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Government Brings Charges of Insider Trading

Federal investigators announced multiple arrests and indictments Thursday in an insider trading scheme that involved four of Wall Street's biggest institutions. Margaret Warner reports, and then guests discuss the case.

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    Federal investigators announced multiple arrests and indictments yesterday in an insider trading scheme that was notable in both its scope and complexity.

    The case goes back six years, involving more than a dozen people, more than $15 million in illicit profits, and includes employees of four of Wall Street's biggest institutions, UBS, Bear Stearns, Morgan Stanley and Bank of America.

    To tell us the story and the impact of all this are Jenny Anderson, who's covering the story for the New York Times, and John Coffee, professor of securities law at Columbia Law School. For the record, he has advised Wall Street firms, stock exchanges and regulators, but has never been connected with this case or any participant.

    Welcome, both of you. Thanks for joining us.

    Jenny, first describe to us how this whole scheme worked. There was one young figure at the center of it, at the beginning of it, a young hedge fund manager at Bear Stearns named Erik Franklin. How did it operate?

  • JENNY ANDERSON, New York Times:

    Well, if we think about it from Erik Franklin's point of view, we've got a trader who's trying to get an edge, who's trying to get ahead in the markets, and he's looking for information that no one else has, material, nonpublic information, and he gets it from two different ways, two different streams of information.

    One of them comes from UBS, from a friend of his, a man named Mr. Guttenberg, who works in the research department at UBS. He knows when stocks are going to be upgraded or downgraded. And when those stocks are upgraded or downgraded, there's an impact on the stock.

    An upgrade will likely push the stock higher and a downgrade the stock lower. He tips off his friend, Mr. Franklin, allegedly, as these cases outline, that there will be upgrades and downgrades in hundreds of stocks, and Mr. Franklin trades on that information, quickly in and out of the stocks and makes instantaneous profits.

    The other one was a little bit more of an old-fashioned insider trading, back to the days of Ivan Boesky and Dennis Levine, where you had at Morgan Stanley, which is a major investment bank that does a lot of mergers and acquisitions.

    There was a compliance lawyer, named Randi Collotta, who allegedly decided that she wanted in on some of the action. She wanted to make some money, so she and her husband asked a friend to do some trading on information about pending mergers and acquisitions.

    She had this information as a compliance officer. She gave it to the trader. He made money, and they split the profits.

    Through some of the people involved in that trickle down made it to Erik Franklin, as well, so he was able to trade on information about upgrades and downgrades, as well as information about pending mergers and acquisitions.


    Explain, also, what methods they used to escape detection for at least five years.


    Well, again, some very tried and true, old-fashioned ways. They met in the Oyster Bar, and they hatched this plan. They met in prearranged places to exchange cash. But they also acquired disposable cell phones, and they texted one another with special codes as to which stocks would go up and down. And they developed their own language to convey the information to one another.

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