust placed in them as a government employee and the integrity of the research they conduct on behalf of the U.S. government,” said James W. McJunkin, assistant director in charge of the agency’s Washington Field Office.

  • URGENT >> BULLETIN >> MOVING: Former Major League Baseball All-Star Doug DeCinces Charged With Insider Trading; Attorney, Physical Therapist And Businessman Who Knew Longtime Third Baseman Charged In Same Case

    URGENT >> BULLETIN >> MOVING: Former Major League Baseball star Doug DeCinces, who threw out the honorary first pitch last night at a game between the Los Angeles Angels of Anaheim and the Minnesota Twins, today was charged with insider trading by the SEC.

    Also charged in the civil case were attorney Fred Scott Jackson, 65, of Newport Beach, Calif.; Joseph J. Donohue, 49, a physical therapist who resides in Trabuco Canyon, Calif.; and Roger A. Wittenbach, 69, a businessman in Lutherville- Timonium, Md.

    DeCinces, a third baseman who retired from the big leagues in 1987, spent 15 seasons in the majors, mostly for the Baltimore Orioles. He was an American League All-Star in 1983, and hit 237 career homers. He also played for the Angels and the St. Louis Cardinals, driving home nearly 900 runs during the course of his long and successful baseball career.

    But the SEC said today that DeCinces, 60, began to drive home illegal profits from insider trading when he came into possession of material, nonpublic information that Abbott Laboratories Inc. was acquiring Advanced Medical Optics Inc. through a tender offer in 2008.

    DeCinces shared the information with the other charged defendants, putting each of them in position to profit illegally, the SEC charged. DeCinces bought 83,700 shares of Advanced Medical ahead of the acquisition news, and allegedly “sold all of his shares for $1.2 million in profits.”

    “Time and again, we see reputable people engaging in insider trading and risking their good names in order to enrich themselves and those around them,” said Daniel M. Hawke, chief of the SEC Division of Enforcement’s Market Abuse Unit and director of the Philadelphia Regional Office. “People need to understand that we are watching for suspicious trading activity, and they will pay a heavy price when we catch them insider trading.”

    Donohue made $75,570 on the illegal tip, while Jackson made $140,259, the SEC charged. Meanwhile, Wittenbach made $201,692. After Wittenbach told his sister to buy the stock, she made $13,214, the SEC said. The sister was not charged.

    DeCinces agreed to settle the case for $2.5 million, without admitting or denying the allegations. The other defendants also settled without admitting or denying.

    Donohue agreed to pay disgorgement of $75,570 and a penalty of $37,785, while Jackson agreed to pay disgorgement of $140,259, prejudgment interest of $12,508 and a penalty of $140,259.

    At the same time, Wittenbach agreed to pay disgorgement of $201,692, prejudgment interest of $5,768, and a penalty of $214,906.

    Jackson bought 8,500 shares of Advanced Medical with a handheld device while having breakfast with DeCinces, the SEC said.

  • URGENT >> BULLETIN >> MOVING: Former NASDAQ Managing Director Charged Criminally, Sued Civilly In Insider-Trading Case; Donald L. Johnson Pleads Guilty To Criminal Securities Fraud Amid Allegations He Cherry-Picked Information While Serving As Stock-Exchange Gatekeeper

    URGENT >> BULLETIN >> MOVING: A former managing director of the NASDAQ stock exchange has been charged by both the SEC and federal prosecutors in an insider-trading case.

    Donald L. Johnson, 56, of Ashburn, Va., already has pleaded guilty on the criminal side of things, the Justice Department said.

    For its part, the SEC said Johnson abused his position, made trades from his work computer and racked up $755,000 dollars in illegal profits over three years.

    Johnson, the SEC said, cherry-picked information on corporate leadership changes, earnings reports, earnings forecasts and regulatory approvals of new pharmaceutical products.

    “This case is the insider trading version of the fox guarding the henhouse,” said Robert Khuzami, director of the SEC’s Division of Enforcement. “Instead of protecting NASDAQ client confidences, Johnson secretly traded on client information for personal gain, even using his NASDAQ office computer to make the trades.”

    Federal prosecutors also used the fox-and-henhouse analogy.

    “Insider trading by a gatekeeper on a securities exchange is a shocking abuse of trust, and must be punished,” said Assistant Attorney General Lanny Breuer, head of the Justice Department’s Criminal Division.

    Meanwhile, U.S. Attorney Neil H. MacBride of the Eastern District of Virginia said Johnson padded his retirement by cheating.

    “He thought he could get away with it by using his wife’s account and inside information to make relatively small trades just a few times a year,” MacBride said.  “But he learned what every other trader on Wall Street must now realize: We’re watching.”

    Prosecutors gave the U.S. Postal Inspection Service credit for the criminal bust.

    Johnson was a managing director on NASDAQ’s market intelligence desk in New York between 2006 and September 2009, prosecutors said.

    “Johnson brazenly stole nonpublic information from NASDAQ and its listed companies in breach of his duties of confidentiality to his employer and clients,” said Antonia Chion, associate director of the SEC’s Division of Enforcement.

    Criminal securities fraud carries a maximum penalty of 20 years in federal prison and a maximum fine of $5 million.

  • URGENT >> BULLETIN >> MOVING: Raj Rajaratnam Guilty In Insider-Trading Case; Sentence Potentially Could Exceed Madoff’s 150 Years

    BULLETIN: Raj Rajaratnam has been found guilty of all 14 counts of conspiracy and securities fraud filed against him in the Galleon Group insider-trading case.

    The verdict came on the 12th day of jury deliberations. It deals a devastating blow to Rajaratnam, but is a major win for prosecutors. The case was brought by the office of U.S. Attorney Preet Bharara of the Southern District of New York.

    Rajaratnam, 53, once was listed by Forbes magazine as one of the wealthiest men in the United States. Prosecutors said that crime ultimately became his business model. Wiretaps and recordings were used to convict him.

    The Justice Department has said it recent months that tools traditionally used in organized-crime investigation have been helpful in exposing white-collar fraud.

    “Raj Rajaratnam, once a high-flying billionaire and hedge fund manager, is now a convicted felon, 14 times over,” Bharara said. “Rajaratnam was among the best and the brightest — one of the most educated, successful and privileged professionals in the country. Yet, like so many others recently, he let greed and corruption cause his undoing. The message today is clear — there are rules and there are laws, and they apply to everyone, no matter who you are or how much money you have.”

    Insider trading “cheats the ordinary investor, victimizes the companies whose information is stolen, and is an affront not only to the fairness of the market, but the rule of law,” Bharara said.

    Rajaratnam traded illegally in the stock of Goldman Sachs, Clearwire, Akamai, AMD, Intel, Polycom and PeopleSupport, prosecutors said, describing the case as the “largest hedge fund insider trading scheme in history.”

    He potentially faces up to 205 years in federal prison. Sentencing is scheduled for July 29. Prosecutors said he gained nearly $64 million by trading on material, nonpublic information culled from fellow cheaters.

    Rajaratnam remains free pending sentencing. He has been placed on electronic monitoring.

    The SEC provided “extraordinary assistance,” Bharara said. The FBI led the criminal probe and also received praise from Bharara.

  • FDA Chemist Cheng Yi Liang’s Very Bad Day: Busted By The Feds, Sued By The SEC For Trading On Information Lifted From Confidential Government Database

    A chemist who works for the U.S. Food and Drug Administration has been charged criminally by federal prosecutors, arrested by federal agents in Maryland, sued by the SEC — and will go to bed tonight knowing his son has been arrested in the same case.

    Cheng Yi Liang, 56, of Gaithersburg, was accused of abusing his position of trust at the FDA by mining the agency’s database for information on drug approvals or denials — and then trading on the information he gleaned to “generate more than $3.6 million in illicit profits and avoided losses,” the SEC said.

    Liang’s son, Andrew Liang, 25, also of Gaithersburg, was arrested, too.

    And high-ranking public officials minced no words when announcing the charges against the men, which included a stunning allegation that the senior Liang sought to conceal the scheme in part by trading in the account of his elderly mother in China.

    “Cheng Yi Liang was entrusted with privileged information to perform his job of ensuring the health and safety of his fellow citizens,” said Assistant U.S. Attorney General Lanny Breuer. “According to the [criminal] complaint, he and his son repeatedly violated that trust to line their own pockets.”

    Breuer is the head of the Justice Department’s Criminal Division.

    “Liang victimized both the investors who were disadvantaged by his theft of inside information and the American citizens whose trust he violated by placing private gain above public good,” said Robert Khuzami.

    Khuzami is director of the SEC’s Division of Enforcement.

    Another high-ranking official summarized today’s events by saying Liang’s actions made government workers look bad.

    “Profiting based on sensitive, insider information — as Liang is charged with today — is not only illegal, but taints the image of thousands of hard-working government employees,” sighed Elton Malone, special agent in charge of the office of special investigations for the U.S. Department of Health and Human Services, Office of the Inspector General.

    Liang, an FDA employee since 1996, began snatching information as early as July 2006, the SEC charged.

    He “illegally traded in advance of at least 27 public announcements about FDA drug approval decisions involving 19 publicly traded companies,” the agency charged.

    In a bid to cover his tracks, Liang “traded in seven brokerage accounts, none of which were in his name. One belonged to his 84-year-old mother who lives in China,” the SEC charged.

    “The insider trading laws apply to employees of the federal government just as they do to Wall Street traders, corporate insiders, or hedge fund executives,” said Daniel M. Hawke, chief of the SEC’s Market Abuse Unit.

    Father and son were charged with conspiracy to commit securities fraud and wire fraud, securities fraud and wire fraud. Federal prosecutors said investigators caught Liang after special software was installed on the work computer he was using.

    See this SEC exhibit that outlines the trades.

     

  • SEC Charges Rajat K. Gupta, One Of World’s Top Business Consultants, In Insider Trading Case Involving Raj Rajaratnam, One Of America’s Richest Men

    In a case apt to plague Wall Street with questions about whether people on Main Street should trust it,  the SEC has accused one of the world’s foremost business consultants with providing illegal “insider trading” tips that lined the corporate pockets of one of the richest men in the world.

    Rajat K. Gupta is accused of providing confidential information about the earnings reports of Goldman Sachs and Procter & Gamble to Raj Rajaratnam and also disclosing to Rajaratnam a plan by Warren Buffett’s Berkshire Hathaway to invest $5 billion in Goldman.

    Gupta allegedly gleaned the information while serving on the boards of Goldman Sachs and Procter & Gamble. Rajaratnam, the head of Galleon Management, used it virtually immediately either to generate illegal trading profits of millions of dollars or to avoid losing millions of dollars, the SEC charged.

    Rajaratnam, who is facing a criminal trial in the Galleon insider-trading case, was listed as No. 236 on the 2009 Forbes magazine list of the 400 richest Americans. Forbes reported that Rajaratnam had assets of $7 billion in 2009.

    Gupta, meanwhile, is the chairman of the International Chamber of Commerce, a special adviser to the United Nations, an adviser to the Bill & Melinda Gates Foundation, an adviser to prominent academic institutions in the United States and India  — and a board member or former board member of some of the most famous companies in the world. By virtually all accounts, he built a stunningly successful international business career after starting out at McKinsey & Co. in 1973.

    Today, though, the SEC accused him of betraying the trust he had built up over decades.

    “Gupta was honored with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets,” said Robert Khuzami, director of the SEC’s Division of Enforcement. “Directors who violate the sanctity of board room confidences for private gain will be held to account for their illegal actions.”

    Gupta “voluntarily resigned” from P&G’s board today, the company said in a statement. He left the board of Goldman Sachs last year.

    One of the problems with illegal insider trading is that it undermines the public’s confidence in the fairness and integrity of securities markets, the SEC says. It is illegal to trade on material, nonpublic information about a security and to breach a fiduciary duty.

    Read the stunning allegations against Gupta, who denies them.

  • DEVELOPING STORY: Douglas Ballard, Banker Accused Of Lending Money For Guy Mitchell’s Alleged ‘Private Island In The Bahamas,’ Pleads Guilty; Case Part Of $1 Billion Failure Of Integrity Bank

    A Georgia banker accused of lending a now-accused Florida real-estate fraudster money to buy a “private island” in the Caribbean has pleaded guilty to conspiracy to commit bank fraud and to receive bribes, and to a single count of tax evasion, federal prosecutors said.

    Douglas Ballard, 40, of Atlanta, formerly was the executive vice president in charge of lending at Integrity Bank, a $1 billion institution that collapsed in August 2008 and was taken over by the Federal Deposit Insurance Corp. (FDIC).

    “Among the roots of our nation’s financial crisis were criminal acts by bank insiders and major borrowers that contributed to the failures or bailouts of financial institutions previously believed to be secure,” said U.S. Attorney Sally Quillian Yates of the Nortern District of Georgia.

    Ballard, Mitchell and Joseph Todd Foster, another Integrity vice president, were indicted under seal in April.  Mitchell, 50, of Coral Gables, Fla., is a developer. Foster, 42, of Atlanta, was in charge of risk management at the bank.

    Prosecutors now say Ballard has admitted that he conspired with Mitchell “to receive bribes from Mitchell and to assist Mitchell in receiving millions in loan draws under false pretenses.”

    Ballard, prosecutors said, “admitted in court to receiving over $200,000 in cash and other corrupt payments from Mitchell in exchange for Ballard’s assistance in distributing millions of loan draws.

    “During this same time, Ballard caused Integrity Bank to distribute nearly $20 million in loan proceeds to Mitchell’s personal account, much of which was allegedly used for Mitchell’s personal consumption (including the purchase of a private island in the Bahamas),” prosecutors said.

    About $7 million of the sum was related to draws on a “construction loan relating specifically to supposed construction and renovation at the ‘Casa Madrona,’ a luxury hotel owned by Mitchell in Sausalito, Calif.

    “The indictment alleges that none of this money was used for construction, and in fact no renovations had occurred,” prosecutors said.

    “While Mitchell was spending much of the loan proceeds on himself, the indictment alleges that [he] paid little, if any, of his money back to Integrity to satisfy interest payments,” prosecutors said in May.

    Instead, prosecutors alleged, “Mitchell paid interest on existing loans by taking draws or disbursements from other loans, and continually borrowed more and more money to keep paying the ever-increasing interest payments.”

    For his part, Foster pleaded guilty to securities fraud amid allegations of insider trading.

    Prosecutors said Foster “dumped his shares of Integrity stock based on his knowledge that the bank was facing an increasingly substantial but undisclosed risk that its major customer, Mitchell, would default on over $80 million in outstanding loans.”

    “These officers of Integrity Bank sure weren’t living up to the bank’s name,” Yates said in May, after the April indictments were unsealed. “While the developer was living the good life, even buying a private island with Integrity’s money, and the bank’s senior loan officer was making huge commissions and taking payoffs from the developer, the bank was dying a slow death. The defendants were going to leave the bank’s shareholders and the FDIC holding the bag, but now they are being held accountable.”

    The case was brought as part of the undertakings of President Obama’s Financial Fraud Enforcement Task Force.

    Mitchell paid about $1.5 million for the private island in the Bahamas, prosecutors said.

    “Those who line their pockets with profits of bank fraud schemes should know they will not go undetected and they will be held accountable,” said Reginael McDaniel, special agent in charge of  the IRS Criminal Investigations unit.

    No sentencing dates have been set for Ballard and Foster. Ballard faces up to 10 years in prison and a fine of up to $500,000. Foster faces up to 20 years in prison and a fine of up to $5 million.

    Mitchell has entered a plea of not guilty.

  • FBI, SEC Nab Pair Using Gmail To Run Insider-Trading Scam; Undercover Agents Responded To Offer To Sell Disney Earnings Report

    So, you want to use Google’s free Gmail service to pull off a scam? From this day forward you should not be confident that you’re not already caught. The FBI today announced that it set up a sting to nail two people who were trying to sell the quarterly earnings report of Walt Disney Co. before its scheduled release date by communicating with potential buyers through a Gmail account.

    Arrested today on federal charges of wire fraud and conspiracy were Bonnie J. Hoxie and Yonnie Sebbag. Hoxie, 33, of Los Angeles, was a Disney administrative assistant and had access to the company’s confidential communications. Sebbag, 29, also of Los Angeles, is a friend of Hoxie’s and used the alias “Jonathan Cyrus.”

    The scheme began when Sebbag and Hoxie sent anonymous letters through the U.S. mail to “multiple hedge funds and other investment companies, many of which were located in Manhattan, offering to sell the Inside Information for purposes of illegal insider trading,” authorities said.

    FBI agents posing as hedge-fund traders interested in obtaining the information communicated with the scammers, authorities said.

    In a separate fraud action by the SEC, the agency said the letters all had Los Angeles postmarks and stated (emphasis added):

    Hi, I have access to Disney’s (DIS) quarterly earnings report before its release on 05/03/10 [sic]. I am willing to share this information for a fee that we can determine later. I am sorry but I can’t disclose my identity for confidentiality reasons but we can correspond by email if you would like to discuss it. My email is [Actual Gmail Address Email Deleted By PPBlog]. I count on your discretion as you can count on mine. Thank you and I look forward to talking to you.

    At least 20 hedge funds, including funds based in several U.S. states and European countries, received the same or substantially the same letter, the SEC said.

    The SEC’s filing suggests the scammers were made to believe that the actual undercover agents were worried about the scammers being agents.

    “First of all, i am not a fed,” Sebbag allegedly wrote to the undercover agents. “I have no way to prove it at this point but i am not asking you to disclose your identity not i will disclose mine. It is up to you to determine if this is worth the risk as i did. I work for Disney, that is all i can tell you.”

    Sebbag, though, did not work for Disney. He lied about that and relied on the information provided by Hoxie, an actual Disney employee and Sebbag’s co-conspirator, authorities said.

    On May 14, the FBI “paid” Sebbag $15,000 for the inside information after meeting him in New York to seal the deal.

    “This investigation should serve as a warning, if you’re contemplating acquiring and profiteering from insider information, sometimes the person you’re trying to sell it to is really an undercover FBI agent,” said George Venizelos, acting assistant director-in-charge
    of the New York FBI field office.

    “What the case also shows is that the FBI’s vigilance is needed to police the small percentage of bad apples who can cause so much damage,” Venizelos said. “The majority behave like the dozens of hedge funds and investment companies that received Hoxie and Sebbag’s offers of insider Disney information: none took the bait, and almost all notified the FBI.”

    The SEC’s director of enforcement said the case sends a powerful message.

    “Hoxie and Sebbag stole Disney’s confidential pre-release earnings information and put it up for sale,” said Robert Khuzami. “Fortunately, multiple hedge funds reported the illicit scheme, and the SEC and criminal law enforcement authorities acted quickly to stop this brazen attempt to establish an ongoing insider trading business.”

    Prosecuutors noted that, after Sebbag received the $15,000, he “further agreed that he would provide similar confidential information in the future in return for a thirty percent share of any profits from the insider-trading scheme.”

    It is common for scammers to use free email addresses to cloak their identities.

    Credit for the busts was given to the interagency Financial Fraud Enforcement Task Force, which President Obama created in November 2009.