On March 25, 2010, BrokeAndBroker.com published a detailed analysis of Securities and Exchange Commission v. Igor Poteroba, Aleksey Koval and Alexander Vorobiev (SDNY March 24, 2010), available here, which alleged that Defendant Igor Poteroba, a high-ranking investment banker in UBS Securities LLC's Global Healthcare Group in New York City, tipped his friend Defendant Aleksey Koval with highly confidential inside information about impending transactions involving pharmaceutical companies. Koval, who held positions at securities industry firms at the time, then traded in stocks and options of the companies targeted for acquisition. Koval also tipped their friend Defendant Alexander Vorobiev, who traded ahead of four of the deals.
On September 21, 2010, a judgment was entered by consent against Poteroba, permanently enjoining him from future violations of Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder, in a civil action entitled Securities and Exchange Commission v. Igor Poteroba, et al., Civil Action Number 1:10-CV-2667, in the United States District Court for the Southern District of New York.
On September 28, 2010, the SEC announced that Defendant Poteroba settled its charges against him, without admitting or denying the findings. In the Matter of Igor Poteroba, Respondent.(Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Acto of 1940, Making Findings and Imposing Remedial Sanctions,Exchange Act Rel. No. 62999 / Investment Advisers Act Release No. 3089 / Administrative Proceeding File 3-14071, September 28, 2010). Pursuant to that settlement, Poteroba is barred from association with any broker, dealer, or investment adviser. Click here for more information.
See my March 2010 article immediately below for background:
Written: March 25, 2010
THE SEC CASE
On March 24, 2010, the Securities and Exchange Commission (SEC) alleged in a Complaint filed in the United States District Court for the Southern District of New York that Defendant Igor Poteroba, a high-ranking investment banker in UBS Securities LLC's Global Healthcare Group in New York City, tipped his friend Defendant Aleksey Koval with highly confidential inside information about impending transactions involving pharmaceutical companies. Koval, who held positions at securities industry firms at the time, then traded in stocks and options of the companies targeted for acquisition. Koval also tipped their friend Defendant Alexander Vorobiev, who traded ahead of four of the deals.
The SEC further alleges that some of the insider trading was conducted through brokerage accounts held in the names of Tatiana Vorobieva (Vorobiev's wife) and Anjali Walter (Koval's wife) and that portions of the proceeds from the illicit trading were received by Vorobieva and Walter. Accordingly, Vorobieva and Walter are named as Relief Defendants to recover investor assets now in their possession. Securities and Exchange Commission v. Igor Poteroba, Aleksey Koval and Alexander Vorobiev (SDNY March 24, 2010) http://sec.gov/litigation/complaints/2010/comp-pr2010-44.pdf
Prior Relationships Among Defendants
Poteroba, Koval, and Vorobiev have known each other for more than ten years. Poteroba, Koval, and Vorobiev were born in Russia; Koval and Vorobiev were both born in the city of Kemerovo. Between 1992 and 1997, Poteroba, Koval, and Vorobiev attended the University of New Haven, in New Haven, Connecticut as undergraduates. Poteroba graduated in 1995, Koval left in 1996, and Vorobiev graduated in 1997. Poteroba and Koval shared a common residence address during part of this time. Between 1995 and 1998, Poteroba and Koval were enrolled in the MBA program at Baruch College in New York City. Poteroba received his MBA degree in 1997, and Koval received his the following year. At various times between 1997 through 2008, Vorobiev has used as his mailing address a number of the residences in New York and New Jersey where Poteroba and Koval resided, together or separately.
From at least 2005 to the present, Koval traded in the tipped securities in an on-line brokerage account maintained in Vorobiev's name. This account was initially maintained at RushTrade Securities. RushTrade acquired Terra Nova Financial, LLC in 2006, and named the combined entity Terra Nova Financial (hereinafter, both RushTrade and Terra Nova are collectively referred to as "Terra Nova"). The account records for Vorobiev's brokerage account at Terra Nova (the "Terra Nova Account") show that Koval has never been formally authorized to trade in Vorobiev's Terra Nova Account. Despite this, on numerous occasions over a period of at least four years, Koval has accessed the Terra Nova Account and executed trades in the tipped securities. Since 2005, both Vorobiev and Koval have transferred funds into and out of the Terra Nova Account. Further, from January 2008 to the present, Koval has withdrawn a total of nearly $125,000 in regular monthly withdrawals from Vorobiev's Terra Nova Account.
UBS's Healthcare Group was retained by one of the parties as a financial adviser in ten of the eleven Business Combinations identified in the Complaint, and in regard to the eleventh Business Combination, UBS sought, but ultimately failed, to be retained as an adviser to one of the participating entities. The Complaint alleges that the insider trading netted approximately $1 million in illicit profits by trading ahead of at least 11 mergers, acquisitions, and other corporate deals.
The Not-So Clever Code
Among the means of communication allegedly used to illegally tip and trade on the inside information were coded e-mail messages that referred to securities and money as "frequent flyer miles" and "potatoes." They coded one e-mail exchange about insider trading as a discussion about a Macy's wedding registry.
Frequent Flyer Miles: The SEC alleges that the scheme began as early as July 2005 when Poteroba illegally tipped Koval in advance of the acquisition of Guilford Pharmaceuticals Inc. by MGI Pharma. Poteroba later sent a coded e-mail to Koval about the insider trading opportunity, signaling that Poteroba had previously given money to Koval and wanted to use those funds in this transaction:
Poteroba: Keep me posted as to how * * * [m]any frequent flier miles you've got this far and how many you plan to get by Friday[.] Will be in Boston tomorrow[.] Plans for a trip look fine so far[.] Worst case we can get a refund by Monday, hopefully we do not[.]
Koval: As I mentioned, I just got into this frequent flyer program. I got five thousand of sign-in bonus miles but thinking maybe if I fly often, I will get additional three to five K miles.
Poteroba: On the frequent flyer program topic you mentioned, I think you should sign up for another flight, if you can, since they are providing bonus mileage soon[.]
According to the SEC's Complaint, Koval wired $5,000 into a brokerage account of Vorobiev that had been inactive for nearly six months. Koval then bought 2,100 shares of Guilford stock in the account at a total cost of $4,983. Both monetary amounts are consistent with the amount of 5,000 "sign-in bonus miles" referred to in the coded e-mails. A few days later, Koval wired an additional $4,800 into Vorobiev's account and purchased an additional 2,030 shares of Guilford stock at a cost of $4,780. The money transfer and subsequent stock purchases are consistent with Koval's coded statement that he "will get additional three to five K miles." On July 21, 2005, Guilford publicly announced that it would be acquired by MGI Pharma, and Guilford's stock closed 41 percent higher than the increase over the prior day's closing price. That same day, Koval and Vorobiev sold most or all of the Guilford stock in their accounts as well as Guilford shares in a brokerage account in the name of Vorobiev's wife.
Potatoes: Allegedly, after Poteroba illegally tipped Koval with material, nonpublic information concerning ID Biomedical Corporation's plans to be acquired, they exchanged instructions by referring to money as potatoes:
Subject Line: Potatoes
Poteroba: Let me know if you finished your recent harvest arrangements and how many kilos are available for my parents. They are in Turkey now and could use some once they are back.
Koval: This year the potato yield was not as high as the last one. Whatever is collected is now being transported in the warehouse, with special climate conditions, from where it is going to be available for delivery. My estimates are about 6.8 kilo per square yard. ...Of course, some potato [sic] need to be left for the next year [sic] seeds [sic] but it should not be a concern since I have a vendor who will provide enough once the spring comes.
According to the SEC's Complaint, the "6.8 kilo" figure is an approximate reference to $7,000 that had been wired out of a brokerage account two weeks earlier and subsequently returned.
Macy's: While allegedly conducting insider trading based on material, nonpublic information about an acquisition involving Molecular Devices Corporation, the following emails referencing a Macy's wedding registry were exchanged:
Subject Line: Let me know if you've started your wedding registry at Macy's
Poteroba: Happy to talk about sales items and etc. ... sale ends soon ...so hurry up.
Koval: Yep, I have set it up. Better do it now when they have [a] sale. I could not believe how many things one needs once engaged. Single life was much easier if you ask me. It is always [a] good idea to know about coupons available. I try to follow up on the rebates programs currently in place but often miss many due to lack of time. Thanks for pointing it out to me. ... Although wedding day is not yet announced, I hope to get all the important items ahead of time: I even started buying small things that [are] usually not important until you need them.
Poteroba: Good points...sale ends on Friday...see if you can get registered for as many items as possible...more you get now...more you save...We should start tracking these events more actively.
According to the SEC's Complaint, Poteroba and Koval exchanged the coded messages to signal that Koval should purchase Molecular securities ("get registered for as many items as possible") and that the opportunity to buy Molecular securities prior to the public announcement would last until Friday, Jan. 26, 2007 ("sale ends on Friday").
The SEC's Complaint charges Poteroba, Koval, and Vorobiev with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10-b5 thereunder, the general antifraud provisions of the federal securities laws, and Section 14(e) of the Exchange Act and Rule 14e-3 thereunder, the tender offer fraud provisions. The Commission seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and the imposition of financial penalties against the defendants, and disgorgement of illicit profits with prejudgment interest from the relief defendants.
Please remember that the above allegations are merely that, and all Defendants are presumed innocent until proven guilty.
THE CRIMINAL CASE
On March 24, 2010, Preet Bharara, the United States Attorney for the Southern District of New York, announced the arrests of Igor Poteroba and Alexei P. Koval for their alleged participation in an insider trading scheme. As set forth in a four-count criminal Complaint, from 2005 through at least February 2009, Poteroba allegedly agreed to leak confidential information about UBS and six of itsclients to Koval. See, http://www.justice.gov/usao/nys/pressreleases/March10/poteroboigoretalcomplaintpr.pdf The information related to forthcoming announcements about mergers or acquisitions involving the following six publicly traded healthcare companies:
In violation of his duties of trust and confidence, Poteroba allegedly disclosed the UBS Inside Information to Koval, who in turn disclosed the UBS Inside Information to another co-conspirator("CC-1"). Koval, CC-1, and others earned total profits of at least approximately $870,000 from the scheme.
Poteroba and Koval each are charged with one count ofconspiracy to commit securities fraud and three counts of securities fraud. The conspiracy charge carries a maximum sentence of five years in prison and a maximum fine of the greater of $250,000, or twice the gross gain or gross loss fromthe offense. Each securities fraud count carries a maximum sentence of 20 years in prison and a maximum fine of $5 million.
Please remember that the above allegations are merely that, and all Defendants are presumed innocent until proven guilty.
Given my role as a prominent critic of ineffective Wall Street regulation, it is all the more important that I avoid being merely a shrill voice that consistently but unfairly criticizes. Without question,the SEC Staff in Poteroba has done a superb job in drafting the Complaint and setting forth in compelling detail its case. Similarly, I compliment Preet Bharara and his staff for the presentation of their criminal case, and I would note the the US Attorney's Office for the SDNY has been consistently outstanding in its handling of Wall Street misconduct under Mr. Bharara's tenure.
There are two critical goals inherent in regulating Wall Street. One, regulation must educate the public about the con artists and con games that seek to prey upon the unsuspecting. Two, regulation must educate the industry as to what happened, how it was detected, and suggest remedial measures to prevent a recurrence. For too many years, Wall Street's regulators have not achieved those goals. Perhaps, in the face of public outrage, the tide is turning? The signs are encouraging but it's still too early to tell.
As I have often noted in the BrokeAndBroker Blog, Wall Street's regulation is too often a game of hide-and-seek rather than a helpful roadmap. Modern day regulation is often typified by imprecise language, poorly drafted complaints and regulations, and an over-abundance of publicity-seeking bosses who steal the limelight from their hard working staff. When I see regulators espousing the highest standards of professionalism, as evidenced in the SEC's and the US Attorney's respective Poteroba cases, I am encouraged that maybe, just maybe, there is hope.
Please, keep up the good work.
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