Nineteen Charged with Using Chat Rooms in Insider Trading Scheme Yielding $8.4 Million

Goldman Sachs and Credit Suisse First Boston temp spreads inside informaton.

By USLaw.com staff

The use of Internet chat rooms for securities fraud violations reached new heights March 14, as the U.S. Attorney for the Southern District of New York, Mary Jo White, and Assistant Director of the Federal Bureau of Investigation's New York office, Lewis D. Schiliro announced that 19 defendants have been charged with collectively making approximately $8.4 million in illegal profits by knowingly trading on inside information.

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The U.S. Attorney further explained that the defendants traded on inside information about 23 mergers, acquisitions, and buyouts, that John J. Freeman, a part-time computer graphics worker, misappropriated while employed by Custom Staffing, a temporary employment agency. Freeman obtained the inside information while working at two investment banks in New York, Goldman Sachs & Co. and Credit Suisse First Boston. He then passed on the information to friends and people in chat rooms.

White commented that insider trading is a "plague on our nation's markets and its investors. Those who steal and trade on confidential information not only gain an unfair, special advantage over other investors, but undermine the very integrity of the nation's markets."

Schiliro stated that "this is a case of insider trading with a decidedly modern twist-the use of the Internet to perpetrate an illegal scheme. These defendants thought that using the Internet would provide them anonymity. It did not." Schiliro added that at least two lessons should be taken from this investigation: "First, those who rely on the myth of anonymity in using the Internet to pursue their criminal activity should understand that law enforcement has the ability to pierce the veil they hide behind, and second, the business community must do a better job at protecting its confidential information."

SEC Civil Charges

The Securities and Exchange Commission also announced March 14 that they brought civil charges in U.S. District Court in the Southern District of New York, against the same 19 defendants. The SEC seeks injunctive relief, disgorgement, civil penalties and other appropriate relief with respect to each of the defendants.

In the commission's press release, SEC Director of Enforcement Richard H. Walker said, "The SEC and the criminal authorities have zero tolerance for insider trading, which strikes at the fairness and integrity of our capital markets. The swift and thorough filing of these charges is a testament to the effectiveness of the coordinated effort by the SEC, the U.S. Attorney, the FBI, and the self-regulatory organizations that form the Intermarket Surveillance Group." Walker added that "while this is the first time we have charged someone with using the Internet to share insider information, we remain on guard and seek to keep the Internet free from those who abuse it for personal gain."

The Commission alleged that, based on information provided by Freeman, each of the defendants purchased the common stock and/or options of some or all of the following public companies: Oregon Metallurgical Corp., Lukens, Inc., Sano Corp., U.S.F&G; Corp., Regal Cinemas, Inc., Illinois Central Railroad Co., Coherent Communications Corp., Baker Hughes, Inc., CIENA Corp., DSC Communications Corp., Camco International, Inc., Getchell Gold Corp., United States Satellite Broadcasting Co., SmarTalk Teleservices, Inc., Fingerhut Co., Mercantile Bancorporation, Inc., Wang Laboratories, Cogeneration Systems Corp. of America, RailTex Inc., Medco Research, Inc., Splitrock Services, Inc., Cameron Ashley Building Products, Inc., and Jason, Inc.

At the time that Freeman tipped the other defendants about these companies, each of the companies was involved in a significant transaction that involved the merger or sale of the company.

Criminal Allegations

According to the U.S. Attorney's complaint, Freeman stole the inside information while creating and revising documents at Goldman and CS First Boston. Freeman was allegedly able to break the codes that attempted to keep the names of the merging companies hidden from employees. Freeman then conducted his own research to corroborate his findings.

The scheme began in 1997 when Freeman went onto an AOL investing chat room and began a dialogue with some of the other defendants. James Cooper of Bowling Green, Ky., and Benton Erskine of Charlestown, W.Va. Freeman allegedly offered Cooper and Erskine the inside information for a percentage of their profits. According to the complaint, for the next two years, the operation allegedly continued with Freeman never meeting Cooper and only meeting Erskine once.

The U.S. Attorney explained that numerous telephone, face-to face, and online conversations were recorded as part of the undercover investigation in this case. In sum, Cooper allegedly traded in six deals and illegally earned $227,192, and also tipped a friend on five deals, thereby earning the friend $60,125. Erskine traded in advance of 16 deals and earned $273,514, the U.S. Attorney reported.

Cooper also allegedly passed on the inside information to his brother Benjamin Cooper of Bowling Green, Ky., and Charles Deon Benson of Small Grove, Ky.

Freeman also allegedly passed on inside information to colleagues at another of his jobs at Philip Morris, and former co-workers of his at Les Halles, a New York restaurant.

The other defendants charged in the case were: Michael Akva, Flushing, N.Y., Gordon Allen and William Borders of Bowling Green, Ky., Bradley Burke, Lawrence Schwartz, and Timothy Siemers of New York, Robert Fricker, Kew Garden Hills, N.Y., Jon Geibel, Nashville, Tenn., Norman Grossman, Long Island City, N.Y., Linda Karlsen, Brooklyn, N.Y., Norman Lehrman, Suffern, N.Y., Anthony Seminara, Long Beach, N.Y., and Richard Zelman of Nyack, N.Y. The defendants face jail time ranging from five to 10 years and potential fines in excess of $1 million.

There is no evidence that any permanent employees of Goldman Sachs or CS First Boston were involved in the theft of the inside information, the U.S. Attorney reported.

© Copyright 2000, USLaw.com

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