Internet insider stock tips distributed onlinegreenspun.com : LUSENET : TB2K spinoff uncensored : One Thread
19 Allegedly Profited on Inside Tips Developed, Distributed Online By Sharon Walsh Washington Post Staff Writer Wednesday, March 15, 2000; Page A01
NEW YORK, March 14 A temporary worker at two of the country's premier investment banks used the power of the Internet to identify companies about to merge and passed tips on to 18 people who made $8.4 million in illegal stock-trading profits, according to charges brought today by prosecutors and securities officials.
John J. Freeman, a part-time computer graphics worker, obtained information about companies that were described but not named in merger documents prepared at Goldman Sachs Group Inc. and Credit Suisse First Boston in New York. Then he went to Yahoo and other Internet sites to identify the companies and passed the confidential information on through "instant messaging" and private chat rooms on America Online, according to criminal complaints unsealed today.
Freeman's tippees included a waiter, a retired schoolteacher, a dentist, a neighbor, a broker, an actor and a man he had never met but talked to in an online chat room.
Freeman and those who allegedly profited from his tips during the past 2= years were charged with conspiracy and insider trading in what U.S. Attorney Mary Jo White said was the largest such criminal case to be brought in terms of the number of deals and the number of defendants. Freeman pleaded guilty and is cooperating with the government.
Once largely restricted to top Wall Street tycoons such as Ivan Boesky and Dennis Levine, who exchanged information the old-fashioned way over the telephone insider trading has become more accessible to others via cyberspace.
"Any crime can proliferate on the Internet with the touch of one button," said Robert S. Khuzami, an assistant U.S. attorney working on the ongoing case. "The Internet connection is interesting because for two years [Freeman] passed tips to someone he'd never met. That never would have happened in an old-style insider-trading case."
With the economy soaring and access to the Internet spreading, white-collar frauds and securities crimes are up as much as 20 percent in the past five years, according to government officials.
"What is alarming to us at the SEC is how junior people at these firms are getting information," said Richard Walker, the general counsel for the Securities and Exchange Commission. But, he noted, "the government is better equipped than ever before to identify these people. The Internet leaves an electronic trail."
The case was cracked when officials of the American Stock Exchange and an industry task force called the Intermarket Surveillance Group noticed suspicious trading patterns in the stocks of companies involved in mergers.
Goldman Sachs and Credit Suisse First Boston were not charged with any wrongdoing and cooperated with investigators. The two investment-banking firms have some of the most stringent safeguards in the business. Even temporary workers must have background checks and sign statements that they won't divulge confidential information. Neither firm would say whether they had changed any of their procedures because of the case.
As one precautionary move, the firms' reports about potential mergers and acquisitions typically don't include the names of the companies involved, though they can have identifying characteristics such as market sector, headquarters location and the price range of the stock.
Freeman used that information to plug into Internet research sites to break the code and come up with the company's names. In addition, he pilfered trash before it could be shredded (the firms shred trash daily), stole papers from printers and rummaged through the desks of employees to get information.
Among the deals Freeman tipped his contacts to was the $1.7 billion acquisition of Fingerhut Cos. by Federated Department Stores Inc. and the $3.5 billion acquisition of USF&G Corp. by St. Paul Corp.
Freeman, whose job was to create or revise graphs, flow charts, spreadsheets and other documents, didn't get rich from his schemes. He made between $70,000 and $110,000, mostly in cash kickbacks that came in birthday cards, because he had little money to invest, prosecutors said. But nine of the defendants had profits of more than $250,000, and one, who was not named because he hasn't been charged, made nearly $1 million, investigators said.
The investors receiving the information knew that Freeman was working at the two investment banks and even had code names for them. Goldman Sachs was "Hamburger Joint No. 1" and Credit Suisse First Boston was "Burger Place No. 2." Discussions would involve which place had the better "meat."
A sense of humor was evident among those who traded on the information.
Two business partners who traded on the information named their accounts "Blue Horseshoe Investments," a reference to the 1987 movie "Wall Street," in which the Gordon Gekko character used Blue Horseshoe as his code name when he had insider information.
Not all of Freeman's tips went to investors via the Internet. Freeman, a former waiter at the Manhattan restaurant Les Halles, tipped both a waiter friend and a patron of the restaurant to his information. In one instance, he was paid for the information with several cases of wine.
Jack Coffee, a law professor at Columbia University, called the case "somewhat bizarre" because of the way Freeman communicated his information and the large number of people who were caught in law enforcement's net.
"The Internet is the great fear of people handling securities cases these days," Coffee said. "But it's suicidal to communicate this way because there's a trail."
While the Internet may leave an electronic trail, much of the evidence used in court papers came from conversations with undercover officers recorded on an old-style device a tape recorder.
) 2000 The Washington Post Company
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