FSA loses latest insider-trade case

A JURY in London acquitted two men charged with insider trading, dealing a blow to the UK Financial Services Authority as it strives to showcase a new tough-on-crime persona.

The FSA had charged Peter Andrew King and Michael McFall with insider trading in advance of a June 2006 pharmaceuticals deal, but the London jury yesterday delivered a not-guilty verdict in less than two hours.

The acquittals overshadowed the FSA’s announcement earlier in the day that it had slapped a JP Morgan Chase unit with a 33.32 million ($57.8m) penalty, the regulator’s largest-ever fine, for failing to separate client money from the firm’s accounts.

The FSA said it expected to bring similar cases against other banks in coming weeks.

After years of rarely filing criminal charges, the agency once derided for being a toothless regulator of The City of London has revved up its law-enforcement efforts with a recent flurry of arrests, police raids, criminal charges and other headline-grabbing actions. But the FSA has successfully prosecuted only a handful of criminal cases, mostly against small-time offenders, and it is under pressure to show that it can win a major case.

The swift loss of its most recent insider-trading case stunned FSA officials, who believed that the complex case would take the jury days to decide.

FSA enforcement chief Margaret Cole said that insider-trading cases are notoriously tough to prove and that “we remain 100 per cent committed to the strategy of achieving credible deterrence”.

The acquittal comes at an inopportune time for the FSA. Doubts are swirling about the agency’s future as the UK’s new coalition government eyes an overhaul of the country’s regulatory apparatus.

In the JP Morgan case, the FSA said that over a nearly seven-year period the US bank’s JPMorgan Securities unit, based in the UK, failed to properly segregate billions of dollars in institutional clients’ money from the company’s own funds.

“Had the firm become insolvent at any time during this period, this client money would have been at risk of loss,” the agency said, calling the mistake “a serious breach of our client money rules”.

The agency said JP Morgan reported the problem when it was discovered and that the error wasn’t deliberate.

Clients didn’t lose any money and the mistake didn’t result in any incorrect financial reporting, the FSA said.

A JP Morgan spokesman declined to comment.

“This is a staggering fine for what is in effect an administrative oversight. If this doesn’t serve to wake up every senior manager to check that he or she has carefully identified all risks and is properly managing them, then nothing will,” said Simon Morris, a partner at London law firm CMS Cameron McKenna.

The FSA said the penalty was appropriate because as much as $US23 billion ($27.3bn) in client funds were improperly intermingled with JP Morgan’s own funds.

The fine would have been 47.6 million if JP Morgan hadn’t agreed to resolve the case at an early stage, which made it eligible for the FSA’s standard 30 per cent discount for speedy settlements.

The FSA’s previous largest fine was 17m against Royal Dutch Shell in 2004 for market abuse.

Homes raided in insider trading probe

STAFF at some of London's biggest stock brokers, including an executive at Deutsche Bank and a trader at Moore Capital, one of the world's biggest hedge funds, have been questioned in the largest ever operation against insider dealing launched in Britain.

Six men were questioned after raids on 16 homes and businesses across London, Oxfordshire and Kent, carried out by 143 staff from the Financial Services Authority and officers from the Serious Organised Crime Agency (Soca).

It is the first time that the agencies have worked together and the size of the operation has sparked speculation that the alleged offences cover many hundreds of thousands of dollars.

In a statement, the FSA said that documents and computers had been seized from residential and business premises as part of a joint investigation with Soca that began in late 2007 into a sophisticated and long-running insider dealing ring.

“It is believed that the City professionals passed inside information to traders (either directly or via middlemen) who traded based on this information and have made significant profits as a result,” the FSA said.

The FSA did not name any of the individuals questioned or institutions that were raided.

However, The Times can reveal that one of the men is Julian Rifat, a trader at Moore Capital Management whose offices in Mayfair, Central London, were raided last night AEDT (early morning GMT).

Moore Capital said: “This morning, representatives of the FSA were at our London office to serve a search warrant for documents relating to an employee of Moore Europe working as an execution trader on its London Equity Execution desk.

“We understand from the FSA that the investigation concerns possible insider dealing and the investigation of the employee does not involve any of the funds managed by Moore Capital.”

Moore is co-operating fully with the FSA in its investigation. The employee has been placed on administrative leave pending completion of the investigation.”

The Times also understands that another of the men questioned was Graeme Shelley, a trader at Novum Securities, the stockbroking and corporate finance firm based in Park Lane, London.

Mr Shelley, a well-known and popular figure in stockmarket circles, joined Novum nine months ago from Religare Capital Markets, the broker formerly known as Hichens Harrison, where he had worked for more than nine years.

His mobile phone was switched off. Novum declined to comment, while a spokesman for Religare said that its offices had not been subject to any of yesterday’s raids.

Another of those questioned, The Times can disclose, is Clive Roberts, a trader at Exane Limited, the French-owned brokerage based in Mayfair. Andrew Melrose, the chief executive of Exane, confirmed that an employee had been questioned yesterday.

Others understood to have been questioned include a well-known former stockbroker with more than 35 years of experience in the City and who has long been in the sights of the authorities.

The individual, whose identity is known to The Times, was the subject of a long-running investigation in the late 1980s and early 1990s carried out by the Department of Trade and Industry — which used to have responsibility for pursuing insider dealing cases — and the Inland Revenue.

The identity of the Deutsche Bank staffer is not yet known but a spokesman for the bank said: “We are co-operating with the authorities as they look into this matter.”

It is believed that Soca’s involvement in the investigation may be linked to a wealthy Iranian-born entrepreneur based in the Middle East who has extensive business interests in the UK.

Additional reporting: Nick Hasell, Miles Costello and Michael Herman

Insider-trading case mole named

FEDERAL prosecutors publicly identified a senior Wall Street trader who became a government mole and wore a body wire for more than a year and who is continuing to co-operate in a sprawling insider-trading case.

David Slaine, a former hedge-fund manager, pleaded guilty to criminal charges that he engaged in insider trading several years ago based on tips about upcoming UBS analyst recommendations, generating more than $US3 million in illicit profits for the hedge-fund where he worked.

As part of his plea Mr Slaine agreed to co-operate with prosecutors from the Manhattan US Attorney’s office. That co-operation led Mr Slaine to wear a body wire, helping the US bring charges in a separate, ongoing insider-trading case involving former Galleon Group traders, people familiar with the matter say.

A lawyer for Mr Slaine, 50, didn’t return calls for comment. In January, The Wall Street Journal identified Mr Slaine as an informant who wore a body wire in the Galleon case.

A total of 21 individuals have been charged in the case, including Galleon founder Raj Rajaratnam, who has pleaded not guilty.

Mr Slaine has told prosecutors, among other things, another former Galleon employee, Craig Drimal, traded on inside information.

In November, Mr Drimal was arrested at his Weston, Connecticut, home. Mr Drimal is allegedly part of a second trading ring whose members — one of them referred to as “Octopussy,” after the James Bond movie — met on a street corner to exchange cash for tips and used disposable mobile phones, according to the government.

The two alleged rings shared some connections, including Mr Drimal, who worked at Galleon. But they were unconnected in other respects, and the US probes of the two rings proceeded separately.

The unsealing of Mr Slaine’s guilty plea came amid several developments in the Galleon case. Seven defendants in the case pleaded not guilty on Tuesday including Mr Drimal and Zvi Goffer.

Mr Goffer was referred to by one member of the alleged ring as Octopussy because he “had arms in so many sources of inside information,” the government says.

Lawyers for Mr Drimal and Mr Goffer didn’t return calls for comment.

Mr Slaine’s involvement in the Galleon case is significant because of his extensive contacts on Wall Street. He is a former Nasdaq trading chief at Morgan Stanley, in addition to several hedge funds, including Galleon, Oracle Partners, Chelsey Capital and CJS Capital, a fund he ran with two former SAC Capital Advisors employees.

In addition to providing evidence on the Galleon case, Mr Slaine has provided other leads to investigators, people close to the situation say.

Mr Slaine pleaded guilty to criminal conspiracy and securities fraud.

The Securities and Exchange Commission also filed a civil insider-trading suit against Mr Slaine on Tuesday in a New York federal court.

Mr Slaine’s guilty plea stems from a 2007 case in which he traded on inside information provided by a UBS employee when Mr Slaine worked at Chelsey.

Until Tuesday’s unveiling of the guilty plea, prosecutors hadn’t named Mr Slaine in the UBS case, in which 13 other defendants all pleaded guilty.

One of the 13 defendants, also a Chelsey employee, led prosecutors to Mr Slaine as part of his co-operation agreement.

In the Galleon matter, other defendants who entered not-guilty pleas on Tuesday included Jason Goldfarb, a lawyer in private practice, and Arthur Cutillo, a former lawyer at Ropes & Gray; and several traders including Emanuel Goffer, Zvi Goffer’s brother, as well as Michael Kimelman and David Plate.

Separately, prosecutors disclosed that they inadvertently gave the SEC in December some wiretaps of conversations involving one of the seven who pleaded not guilty Tuesday.

The information was disclosed in a letter from Assistant US Attorney Jonathan Streeter that was dated January 27 and unsealed Tuesday.

The admission is part of a brewing battle between the government and defence lawyers over the wiretap recordings that are at the centre of the case.

In a letter dated January 29 and made public on Tuesday, Cynthia Monaco, a lawyer for Zvi Goffer, argued that the wiretap recordings should be suppressed because prosecutors shared them with the SEC.

She said the recordings given to the SEC include seven consensual recordings and 21 wiretap communications and described the recordings as the “core” of the government’s case and “its view of the most damaging evidence” against Zvi Goffer and six co-defendants in his criminal case.

Mr Streeter said that, upon learning of the inadvertent disclosure, the SEC immediately returned all the recordings to prosecutors and didn’t keep copies.

“These recordings were provided to the SEC as part of a larger production of consensually recorded calls that are not subject” to the wiretap statute, he said.

Ms Monaco — who told a federal judge in a letter that Mr Slaine was a government co-operator — said in court her client was subject to wiretaps in the criminal case for five months.

Ms Monaco has asked for a hearing before New York Federal Judge Jed S Rakoff, who is presiding over the SEC’s civil case, to discuss the disclosure and “to fashion an appropriate remedy.”