Legal News

Stock-Fraud Bust Emboldens SEC; The ?Cop is on the Beat?

By Dan Slater

It may not have generated any case law, but, with final exams just around the corner, Wall Street’s latest story of stock market fraud gives corporations professors some nice real-world fodder for their fact patterns. Here’s what happened:

In a complaint filed yesterday in federal court, the SEC has alleged that, in an instant message, 32 year-old Paul Berliner, a trader at Schottenfeld Group, circulated the notion that buyout firm Blackstone, which had agreed to buy credit card processor Alliance Data Systems for $6.4 billion, was considering lowering its offer from $81.50 to $70 a share. “Blackstone is negotiating a lower price due to weakness in World Financial Network-part of ADS’ Credit Services Unit,” wrote Berliner.

As Berliner sent the message, ADS shares traded around $77. Over the next seven minutes, Berliner began selling short 10,000 shares of ADS. Almost immediately, as the stock fell, Berliner began buying it back at the lower price, turning a $25,000 profit on the trades within 10 minutes. Click here for the WSJ story, and here for a story from the NYT.

Berliner’s message spread, and was picked up by the WSJ’s own Deal Journal blog in a November 29 post entitled “The Anatomy of a Bum Rumor,” which excerpted parts of the instant message, and included a denial from ADS suggesting that the instant message wasn’t true. Later that day just before the market closed, ADS issued a press release saying the rumor was false, and its stock price rebounded to close near $77.

Yesterday, Berliner agreed to settle the charges filed against him, without admitting or denying wrongdoing, and to pay $26,129 in profits and interest and a penalty of $130,000. He’s also barred from working at a brokerage firm. “Our client looks forward to putting this matter behind him and moving on with other endeavors,” Balestriere Lanza, the law firm representing Berliner, said in a statement.

On Thursday, according to the reports, SEC Chairman Chris Cox, who has been under fire for lax enforcement, appeared on CNBC and said the case was evidence that the SEC can move quickly and that the “cop is on the beat.” In a written statement, he called such market manipulation a “witch’s brew” that the agency will prosecute vigorously.

Full post as published by Law Blog - WSJ.com on April 25, 2008 (boomark / email).