The Century's Big Insider-Trading Bust

Involving a number of investment houses, the charges cast a wider net than anyone had anticipated. Plus, a piggyback cover-up scheme is revealed

Michael Garcia, the U.S. Attorney for the Southern District of New York, discusses the relationship of several suspects arrested in an alleged insider-trading conspiracy. Rick Maiman/ Bloomberg News

Story Tools

Even John Grisham would have a tough time topping the latest Wall Street insider-trading saga, outlined on Mar. 1 by federal authorities against a group of current and former employees of four big investment houses: UBS (UBS) Morgan Stanley (MS), Bank of America (BAC) and Bear Stearns (BSC).

The case involves allegations that hedge funds bought information about impending rating changes on stocks from an executive at UBS, got tips about upcoming corporate mergers from a former Morgan Stanley compliance officer, and paid a Bank of America broker for the right to get shares in hot initial public offerings. There's even a charge that some day traders, who had gotten wind of the alleged activities, were shaking down other traders for money to keep secret their role in the purported insider-trading scheme.

The Plot Thickens

News of the investigation and the possibility of federal authorities filing charges against a UBS employee were first reported this week by BusinessWeek.com. But the extent of the alleged wrongdoing is far greater and more complex than anyone imagined.

In all, nine people, including Mitchel Guttenberg, 41, a UBS executive director, and Randi Collotta, a former Morgan Stanley compliance officer, are facing an array of criminal or civil securities fraud charges. Four other people have already pleaded guilty to federal criminal charges including securities fraud, conspiracy, and bribery.

The Securities & Exchange Commission estimates the various insider-trading schemes netted more than $15 million for all of the participants. The SEC says the maneuver in which Guttenberg tipped off two traders to impending changes in stock ratings accounted for the lion's share of the illicit trading gains, netting $14 million in "illegal profits." Michael Garcia, the U.S. Attorney for the Southern District of New York, put the defendants' total haul from the various schemes at $8 million. Authorities say the discrepancy in the figures is due to the fact that civil charges filed by the SEC are slightly different from those in the criminal case brought by prosecutors.

Largest Case in 20 Years

Whatever the precise figure, the case is a big black eye for Wall Street. Indeed, federal authorities are calling the arrests, which took place following a six-month investigation, one of the more significant insider-trading cases ever filed. Scott Friestad, an SEC associate director, says the "action is one of the largest SEC insider-trading cases" in nearly two decades.

The investigation moved so swiftly because prosecutors and regulators got help from a number of cooperating witnesses, some of whom even secretly recorded conversations with some of the defendants, say people familiar with the case. Some of the defendants learned only recently that they were under investigation.

Up until Feb. 28, the day before the charges were announced, Guttenberg had continued to show up for work at UBS. Doug Morris, a spokesman in New York for the Swiss-based bank, says Guttenberg is now on an unpaid leave of absence. "UBS is assisting the authorities to the fullest extent possible in their investigation into the alleged actions of a single UBS employee. The U.S. Attorney has described UBS as a victim of this alleged scheme," says Morris. Lawyers for Guttenberg and many of the other defendants could not be reached for comment.

Selling Tips for Four Years

What's most astonishing may be the brazenness of the activities alleged to have taken place. In the case of Guttenberg, for instance, federal prosecutors say he was selling advance notice of ratings changes on stock by UBS analysts to two traders for nearly four years. Guttenberg, a member of UBS's investment review committee, stopped selling the information only when he stepped down from the committee in December.