Feature Story / "Follow
the Money" with a Collateralized Debt Obligations
backed by a home mortgage. Such is a CDOs, say the
insider like the pretty female pictured on the
left. They have been a hot product with many big
investors for many years: says Troy
Cory-Stubblefield, co-author of "BOA, The
"In fact, in
recent years" say Troy, "Hedge Funds Collateralized
by China U.S. Treasury Bonds and Rogues at major
firms have made big bucks for the managers, and
have been used to help monitized the mortagage
pools, and why not? It's their money."
MORE ABOUT The Tortfeassors, AND MELVIN BELLI
The LA Times recently
reported that: -- a Wall Street executive sat down
with his friend ("Mr. Milton") -- in Manhattan's
famed Oyster Bar about five years ago to discuss
repaying a $25,000 loan.
But instead of cash, the
Wall Street Bank rep offered a currency that's far
more valuable on Wall Street: inside information
about dozens of stock analyst recommendations at
his firm, financial services powerhouse UBS.
Thus began what regulators
described Thursday as one of the most pervasive
insider-trading scandals since the days of Ivan
Boesky, Milikin and Dennis Levine in the late
to avoid detection, the men used disposable
cellphones so there wouldn't be records of their
calls and exchanged text messages in code,
purported scheme, along with an alleged separate
plot at venerable Morgan Stanley also disclosed
Thursday, involved 14 people, four major Wall
Street firms, three hedge funds and at least $15
million in illicit profit, according to federal
involved people who should have known better and
people who were making a great living," said Linda
Thomsen, enforcement director at the Securities and
Exchange Commission. "This is outrageous."
02 - Ivan Boesky, what did he do?
Although insider trading
has receded from public view since Boesky paid $100
million to settle federal civil charges,
authorities fear that it's making a comeback in the
particular, they are worried that hedge funds --
lightly regulated investment pools that are often
willing to take big risks in pursuit of big profits
-- might be especially willing to flout the law to
get an edge.
time you have something that taints the industry,
it's a topic of conversation," said George
Rodriguez, a managing director at TradeTrek
Securities, an institutional brokerage firm in
Stark, a veteran trader now working as a
consultant, said traders "have been talking for
ages" about suspicious price movements in stocks
ahead of significant news.
always been a sneaking suspicion that there's
information leakage," she said. "It's like, 'These
guys are just not that smart.' "
UBS case, Guttenberg, 41, of Manhattan, and
Franklin, 39, of Denville, N.J., concocted an
elaborate scheme to trade on information available
to Guttenberg, authorities said. Guttenberg was a
manager in UBS' stock research department and sat
on a committee that held daily meetings to review
analyst recommendations, according to charges
brought by the SEC and the U.S. attorney's
meeting at the Oyster Bar, a seafood eatery in
Grand Central Station, took place in November 2001,
just weeks after the Sept. 11 terrorist attacks.
After Franklin recouped his $25,000, the two men
shared the trading profits, with Franklin giving
Guttenberg cash, according to the SEC's complaint,
which was filed in U.S. District Court in
Guttenberg routinely tipped off Franklin to
pending ratings changes on stocks such as Amgen
Corp., Whole Foods Market Inc. and Union Pacific
Corp., the SEC said.
then used this information to illegally trade
securities for himself and two hedge funds he
managed -- Q Capital Investment Partners and Lyford
Cay Capital, a hedge fund at Bear Stearns Cos., the
03 SEC & Insider Tradeing
"The SEC has always brought
insider-trading cases, but recently they've been
getting more aggressive," said Thomas O. Gorman, a
former attorney for the agency who heads the SEC
practice at Porter Wright Morris & Arthur in
trading typically involves someone with advance
knowledge of an event that would influence the
financial markets -- such as an analyst
recommendation or a corporate acquisition --
trading ahead of the public release of that
information. The gains these insiders usually reap
come at the expense of investors who didn't have
the same knowledge.
emergence of hedge funds as a major force on Wall
Street has added a new dimension to an old
this year, the SEC opened an investigation into
whether stock brokerages were supplying hedge funds
with advance notice of customer orders for big
trades. The hedge funds are suspected of buying or
selling shares ahead of these orders and repaying
their tipsters by steering trading business their
case disclosed Thursday, the SEC brought civil
charges against 11 people, two hedge funds and a
day-trading firm. The U.S. attorney's office in New
York lodged criminal charges against 10 of those
people and three others.
the criminal defendants were arrested at their
homes before dawn Thursday by FBI agents. Several
were still being arraigned Thursday evening. None
of the defendants or their lawyers could be reached
the insider-trading charges rippled through Wall
Street investment firms.
Authorities said Franklin also provided
information to Mark E. Lenowitz, who used it to
make illegal trades for himself and a hedge fund he
managed, DSJ International Resources.
Capital and DSJ were included in the civil charges,
but Lyford Cay was not accused of wrongdoing.
in a statement that it "is assisting the
authorities to the fullest extent possible in their
investigation into the alleged actions of a single
UBS employee," adding that the U.S. attorney "has
described UBS as a victim of this alleged
other people allegedly learned of the illicit
trading as the scheme progressed and tried to
Babcock, a Bear Stearns broker who processed
Franklin's trades, began monitoring and secretly
mimicking many of those transactions, the SEC said.
Two other Bear Stearns brokers did the same.
actions described in the complaint are clear
violations of our policies and procedures," Bear
Stearns spokesman Russell Sherman said Thursday.
"We have and will continue to cooperate fully with
Guttenberg passed tips to another friend, David
Tavdy, his trades were secretly mirrored by David
Glass, who owned the day-trading firm where Tavdy
did business, the SEC said. Glass and Tavdy later
teamed up in their trading.
supervisor learned of the scheme, he and another
man demanded $150,000 to keep quiet about it,
according to the SEC. Tavdy and Glass acquiesced
and eventually paid $30,000 in several
installments, according to prosecutors.
Altogether, the UBS scheme netted at least
$14 million in illicit profit for eight people and
the three hedge funds, the SEC alleged.
Prosecutors also charged that a broker at
Banc of America Securities, a unit of Bank of
America Corp., allocated shares of initial public
stock offerings to one of the hedge funds that
Franklin managed for a payment of $9,500.
alleged separate Morgan Stanley scheme involved a
compliance lawyer whose job was to ensure that
others followed securities laws.
attorney, Randi E. Collotta, 30, of Bayport, N.Y.,
allegedly leaked news of upcoming mergers to her
husband, Christopher K. Collotta, 34, who is also a
lawyer, and to another man, Marc R. Jurman, 31, a
broker in Florida.
information said to have been provided by Randi
Collotta was used to reap nearly $1 million in
illicit stock trades, the SEC said.
statement, Morgan Stanley said it was "outraged
that a former employee allegedly stole confidential
information from the firm, and we have cooperated
and will continue cooperating fully with the
the deals allegedly leaked by Collotta was
UnitedHealth Group Inc.'s plan to acquire
PacifiCare Health Systems Inc., announced in July
authorities said the schemes at UBS and Morgan
Stanley were separate, there was an unusual
Stearns' Babcock and the two others named in the
UBS case received information from Jurman about
corporate mergers involving Morgan Stanley clients,
the SEC said. As a result, these three were alleged
to have taken part in both insider trading
Authorities did not say how they uncovered
the alleged wrongdoing in either case.
and Levine were two of Wall Street's most infamous
figures from the 1980s. Both served prison time for
Public Employees' Retirement System, for example,
has steered clear of CDOs in recent years, said
Curtis Ishi, a senior investment officer at the
"We need to understand the management and how they
produce returns," Ishi said. CDOs, he said, require
"quite a bit of analysis."
CDOs - "Collateralized Debt
Obligations", or MORTGAGE POOLS are home mortgages
used as collateral, and in the 80s created a
$600million dollar fiasco, which sent many mortage
heads to prison. "Getting a handle on CDOs is a
complex challenge," reports the LA
CDO MORTGAGE POOL STORY.
Collateralized debt obligations
with a home mortgage, or CDOs, have been a hot
product with many big investors for many years:
says Troy Cory-Stubblefield, co-author of "BOA, The
in recent years Hedge Funds Collateralized by China
U.S. Treasury Bonds have been used to help
monitized the mortagage pools, and why not? It's
their money. --SEE
MORE ABOUT The Tortfeassors, AND MELVIN BELLI
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