Category: Famous Cases


The Securities and Exchange Board of India (Sebi) is examining whether Tata Sons Ltd violated insider trading regulations in its interactions with group operating companies, according to The Economic Times. This isn’t surprising. A letter by Cyrus Mistry, former chairman of Tata Sons, to the company’s board had mentioned possible violations of insider trading regulations. In addition, people close to Mistry have spread the word that the relationships between operating companies, Tata Sons and Tata Trusts are nebulous. According to them, price-sensitive information often goes back and forth between these entities before the board of the operating company comes to a decision.

The charges, in one sense, implicate Mistry himself, since he was a key link between the operating companies and Tata Sons. Sebi’s insider trading regulations prohibit communication of unpublished price-sensitive information.

But a pertinent question here is if communication of price-sensitive information with a large shareholder should be seen as a violation, per se. If so, perhaps every Indian company would have violated Sebi’s regulations at one time or another. For instance, when a board nominee of the government or a bank or a private equity fund receives price-sensitive information, it doesn’t remain a closely guarded secret. That information is typically taken back to the team overseeing the investment at these entities.

It then depends on how you read Sebi’s insider trading laws. They state, “No insider shall communicate, provide, or allow access to any unpublished price sensitive information… to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.” A bank’s or an investment firm’s nominee on a company’s board will argue that sharing the information with his team is in furtherance of legitimate purposes and performance of duties.

A Tata Sons nominee on the board of a Tata group company will make the same argument. Surely, it can’t be the regulator’s case that nominee directors keep all price-sensitive information close to their chests, and not take it back to the firm they represent. If it insists on doing so, it will throttle decision-making at the holding company level or at banks and investment firms, as the case may be. A former executive director at Sebi said that if such restrictions are imposed, taking normal business decisions will become impossible.

In fact, if Sebi starts examining all board nominees of large shareholders and how they handle price-sensitive information, it will clearly be a slippery slope. Where, then, does one draw the line?

Policymakers should accept the fact that large shareholders will rule the roost when it comes to decision-making at a company. A structure where the rights of large shareholders are curtailed will unduly empower the management of the company, which will result in negative outcomes.

JR Varma, professor of finance at Indian Institute of Management, Ahmedabad and a former Sebi board member says, “The central problem in Indian corporate governance is how to manage the conflicts between dominant shareholders and minority shareholders. We can’t improve corporate governance by limiting shareholder democracy, and therefore the ‘legitimate’ governance rights of the majority shareholder must be respected. In fact, the various obligations that regulators impose on dominant shareholders don’t make sense without the governance rights that underpin these obligations. That does not mean giving the majority shareholder a free hand to do whatever it likes. An important goal of corporate governance regulations is to ensure that dominant shareholders don’t abuse minority shareholders through unfair related party transactions or through insider trading.”

Sebi will surely have a case on its hands if it finds that any of the Tata Sons directors or any of trustees of Tata Trusts traded shares of operating companies, when the trading window was closed for insiders. The former Sebi official says that the operating word that should be kept in mind as far as insider trading violations go is ‘trading’. Besides, Sebi should devote its resources to areas where there is an abuse of power by dominant shareholders such as related party transactions that work against the interest of minority shareholders. The fact that Tata Sons and its principal shareholder procured price-sensitive information ahead of others is, in itself, not something to get worked up about. In fact, among other things, people close to Mistry complained how he had to hold multiple meetings with both trustees of Tata Trusts as well as directors of Tata Sons ahead of important decisions. These are matters that Tata Sons and Tata Trusts need to resolve.

Sebi has a model code of conduct as far as handling price-sensitive information by a listed company goes. The code doesn’t envisage sharing of information with a dominant shareholder. Even so, the Tata group can adapt best practices so that leakage of information is kept to the minimum

Source:

http://www.livemint.com/Opinion/KHA3k8guR1GIAjAXCJYFhI/Did-Tata-Sons-violate-insider-trading-norms.html

 

Here’s How the SEC Is Using Big Data to Catch Insider Trading

The Market Abuse Unit culls through billions of rows of trading data going back 15 years.

When plumber Gary Pusey pleaded guilty in May to insider trading, it was a victory not just for New York prosecutors but for a little-known squad inside the U.S. Securities and Exchange Commission that uses data analysis to spot unusual trading patterns.

Formed in 2010, the Analysis and Detection Center of the SEC’s Market Abuse Unit culls through billions of rows of trading data going back 15 years to identify individuals who have made repeated, well-timed trades ahead of corporate news.

The new strategy is starting to show results, enabling the SEC to launch nine insider trading cases, around 7% of cases the agency brought since 2014 against people who trade on confidential corporate information.

It signals a shift in how the agency initiates insider trading probes, which more often are launched based on referrals from Wall Street’s self-regulator Financial Industry Regulatory Authority, or an informant’s tip.

“It’s essentially the new frontier,” said Andrew Ceresney, the SEC’s enforcement director. “We have tremendous amounts of data available to use, and we’ve been developing tools to take advantage of that.”

That data was key to spotting trades by Pusey ahead of at least 10 deals from 2014 to 2015 involving Barclays BCS 0.49% , where his friend Steven McClatchey worked.

The SEC has also used data mining in a high-profile probe of traders who it says made more than $100 million using information obtained by Ukrainian hackers.

Others charged include former employees of law firm Wilson Sonsini Goodrich & Rosati and investment bank Goldman Sachs Group GS 1.31% . In August, former Perella Weinberg Partners banker Sean Stewart was convicted in a case credited to the SEC unit. He denies wrongdoing and is expected to appeal.

 

10 Billion Rows of Trading Data

The cases have come at a time when other U.S. and European regulators have increasingly looked to find ways to take advantage Big Data in order to strengthen their enforcement operations and market surveillance.

The United Kingdom’s Financial Conduct Authority has in recent years taken steps to develop technology to analyze large amounts of data to pursue market abuse cases.

For the SEC, the six-year data-push has had the benefit of giving it some extra autonomy in pursuing insider trading probes beyond the inquiries and referrals that self-regulatory organizations like FINRA produce for the agency.

“Why wait to do a referral when you could do it proactively?” said Daniel Hawke, a former chief of the SEC’s Market Abuse Unit now at the law firm Arnold & Porter.

The SEC does not have a direct feed of the markets’ trading data. Instead, it mines 10 billion rows of “blue sheet” data of trades executed by brokerages that the agency gathered in various investigations.

Analysts use a home-grown program called Artemis to analyze patterns and relationships among multiple traders.

Joseph Sansone, a co-chief of the Market Abuse Unit, said the SEC in particular mines data to identify individuals who repeatedly buy stock ahead of mergers, enabling the agency to focus on repeat offenders.

“The ability to see pattern of multiple trades over a matter of months or years gives us confidence to invest resources into investigations,” he said.

The SEC also uses software from privately-held Palantir Technologies, which identifies links between individuals and entities by connecting pieces of information from multiple data sources. In 2015, the agency awarded a $90 million, five-year contract to Palantir.

Plumber’s Scheme

In Pusey’s case, the SEC said that the data unit “detected an illicit pattern of trading” by the plumber, who successfully traded ahead of mergers involving companies that included Entropic Communications ENTR 0.00% and CVS Health CVS -2.83% .

In all of the deals, the target or acquirer were represented by Barclays. The SEC referred the case to federal prosecutors in Manhattan and the Federal Bureau of Investigation.

In December 2015, Pusey, 47, began actively cooperating with them, providing “detailed information” about his source, according to court papers.

In May, the FBI arrested that source, McClatchey, a close friend of Pusey’s who worked as a director at Barclays.

McClatchey, 58, pleaded guilty in July to tipping Pusey in exchange for money. He agreed to not appeal any sentence of five years in prison or less and to forfeit $76,000.

Both men are set to be sentenced later this year. Lawyers for the defendants did not respond to requests for comment.

To be sure, even with data mining, traditional investigative techniques like enlisting cooperators and issuing subpoenas for documents remain key to building out a case. The SEC has in the past acknowledged that it faces a challenge to keep up with technological advances in the securities markets it regulates, where spending by a number financial firms can surpass the agency’s own expenditures.

And despite its early success, the SEC’s ability to launch cases by data mining is also limited because it collects trading information on an ad-hoc basis.

That is expected to change.

In April, the SEC released a plan to establish a database that stores every trade order, execution and cancellation. Known as a “consolidated audit trail,” it is a central repository that is expected to begin getting data from stock exchanges and FINRA by late 2017.

Thomas Sporkin, a former senior SEC official with the law firm BuckleySandler, said that new database could significantly advance the SEC’s ability to track suspicious trading.

“Doing surveillance for insider trading today—it’s like we’re in the early days of the automobile,” he said. “What the consolidated audit trail will provide is the future. It’s the flying car.”

Source:

Here’s How the SEC Is Using Big Data to Catch Insider Trading

About a year before Sanjay Valvani’s wife found him dead inside his Brooklyn Heights home, the star money manager learned he was under investigation for insider trading.

Valvani drove profits at Visium Asset Management, an $8 billion New York hedge fund that had been on the rise.

He was insistent about his innocence from the start. He hired one of Wall Street’s top defense attorneys and told friends that he’d be fine — that the government could not bring a case against him.

Then, in June of this year, the charges were filed.

The indictment, which landed on June 15, a Wednesday, said he deserved as much as 85 years in prison.

The news media — including Business Insider — jumped all over the story, reporting on the indictment against Valvani and his apparent conspiracy with a former senior Food and Drug Administration official. News photographers snapped pictures of him as he left the courthouse in downtown Manhattan — all fairly standard for a white-collar case.

Valvani was advised that the negative press coverage would blow over in about a week and that an eventual trial would be his chance to defend himself publicly.

But he didn’t make it through. On Sunday — June 19 — Valvani, 44, celebrated Father’s Day with his family, including his two daughters. The next evening, he was found dead.

The police arrived at about 6 p.m. and found Valvani’s body facedown in a bedroom, a note and a weapon nearby. The medical examiner ruled it a suicide.

Why does a man who thinks he is innocent do this?

Valvani, who had pleaded not guilty in court, repeated his claim of innocence in the note he left behind, according to two people who said they had seen it. The note is not in court records relating to his case.

He also had a support network. Several of the people who knew him said they thought the government’s charges were weak, especially since the standard by which prosecutors need to prove insider trading is in flux. Valvani’s lawyer, Barry Berke, is considered top notch and just last year had gotten insider-trading charges dropped for SAC Advisors’ Michael Steinberg.

Preet Bharara, the US attorney for the Southern District of New York, did not hold a press conference to announce the charges against Valvani as he has in other white-collar cases.Thomson Reuters

So, friends and colleagues who spoke with Business Insider say Valvani’s death came as a shock.

He was meticulous and thought through every action, according to one colleague. There were times when he lost millions of dollars but wouldn’t flinch, the person said. The colleague and another friend describe Valvani as levelheaded and said he didn’t drink alcohol.

“He was too smart to not have thought through all of this … I don’t believe he did anything wrong,” the colleague said. “Everybody was mostly just hurt that he didn’t get to defend himself.”

Most of his friends and colleagues asked not to be named in this story because of professional relationships or, in one case, out of deference to his family. Valvani’s wife, through Valvani’s attorney, declined to speak with us, and his father — in a brief conversation — said he couldn’t bring himself to speak about the situation.

But the people who did speak revealed that Valvani was under pressure on several fronts. His relationship with Jacob Gottlieb, Visium’s founder who once was a mentor to Valvani, had shifted. Partly out of loyalty to Gottlieb, who had made Valvani’s career, he may have felt like he couldn’t leave Visium, even though he was notably underpaid and likely would have succeeded on his own, colleagues said.

And later, like many accused of white-collar crimes, he was being professionally isolated and he worried about the impact that the charges would have on employees of Visium if the fund would have to shut down as a result.

That last part, his friends say, was the kind of thing that defined Valvani’s character. But his death has forced people who knew him to contend with a narrative of his life that they hadn’t previously considered.

“I’ve known him since 2010, and after a while you can read somebody,” said Shibani Malhotra, a friend and professional contact.

A few weeks before the government announced the indictment, Malhotra met Valvani for coffee. He told her he didn’t think he had done anything wrong.

“I could read how sure he was,” she recalled. “It was so emphatic.”

A few days before Valvani died, she sent him a text — a silly Bollywood song.

“He seemed really chirpy,” she said. “It’s not like he didn’t respond or sounded bad.” He didn’t mention the case.

Coverage of Valvani’s death, Malhotra believes, was colored by the assumption that it was confirmation of his guilt.

“He was presumed guilty, and then when he committed suicide, it wasn’t written so directly, but presumed that he did it,” Malhotra said.

Malhotra and the other people who spoke about Valvani for this story say they did so to counteract this narrative.

Stresses of an indictment

Valvani’s life had been full of successes. From humble beginnings — raised in Kalamazoo, Michigan, by immigrant parents — he had become one of Wall Street’s best healthcare investors by age 44. The fall from grace hit him hard.

In April, it was reported Valvani was the target of a federal insider-trading investigation, and Visium put him on leave. That’s when colleagues and professional contacts started retreating. Compliance reasons prevented some of them from being in contact, Malhotra said.

In June, two days after Valvani was charged and pleaded not guilty, Visium — a business he had helped build — announced it would shut down.

The idea that it would result in colleagues losing their jobs weighed on him. Visium employed some 170 people with headquarters in New York and offices in London and San Francisco.

Visium remains under investigation, according to FBI sources.

Something soured in 2015

Valvani was a star portfolio manager on Visium’s healthcare fund. He generated massive profits that enriched him and Gottlieb, the hedge fund’s founder, and helped Visium build its reputation.

His death has raised questions — and, at times, produced conflicting accounts — about his legacy at the fund.

What is clear, however, is that Valvani was a significant player managing the healthcare fund, which racked up industry awards for performance over the years. Visium, which also included other funds, grew to managing $7.8 billion at the start of this year, a 20% increase from the year before, according to Hedge Fund Intelligence.

Gottlieb, a trained medical doctor and Visium’s chief investment officer, was the firm’s public face and a frequent speaker at industry conferences. And while some of Visium’s investors thought Gottlieb was running a portfolio, he didn’t trade, according to two people who worked at Visium.

Valvani and Gottlieb had worked together for more than a decade. They were both at the hedge fund Balyasny Asset Management, and Gottlieb helped give Valvani his big break, bringing him over as an analyst in 2003. Valvani eventually was promoted to portfolio manager, a top hedge fund job, according to a profile by Duke’s Fuqua School of Business, his alma mater.

Before then, Valvani had worked as a sell-side analyst, covering companies and publishing research used by portfolio-manager clients. Running his own portfolio was a huge step for him.

In 2005, Gottlieb, Valvani, and others on the Balyasny team spun out to form Visium.

“In the beginning, I really had to convince Jacob Gottlieb that I was hungry to join his hedge fund,” Valvani said, according to the Duke profile. “But I believed in myself, my education, and my experience.”

Valvani felt indebted to Gottlieb and had a close, reverential relationship with him, according to two people who worked with them.

At the same time, Valvani, along with other Visium managers, was paid below market rate. Valvani was one of the firm’s partners, but that title did not equate nearly as much financial upside as at other hedge funds — a sore spot for the partners each year, according to two people who worked at Visium. Being a partner was almost meaningless. Technically, the term meant there was a pool of money that the partners could access each year, but there usually wasn’t much in it, the people said.

Earlier this year, the firm improved its compensation structure for its investment staff. Portfolio managers would keep about 12% of their performance gains, whereas previously they kept as low as 8%. Still, that compensation paled in comparison to that available at other funds, which pay out as high as 18% to 20%. If a Visium manager is generating $100 million in profit a year, a few percentage points of difference could mean millions left on the table.

Gottlieb and Valvani’s relationship soured last year, according to one of the colleagues and a separate professional contact. The reasons aren’t completely clear, but some details have emerged.

Usually a star performer, Valvani saw his returns drop last year as he was caught up in healthcare trades that went the wrong way, according to the colleague. He had been behind Visium’s position in Valeant, the controversial drug company that plunged in value, the colleague said.

Valvani was also considering leaving Visium last year, either to start his own firm or to work for someone else, according to the professional contact.

In the end, Valvani stayed put.

“Valvani was indebted to Jake because he moved from the equity research side to being an analyst at a hedge fund,” the Visium colleague told Business Insider. “He’d never have been as successful if Jake hadn’t given him a shot.”

A family affair

While Gottlieb was the public rep for Visium, speaking at hedge fund conferences and accepting awards, Valvani was the backbone to the firm, managing as much as $2 billion at Visium’s biggest fund, two people who worked at Visium said.

Valvani’s and Gottlieb’s personalities were different, and in the months after Valvani’s death, contrasting versions are emerging about their legacy at Visium.

While two colleagues say Valvani drove the profits at Visium’s high-profile healthcare fund, Gottlieb disputes this, according to one person close to him.

Gottlieb was known as someone who sought bargains in his personal life as much as in his professional. He negotiated a prenuptial agreement with his now ex-wife 12 times, each time offering something lower, according to court papers relating to a case between them.

He has said he kept salaries at Visium low to make up for the lower fees the firm charged its investors, according to a person close to him.

But that was little solace to those who worked there, staff members said. And private fund documents show that Visium charged investors the industry standard: 2% for management fees and 20% of investment performance.

“All Jake wanted was to become a billionaire,” one staffer said.

Gottlieb employed family members at Visium, including his brother, Mark Gottlieb, and brother-in-law, Stefan Lumiere, a former portfolio manager who was charged — in a separate case from Valvani’s — in June with mis-valuing Visium’s credit fund. Lumiere has pleaded not guilty to those charges.

Lumiere was fired in 2013, after Gottlieb filed for divorce from Lumiere’s sister in August 2012. Lumiere learned of his firing when a security guard told him his key card wouldn’t let him into Visium’s midtown Manhattan office building, according to three people familiar with the matter.

Gottlieb doesn’t dispute the manner of Lumiere’s dismissal but describes it as a resignation rather than a firing, according to the person close to him.

‘Obama-like’

Valvani is described as kind, soft-spoken, and humble.

“He’d be meeting with the chairman of Pfizer and give that same level of respect to the janitor cleaning the toilets at Visium,” a colleague said. “You don’t find people like that in this industry.”

Valvani joked with a colleague that after Wall Street he would have liked to one day become mayor.

He was a gifted speaker, the colleague said. “He had a way with words. When you think of politicians, it was an Obama-like level,” the person said.

Valvani was also charitable, endowing his alma mater and donating to local causes, according to a Bloomberg News profile in June.

Malhotra, who worked with him professionally as a sell-side analyst, described Valvani as respectful even when their views on a stock diverged.

“I once had a sell on a stock that Visium owned,” she said. “Typically, hedge fund managers can get aggressive, but Sanjay would always listen and would say, ‘I disagree, and here’s why.'”

Toxic

Other factors bore down on Valvani.

The intense media coverage of the indictment upset him, according to Malhotra.

“No one tried to see it from his point of view. That was hard for him,” she said. “He was presumed guilty.”

He “couldn’t handle that his integrity was being challenged,” Malhotra added. “Once you’re accused on Wall Street, even if you win your case, you’re toxic. No one will talk with you.”

This was also the first time Valvani faced the realm of failure, according to a close colleague.

Family was everything to him, according to those who knew him. He spent weekends taking a daughter to squash tournaments around the Northeast, and his girls often came to visit him at Visium’s Manhattan office.

Post-suicide struggle

Friends and family have been grappling with his death for months. Malhotra said she mostly tries to pretend it never happened.

Valvani’s death has left those who knew him seeking answers. Some blame the government for bringing what they view as baseless charges. Others blame the culture at Visium.

Trying to make sense of the chaos is only human.

“When someone kills themselves violently out of the blue, we don’t have a narrative for it,” said Benyamin Cirlin, the executive director for the Center for Loss and Renewal in New York. “There’s no foundation. There’s no narrative hint.”

Valvani’s death also leaves many unanswered questions.

“Part of being human is learning to live with some painful mysteries,” Cirlin said. “Part of the long-term healing is learning how to live with ambiguity and a plot line that doesn’t end neatly.”

Over and over, Valvani’s friends and colleagues said that they wish he would have fought the charges. It is possible that more information could come to light, because the FBI is still investigating Visium, according to two people at the agency. Visium and Gottlieb have not been accused of wrongdoing.

Dealing with the shame and stigma of being accused is not easy, especially since there is no certainty of how long a trial will last, nor what its outcome will be, those who have been through it say.

“This is the hardest part, every second of every day before you have clarity,” said Justin Paperny, who spent 18 months in prison for securities fraud and now provides consulting through his company, White Collar Advice. “Everything is on hold for you.”

“When someone is indicted for a crime, they think the worst, and they think their life is over,” said Jeff Grant, who served time in prison for committing fraud as a lawyer before starting a ministry helping people accused of white-collar crime and their families.

“It’s not true. Their life is going to be different, and in many cases, it’s going to be better,” he said, explaining that the pressures those people had could be lifted.

“But it’s never going to be what they think it’s going to be.”

Grant also said that marriages rarely survive the pressure. Two people said Valvani was facing issues in his relationship with his wife, though their accounts of what was going on varied.

Alone, but not alone

A day before Valvani’s memorial, Malhotra sent an email requesting notes for the family. She said she received 27 responses — some from competitors at other hedge and mutual funds, and CEOs and CFOs of healthcare companies.

“Don’t believe the media,” one of the notes to Valvani’s children said. “This is not your father, and this is not how you should remember him.”

Valvani’s contacts got short notice for his memorial. At the private Brooklyn club where it was held, some 200 people packed in.

“He died feeling alone,” Malhotra said, “and he wasn’t alone.”

Source: http://uk.businessinsider.com/behind-the-life-and-death-of-visiums-sanjay-valvani-2016-9?r=US&IR=T

In what appears as the biggest insider trading case since 2014, an Indian origin hedge fund manager along with his ally and source – a former government official has been charged by the Security and Exchange Commission with criminal cases.

According to SEC, Sanjay Valvani, and another hedge fund manager working in the same firm were arrested after both were found doing insider trading with the help of a former Food and Drug Administration official, who helped them in obtaining nonpublic information from the FDA.

SEC also added that another fund manager; third from the same investment advisory firm was charged with falsely inflating assets in portfolios he managed.

According to SEC, Sanjay Valvani amassed unlawful profit worth $32 million for hedge funds investing in health care securities with the help of Gordon Johnson, a former FDA employee who has over 12 years of experience in the government agency and remained in close touch with his former colleagues.

READ:  Two Indians, Indian American Karan Jerath among 17 UN Young Leaders

Johnson worked as a double agent for a trade association representing generic drug manufacturers and distributors while he was a hedge consultant. This gave him access to confidential information about companies that are deemed to get approvals from the FDI to produce enoxaparin, a generic drug that helps prevent the formation of blood clots.

Johnson allegedly leaked confidential information to Valvani including the details of the conversation that he had with FDI officials, which also includes a very close friend of his during his time in the agency.

Valvani who had information about the companies that will get approval from FDI, traded in advance, before the public announcements and amassed profit. Some of the companies that Valvani traded prior to the public announcement include Momenta Pharmaceuticals, Watson Pharmaceuticals, and Amphastar Pharmaceuticals.

“We allege that Valvani’s formula for trading success was tapping Johnston to abuse his position of trust as a generic industry representative to the FDA and underhandedly obtain confidential information from his friends and former colleagues at the FDA,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “Valvani and his hedge funds made millions by trading on nonpublic FDA drug approval information not available to the rest of the stock market.”

Adding to this, the SEC also indicated another hedge fund manager Christopher Plaford, who was tipped by Valvani on nonpublic information as well as confidential information from a former Centers for Medicare and Medicaid Services official about an impending cut to Medicare reimbursement rates for certain health services.

According to SEC, Plaford who is cooperating with the investigation allegedly made a whopping profit of $300,00 by trading based on the insider information in hedge funds he managed.

In another case filed against Stefan Lumiere, the SEC alleges that he along with Plaford engaged in a fraudulent scheme to falsely inflate the value of securities held by a hedge fund advised by their firm.

“Lumiere allegedly used fake prices to value assets while investors were led to believe the fund was using real prices from independent sources that reflected the market value for those assets,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Financial professionals who cheat investors and game the system should not expect to get away with it.”

 

Source:

Indian-origin hedge fund manager charged with insider trading in US

Along the way Newman has become an unlikely hero to those on Wall Street who believe Bharara has been overzealous and overreached.

Here, for the first time, Newman shares with Fortune exclusively his story about what it was like to be the target of a driven federal prosecutor determined to add another insider-trading conviction to his growing pile of Wall Street pelts. Through it all, Newman never backed down from his belief that he did nothing wrong. (Bharara still maintains that Newman was rightfully convicted, but he did not respond to Fortune’s requests to comment for this article.)

As he reflects on the events that reshaped his life, Newman, 51, shows traces of bitterness but mostly exudes calm and a degree of satisfaction. That perspective has come only with time, though. The day the feds came calling, his feelings ran more toward fear, panic, and confusion.

Newman was no neophyte by the time he answered the call from Makol. He had already been working in finance for more than two decades. An accounting major at Skidmore College, he decided early on that a career as an accountant was not for him. He’d gotten an MBA from Babson College, passed his chartered financial analyst exam, and landed a job, in Boston, at a division of John Hancock’s asset management business. Newman next spent a few years as a tech analyst at Merrill Lynch in New York and another seven years running money at a couple of hedge funds in Boston. In March 2006 he was recruited to Diamondback as a portfolio manager. Over his nearly three years there actively managing money, Newman made investors over $75 million in profit. In return, Diamondback paid him more than $9 million.

Bharara and his team treated Newman like a high-value target from the beginning. In fact, they broke new ground in building the case against him. The day before Makol placed his call, a Sunday, the FBI had obtained a search warrant from a federal judge in Bridgeport, Conn., authorizing the raid on Diamondback. This was a new twist in the investigation of insider trading, just as the authorized use of wiretaps had been in the Rajaratnam case. The FBI had never before raided a hedge fund’s office looking for evidence of insider trading. Instead, agents had previously gathered information they wanted through subpoenas.

The warrant authorized the FBI to search Newman’s office, his files, and his computer, among other things, to look for evidence related to alleged insider trading by him in the stock of Dell Computer, based on information he supposedly received from Primary Global Research. The FBI was also looking for any email correspondence between Newman and his former research analyst, Jesse Tortora, as well as with Sam Adondakis, an analyst who worked for Anthony Chiasson, a portfolio manager at hedge fund Level Global Investors. (The FBI also raided the offices of Level Global and another hedge fund, Loch Capital.)

To establish probable cause for the warrant, an FBI agent named Michael Howard swore out an affidavit, in which he described how the FBI had approached an independent consultant—later revealed to be Karl Motey—who admitted to obtaining information from insiders at public companies and then providing it to clients at hedge funds in exchange for fees. Motey became a cooperating witness for the government. (Motey later pleaded guilty to providing nonpublic information to hedge funds.) Howard asserted in his affidavit that Diamondback, and specifically Newman, was one of Motey’s clients between 2007 and March 2009 and had paid for “inside information” from him about two semiconductor companies: Marvell Technology Group and UMC. (Newman says he never traded on any information Motey provided to him about Marvell or UMC. Reached by email, Motey declined to comment for this article.)

After the raid, Newman was put on paid leave until the end of 2010. That was the end of his career at Diamondback. In January 2011, according to Newman, Diamondback’s attorney informed Pavlis that there was nothing Newman could do to get his job back, so he decided to resign.

Meanwhile, Brodsky kept calling Pavlis to try to get his client to speak with him. “If Newman doesn’t want to come in and talk to us, we have other guys wearing wires at Diamondback,” Brodsky told Pavlis, says Newman. But after the raid on Diamondback Newman decided that he was not going to cooperate with the prosecutors. The raid offended Newman, he says, because it was needlessly disruptive to people’s lives. And besides, he believed he had done nothing wrong.

After resigning from Diamondback, Newman moved back to the house in Needham, Mass., that he shared with his wife, Jill, and their daughter, who was 9 at the time. By then he says his marriage was on the rocks—over, really—and had been for some time, though he remained a devoted father. Before the raid, Newman’s routine had been to stay with his mother in Wilton, Conn., during the week and return home on the weekends. Now he wanted as much time as possible with his daughter.

Newman spent months in judicial purgatory. Every day, he woke up in abject fear that he might be arrested. Once, after a news story about insider trading appeared, a group of reporters from ­Reuters came to his house. (He wasn’t there.) Another time he got a call from a Bloomberg reporter wanting to talk to him. He didn’t answer the phone and then had his landline disconnected. He couldn’t sleep well because he was worried that his daughter would wake up and see him being arrested. He couldn’t work. He couldn’t trade. “All you do is spend your days kind of in panic mode, like, What’s going to come?” he recalls.

In September 2011, Pavlis heard from Diamondback’s lawyers that Diamondback was pushing hard to negotiate a settlement with the government in an attempt to stem a flood of investor redemptions. (On Jan. 23, 2012, the Justice Department entered into a deferred prosecution agreement with the firm in exchange for a total of $9 million in fines paid to the Securities and Exchange Commission and the DOJ. The firm announced it would close in December 2012 as a result of the redemptions. After Newman’s conviction was overturned, the government repaid the $9 million.)

Every day, Newman woke up in abject fear that he might be arrested. “All you do is spend your days kind of in panic mode, like, what’s going to come?” he recalls.

A month later, on a Friday afternoon, a furious Brodsky called Pavlis again. “It’s 10 months since the raid, and your client has to come tell us what the hell happened!” Brodsky screamed over the phone, according to Newman. “He’s got to tell us what went on there. This is a high-profile case!” (Brodsky did not respond to requests to comment for this article.)

Brodsky told Pavlis that Newman had two weeks to meet with him. “If you’re going to give him two weeks, if you’re going to arrest him in two weeks, why don’t you tell us what you have?” Pavlis replied.

“I never said I was going to arrest him,” Brodsky said. “What are you talking about?” When Pavlis relayed the conversation with Brodsky to Newman, Newman says he was both happy and nervous. Something didn’t feel right.

The following Monday, Newman met with Pavlis and they resolved that Newman would not go see Brodsky. “They have nothing,” Newman told Pavlis. Still, the more he thought about what Brodsky said, the more concerned the trader became. He thought, “They’re going to make something up, and I’m going to get arrested at some point.”

That point finally came at around 6 a.m. on Jan. 8, 2012, some 14 months after the FBI had first called him. Newman was at home in Needham. Just as he always imagined, he heard a knock at his door. He looked out the window and saw eight FBI agents. The local Needham police were there too. There were about 12 cars total in and around his driveway. But no sirens. “They wanted to surprise me,” he says. “They take great joy in that.” Newman was relieved that his daughter was still asleep.

Newman put on a T-shirt and pants and opened the door. “What’s up?” he said nonchalantly. He was surprised, he recalls, when the agents hesitated for a moment. “We’re arresting you for insider trading,” they finally told him, “and you’ve got to come with us.” He told them he needed to get his glasses. They said no. “You can’t leave our sight,” they told him. They searched him and handcuffed him. Newman claims that he was not read his Miranda rights.

He stayed cool as the agents put him in the backseat of a small Chevy. “You can’t let them see you panic because you can tell this is their sole desire,” he says. Needham is 20 miles from Boston, and at that time of day it should have been a quick trip to the courthouse. But the “two meathead FBI guys,” he says, decided to take him a very long, slow way through small towns and back roads. What should have been a 20-minute trip took 90 minutes.

Finally, Newman was checked in at the courthouse at around 8 a.m. and deposited in a jail cell. In the cell with Newman was a guy accused of robbing banks. He asked Newman what he was in for. Newman replied that he was being charged with insider trading. “Oh, the same thing as me,” the guy said. Newman fell asleep with his head on a roll of toilet paper. After a couple of hours a federal marshal took Newman to be fingerprinted and have his mug shot taken. There were about seven other marshals in the room watchingThe Departed, the Martin Scorsese film about Boston cops. Newman couldn’t believe it. “They’re saying to each other, ‘Oh, this part is awesome,’ and they’re all sitting there entranced,” he recalls. He says the marshal initially messed up the fingerprinting because he was distracted by the movie. Newman was released later in the day after posting bail of $1 million.

Back at home, Newman went through the indictment against him carefully. He was charged along with Anthony Chiasson of Level Global, even though the two hedgies barely knew each other, according to Newman. The gist of the government’s case against them was that a ring composed of their research ­analysts—Tortora for Newman, and Adondakis for Chiasson, both of whom had pleaded guilty and were cooperating with prosecutors—and others had exchanged with each other “material nonpublic information obtained directly and indirectly from employees of certain publicly traded technology companies.” The “fight club,” as Tortora often referred to the circle of analysts, then allegedly gave this inside information to Newman and Chiasson, who traded on it.

Specifically, the government alleged, Tortora had obtained “inside information” about Dell from Sandy Goyal, an unindicted “co-conspirator” who obtained the information about Dell from a company insider who worked in the investor relations department. In other words, whatever inside information that Newman allegedly received and traded on came to him fourth-hand. For instance, before Dell’s May 29, 2008, earnings call, the Dell ­insider—later identified as Rob Ray, a Dell investor relations employee who was never charged with wrongdoing by prosecutors—allegedly shared with Goyal the information that Dell’s gross margins would be higher than expected. The government alleged that Goyal passed the information to Tortora, who passed it to Newman, who allegedly traded on the information and made about a $1 million profit for Diamondback’s investors. (The same information went to Adondakis, who supposedly passed it on to Chiasson, who allegedly traded on it and made a profit of $4 million.)

The same information flow allegedly occurred before Dell’s August 2008 earnings call. And the indictment also alleged that Newman and Chiasson had traded on inside information about Nvidia’s earnings in 2009. Newman and Chiasson were each accused of multiple counts of securities fraud and of one count of conspiracy to commit securities fraud. The government alleged that Newman had made a total of $4 million in illegal gains.

Right away, Newman knew something was amiss. He looked back at Dell’s quarterly earnings for May 2008 and discovered that the gross margins had been lower than anticipated, not higher. The Wall Street estimate for Dell’s margin that quarter had been 18.5%, but the actual gross margin for the quarter was 18.1%. “They’re charging me for something that didn’t even happen!” he thought. He called Pavlis. “Not only do I not remember getting any information,” Newman told his lawyer, “but the information they put in is wrong.” Pavlis said it was something to examine.

“They’re ­charging me for ­something that didn’t even happen!” thought Newman as he read the details of the indictment.

Newman, though, decided it was time to hire new, high-powered lawyers. (Diamondback’s insurance paid about 95% of Newman’s $10.2 million in legal fees; he paid the rest.) He hired Stephen Fishbein and John Nathanson, at Shearman & Sterling, in New York City. They immediately reached the same conclusion as Newman about the Dell gross margins. “They charged you for something you shouldn’t have been charged for,” he says his new lawyers told him.

However, the government’s factual snafu didn’t seem to help Newman in the trial, presided over by federal judge Richard Sullivan. Antonia Apps, who prosecuted the case for the government, argued that it didn’t matter whether the Dell information was right or wrong. All that mattered was that the information should not have been shared in the first place. Once it was, regardless of whether Newman knew where it had come from or whether it was material and nonpublic, he should not have traded on it.

For Newman, one of the more disturbing aspects of the trial, which occurred over six weeks in late 2012 at the federal courthouse in Manhattan, was learning what Tortora, his former analyst, said about him. By that time the two men did not get along. “He didn’t like me,” Newman says. “We didn’t leave on good terms.” At the end of 2009, after a little more than two years of working together, says Newman, he fired Tortora for poor performance. Newman says he still paid him $700,000 for the year. The year before Tortora had made more than $2 million. “He flipped out,” Newman says. Newman gave him a few months to look for a new job, then cut him loose. Tortora was furious.

Tortora pleaded guilty and agreed to help the prosecution make its case against Newman. Newman says Tortora “burned through all his money, and he didn’t have a choice” but to cooperate with the government. At trial, Tortora testified that he had lost hundreds of thousands of dollars day-trading and gambling. When asked during the trial about his relationship with Newman, Tortora said, “I hate him. I hate him to this day.” (Tortora did not respond to requests for comment made through his lawyer.)

After two days of deliberation, on Dec. 17, 2012, the jury convicted Newman and Chiasson of four counts of securities fraud and one count of conspiracy to commit securities fraud. Newman had steeled himself against the verdict, and he intentionally showed no emotion as the verdict was being read.

The jury agreed with the prosecution’s argument that confidential information should not be traded on regardless of where it came from, even if the trader did not know it had been obtained illegally. Newman’s lawyers argued that this was new law, though: Prior to Newman’s conviction, it was illegal to trade on inside information only if the insider sharing the confidential, nonpublic information breached a fiduciary duty to shareholders and if the person who received the information, and then traded on it, knew that the information was obtained improperly.

Newman says there’s “close to no chance” that he could land another hedge fund job. Today he’s focused on rebuilding his life.Photograph by Spencer Heyfron

Apps argued that Newman should have known that the information he had received about Dell and Nvidia was “bad information.” But, Newman says, “there was no tipper ever charged. The Dell and Nvidia guys were never charged criminally or civilly. You can’t have insider trading if you don’t charge the tipper.”

On May 2, 2013, Judge Sullivan sentenced Newman to 54 months in federal prison. “Fifty-four months for something I didn’t do,” Newman says now. “Nuts.” He was also ordered to pay a $1 million fine and forfeit $737,724 in ill-gotten compensation, or about half of Newman’s liquid assets at the time.

Bharara piled on in a public statement. “With today’s sentence, Todd Newman becomes the first member of this corrupt circle of friends to be punished for his conduct,” he said after the sentencing. “Efforts to cheat the market by gaining an illegal edge ultimately lead to a loss of one’s liberty, as it did for Todd Newman today.”

Three months later Newman appealed his conviction to the Second Circuit Court of Appeals. The gist of his appeal was that what the jury convicted Newman of was not a crime—at least based on the insider-trading laws as they have been applied for decades. Newman’s lawyers faulted the judge for failing to properly instruct the jury about the law. “When all was said and done, Mr. Newman was not convicted of trading on information he knew to be obtained improperly,” the Shearman & Sterling lawyers wrote. “The jury was not instructed that such knowledge needed to be proved and the government offered no evidence to prove it. Instead, Mr. Newman was convicted simply of profiting from information that ordinary investors did not have. That is not a crime.”

On Dec. 10, 2014, a three-judge panel on the Second Circuit agreed with Newman and threw out his conviction as well as that of Chiasson. The panel ruled that the prosecution’s argument was flawed and that Sullivan had erred in advising the jury. The appeals court ruled, importantly, that the prosecutors presented “no evidence” at trial that Newman and Chiasson “knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.”

Bharara didn’t give up right away. First, he asked for an “en banc” ruling from the Second Circuit—one in which all the judges on the court, not just a three-judge subset, reconsider the decision. In April 2015 the Second Circuit denied Bharara’s request. Then, last October, the Supreme Court declined to review the Second Circuit’s ruling, freeing Newman once and for all. On Oct. 22, Bharara dropped the charges against the six “cooperating witnesses” in Newman’s case, all of whom had pleaded guilty, including Tortora. Maintaining their guilty pleas, he said, would not be “in the interests of justice.” Tortora’s attorney issued a statement: “After five long years, my client is thrilled to be vindicated. Justice was served in the end.”

Needless to say, Newman believes that Bharara came after him wrongly and recklessly. “He blames everybody else on Wall Street for stepping over the line, and he’s the one that stepped over the line in my case,” Newman says.

He was offended at first to read that Bharara had cooperated with the producers of Showtime’s hit show Billions, about a ruthless federal prosecutor in New York who’s determined to take down a billionaire hedge fund manager for insider trading. He didn’t like the idea of a show making light of such situations. But after seeing the show, he’s amused by it. “They’ve actually made the hedge fund guy look better than the U.S. Attorney in the Southern District,” says Newman with a smile.

These days, Newman is mostly focused on putting his life back together. He does some trading. But he says there’s no chance “or close to no chance” of getting hired at a hedge fund again, so he hasn’t bothered trying. He plans to start a business to help others make it through experiences similar to his own.

He has plenty of hard-won lessons to share. The trial itself was especially painful. “You sit there for five weeks being ripped apart,” he says. For Newman it was humiliating, and he started losing hope that he would prevail. But then he picked himself up and continued the fight. In the process, he may have helped change the way we regulate Wall Street forever.

A version of this article appears in the September 1, 2016 issue of Fortune.

Source:http://fortune.com/todd-newman-diamondback-insider-trading/

Is First International Group, a company that has offered to buy Electrosteel Steels Ltd from a group of banks, a front for Dharmesh Doshi, a shadowy figure from the second big stock exchange scandal to roil Indian markets?

Indeed, experts have already red-flagged this as one of the factors that banks have to watch out for when they acquire control of companies that are unable to repay their loans.

The story begins earlier this year when a consortium of lenders to Electrosteel Steels set out to identify a buyer for the 50% equity they received in the company in return for Rs.2,500 crore in unpaid debt through a conversion under the strategic debt restructuring scheme.

An unlikely candidate emerged as a possible buyer.

Its name was First International Group Plc. (which quaintly abbreviates as FIG). The only other contender was Tata Steel Ltd. Since FIG was offering Electrosteel creditors a better deal, they were leaning towards a sale to it.

FIG approached SBI Capital Markets, which was working on behalf of lenders, with an expression of interest in Electrosteel Steels, said a banker familiar with the negotiations who spoke on condition of anonymity

As news of the likely deal spread, the question on everyone’s mind was—what is FIG? A glance at the company’s website shows that it is a London-based entity which deals in securities.

Next question—why is a securities company interested in buying an Indian steel company?

To this the bankers had no answer.

Bankers asked the local arm of audit firm Deloitte India to conduct forensic due diligence exercise on the company. The deal is currently in cold storage pending the results of this audit.

Meanwhile, documents accessed by Mint suggest close links between FIG and Doshi, an associate of stock broker Ketan Parekh, who was banned from the Indian markets in 2001. They also show that FIG had extensive dealings with both Doshi and his company, Jermyn Capital Partners, which, in turn, had some dealings with Electrosteel.

Doshi, along with Ketan Parekh, was one of the key accused in the stock market scam of 2001 and had been barred from the Indian markets for life. That was the second major scam to roil Indian markets; the first took place in the early 1990s and was masterminded by Harshad Mehta, Parekh’s mentor.

The Securities and Exchange Board of India (Sebi) found links between Jermyn Capital Llc., London-based Jermyn Capital Partners Plc. and Doshi. In a 13 January 2006 order, Sebi noted that “Jermyn Capital Partners Plc was formerly known as Triumph Securities UK Plc which was a 100% subsidiary of Triumph International Finance (India) Ltd (TIFIL) through its Mauritius based subsidiary International Holdings (Triumph) Ltd”.

“SEBI had earlier conducted investigations in the wake of the ‘Stock Market Scam of 2001’ and initiated various punitive actions against TIFIL and its directors including Mr. Ketan V. Parekh, Mr. Kartik K. Parekh, Mr. Dharmesh Doshi, Mr. Jatin R. Sarvaiya and Mr. A.R Kapadia. While Mr. Ketan Parekh and three other Directors of TIFIL were arrested in May 2002, Mr. Dharmesh Doshi evaded arrest and is still absconding,” said the 13 January 2006 order.

While Jermyn Capital Partners Plc. was barred from the Indian Securities market, it continued to remain active in the UK. In 2010, the company changed its names to Orbit Investment Securities Services Plc. It continues to function under that name.

Arundhati Bhattacharya, chairperson of State Bank of India, which heads the consortium of lenders to Electrosteel Steels, did not respond to an e-mail seeking comment.

Bankers must exercise due caution while working with potential buyers of stressed assets, said an expert.

“In its most recent guidelines on SDR, the regulator has stated very clearly that banks are required to do additional due diligence on the new buyers and establish that they are not related or are associates of the current promoter group. The onus of finding out all possible details about the buyer remains with the banks. They must consider any red flags which are raised in respect of a potential buyer and should be cautious in who they are dealing with,” said Dinkar V., partner, transaction advisory services, at global consulting firm EY.

Dinkar, who also heads the restructuring and stressed asset turnaround unit of EY, was not commenting on the Electrosteel case in particular.

 

 

Source:

http://www.livemint.com/Money/OvK6BEVABPdtfCUlNFMNsM/Is-First-International-Group-a-front-for-Dharmesh-Doshi.html

 

Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted an investigation into the scrip of Palred Technologies Limited (hereinafter referred to as ‘PTL’ or ‘the Company’) for the period of September 18, 2012 to November 30, 2013 (hereinafter referred to as ‘the investigation period’), to ascertain the possible violation of the provisions of the SEBI Act, 1992 (hereinafter referred to as ‘SEBI Act’) and SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as ‘PIT Regulations’).

2. PTL was incorporated in the year 1999. The Company had changed its name from Four Soft Limited to PTL w.e.f. December 09, 2013. The scrip of Palred is listed on National Stock Exchange Limited (hereinafter referred to as ‘NSE’) and Bombay Stock Exchange (hereinafter referred to as ‘BSE’).

The investigation alleged that Mr. Palem Srikanth Reddy, who is also the Chairman and Managing Director (CMD) of PTL, Ms. P. Soujanya Reddy, Mr. Ameen Khwaja, Ms. Noorjahan Khwaja, Mr. Ashik Ali Khwaja, Ms. Rozina Hirani Khwaja, Ms. Shefali Ameen Khwaja, Mr. Shahid Khwaja, Ms. Kukati Parvathi, Mr. Pirani Amyn Abdul Aziz, Mr. Karna Ramanjula Reddy, Mr. Umashankar S, Ms. Raja Lakshmi Srivaiguntam, Mr. Prakash Lohia and Mr. Mohan Krishna Reddy Aryabumi had traded in the scrip of PTL during the investigation period, while in possession of ‘price sensitive information’ (hereinafter also referred to as ‘PSI’).

The Company, in its e-mail dated June 20, 2014 had informed SEBI that Mr. Palem Srikanth Reddy (the Chairman and Managing Director of PTL), Mohan Krishna Reddy and P. Soujanya Reddy were the persons privy to the ‘slump sale of software solutions business to Kewill group’. Mr. Palem Srikanth Reddy was also privy to the information about the declaration of dividend. Mr. Palem Srikanth Reddy being the connected person within the meaning of Regulation 2(c)(i) of the PIT Regulations and having access to the UPSI, as detailed above, is alleged to be an ‘insider’ in terms of the Regulation 2(e) read with Regulation 2(c) of the PIT Regulations.

The investigations have revealed that Mr. Palem S. Reddy had communicated/ counselled, directly or indirectly the UPSI to one Mr. Ameen Khwaja, his relative Ms. Kukati Parvathy and others (hereinafter collectively referred to as the ‘suspected entities’). The details of the connections of suspected connected entities with Mr. Palem S. Reddy are as under:

Mr. Palem Srikanth Reddy and Mr. Ameen Khwaja were the common directors of one Pal Premium Online Media Pvt. Limited (hereinafter referred to as ‘Pal’). The names of both Mr. Palem Srikanth Reddy and Mr. Ameen Khwaja appear in the promoter category of Pal. It was found that Pal had provided services relating to ‘search engine’ to PTL during the period September 2011 to May 2013 (i.e. during the period of UPSI). Further, after the ‘slump sale of business’ by PTL to Kewill group, discussions pertaining to the merger of Palred Media and Entertainment Pvt. Limited and Pal with PTL had begun on December 19, 2013, which later got approved by the Board of Directors of the Company. In view of the same, Mr. Ameen Khwaja is also alleged to be an ‘insider’ and ‘connected person’ in terms of the Regulations 2(e) and (c) of the PIT Regulations.

Mr. Ameen Khwaja appears to have not traded in the scrip of PTL during the period of investigation. However, his immediate family members namely Ms. Noorjahan A. Khwaja, Mr. Ashik Ali Khwaja, Ms. Rozina Hirani Khwaja, Ms. Shefali Ameen Khwaja and Mr. Shahid Khwaja (hereinafter collectively referred to as ‘Khwaja group’) were found to be trading in the scrip of PTL during the UPSI period.

The trading pattern of Khwaja group entities was found to be in clear deviation from their established trading pattern. Except Ms. Noorjahan Khwaja, no other Khwaja group entity had traded in the market since April 01, 2011 to September 17, 2012. Even the maximum purchase value of Ms. Noorjahan Khwaja at BSE/ NSE was only 2.13 lakh in seven scrips, the same is in sharp contrast to the amount of 16.62 lakh, she had invested in the scrip of PTL (a not-so-frequently traded scrip during the relevant period). Further, it has also been revealed that the trading accounts of four members of Khwaja group were opened only on June 26, 2013, June 27, 2013, July 10, 2013 and July 12, 2013 i.e. during the UPSI period.

Mr. Pirani Amyn Abdul Aziz is also found to be connected to Mr. Ameen Khwaja through mutual friends on ‘Facebook’. He was employed with Deloitte Tax Services India Pvt. Limited (a group company of Deloitte Touche Tohmatsu India Pvt. Limited, which had conducted the due diligence of PTL during the slump sale). During the course of investigation, Mr. Pirani Amyn Abdul Aziz failed to reply to the specific details, as sought by SEBI.

His trading pattern was found in deviation from the established trading pattern. It was found that he had transacted only in the scrip of ‘Cummins India Limited’ for a quantity of only three shares for a consideration of 1,330,which he had purchased and sold during July 2013. Further, he was not found trading in any other scrip since April 2011 except that of investing about 5 lakh in PTL shares from June 2013 onwards, i.e., during the UPSI of ‘slump sale’. The proportion of his investment in PTL shares when considered in relation to his income and that too in a scrip which was not frequently traded (during the relevant period), is not commensurate with the usual investment behavior

It was found that he had opened his trading account with HDFC Securities Limited on June 25, 2013, i.e. just one day prior to his trading (i.e. June 26, 2015), in the scrip of PTL. Further an analysis of his bank account details revealed that he had received a series of cash deposits, prior to each payment to his broker for transacting in the shares of PTL. Mr. Pirani Amyn Abdul Aziz has not furnished any detail of the source of such cash deposits. The same raises serious suspicion on his transactions.

TABLE – 5

Trades during the UPSI of ‘slump sale’

(i.e. between September 18, 2012 –August 10, 2013) S.No.

Name

During 18/09/2012 to 10/08/2013

During 18/08/2013 to 20/08/2013

Total

Buy

Sell

Buy

Sell

Buy

Sell

1

Srikanth Palem Reddy

2,09,968

5,399

0

0

2,09,968

5,399

2

Noorjahan A Khwaja

1,20,972

2,456

0

0

1,20,972

2,456

3

Ashik Ali Khwaja

64,193

0

0

0

64,193

0

4

Rozina Hirani

43,014

0

0

0

43,014

0

5

Shefali Ameen Khwaja

45,000

0

0

0

45,000

0

6

Shahid Khwaja

50,822

0

0

0

50,822

0

7

Pirani Amyn Abdul Aziz

32,305

0

0

0

32,305

0

8

Karna Ramanjula Reddy

13,954

0

0

0

13,954

0

9

Umashankar S.

6,000

5,000

0

0

6,000

5,000

10

Raja Lakshmi Srivaiguntam

16,955

200

0

0

16,955

200

11

Rajpal Suresh Chandra

15,000

5,260

0

0

15,000

5,260

12

K. Parvathi

34,900

0

0

0

34,900

0

13

Prakash Lohia

25,972

2,000

3,500

0

29,472

2,000

14

Soujanya Reddy

17,500

0

0

0

17,500

0

TABLE – 7 Profit/losses incurred by suspected entities during their trading in PTL

Buy Vol.

Buy value in

Sell Vol.

Sell value in

Remaining shares unsold till UPSI 14.10.2013

Closing price on day of PSI

Notional sell value of shares

Gain (₹)

A

B

C

D

E=A-C

F

G=E*F

H=G+D-B

Srikanth Palem Reddy

209968

2799682

5399

91651

204569

39.2

8019105

5311074

Noorjahan A Khwaja

120972

1661672

2456

52634

118516

39.2

4645827.2

3036789

Khwaja Ashik Ali

64193

1010859

0

0

64193

39.2

2516365.6

1505507

Rozina Hirani

43014

636791

0

0

43014

39.2

1686148.8

1049358

Shefali Ameen Khwaja

45000

701666

0

0

45000

39.2

1764000

1062334

Shahid Khwaja

50822

914136

0

0

50822

39.2

1992222.4

1078086

Pirani Amyn Abdul Aziz

32305

499986

0

0

32305

39.2

1266356

766370

Mohankrishna Reddy Aryabumi

9300

273005

0

0

9300

39.2

364560

91555

Karna Ramanjula Reddy

16250

296240

0

0

16250

39.2

637000

340760

Umashankar S.

10450

230004

5000

71746

5450

39.2

213640

55382

Raja Lakshmi Srivaiguntam

16955

282090

200

3360

16755

39.2

656796

378066

K. Parvathi

35800

593167

0

0

35800

39.2

1403360

810193

Prakash Lohia

25972

374023

2000

37900

23972

39.2

939702.4

603579

Soujanya Reddy

17500

215924

0

0

17500

39.2

686000

470076

Total

698501

15055

683446

16559129

TABLE – 8 S.No.

Entity Name

PAN

Profit (₹)

Interest 12% p.a.**

Total (₹)

1.

Mr. Palem Srikanth Reddy

AAMPP9497N

53,11,074

20,63,898

73,74,972

2.

Ms. Noorjahan A. Khwaja

ACAPK3460G

30,36,789

9,53,469

39,90,258

3.

Mr. Ashik Ali Khwaja

ADMPA1271E

15,05,507

4,67,243

19,72,750

4.

Ms. Rozina Hirani Khwaja

ABQPH3900B

10,49,358

3,25,675

13,75,032

5.

Ms. Shefali Ameen Khwaja

ADTPV2598L

10,62,334

3,29,003

13,91,337

6.

Mr. Shahid Khwaja

ATXPK3630J

10,78,086

3,29,629

14,07,715

7.

Mr. Pirani Amyn Abdul Aziz

AONPP0697R

7,66,370

2,39,107

10,05,477

8.

Mr. Mohan Krishna Reddy Aryabumi

ABLPA2405R

91,555

26,097

1,17,652

9.

Mr. Karna Ramanjula Reddy

APAPK7847J

3,40,760

1,12,031

4,52,791

10.

Mr. Umashankar S.

ANUPS2006D

55,382

17,498

72,880

11.

Ms. Raja Lakshmi Srivaiguntam

BOPPS3150H

3,78,066

1,16,216

4,94,282

12.

Ms. Kukati Parvathi

ACIPP8586G

8,10,193

3,02,857

11,13,050

13.

Mr. Prakash Lohia

ABTPL5701F

6,03,759

1,91,095

7,94,674

14.

Ms. P. Soujanya Reddy

AAQPP2729R

4,70,076

1,81,436

6,51,512

TOTAL

1,65,59,129

56,55,254

2,22,14,383

* Interest calculated on illegal gains from the individual date of buy transaction till January 31, 2016

10. Considering the facts and circumstances of the case, the balance of convenience lies in favour of SEBI. With the initiation of investigation and quasi-judicial proceedings, it is possible that the noticees may divert the unlawful gains (subject to the adjudication of the allegation on the merits in the final order), which may result in defeating the effective implementation of the direction of disgorgement, if any to be passed after adjudication on merits. Non-interference by the Regulator at this stage would therefore result in irreparable injury to interests of the securities market and the investors.

In view of the foregoing, I, in exercise of the powers conferred upon me by virtue of Section 19 read with Sections 11(1), 11(4)(d) and 11(B) of the SEBI Act, 1992, hereby order to impound the alleged unlawful gains of a sum of 2,22,14,383 (alleged gain of 1,65,59,129 + interest of 56,55,254 from the date of buy transactions to January 31, 2016), jointly and severally from the persons tabulated in the paragraph above. If the funds are found to be insufficient to meet the figure of unlawful gains, as directed above, then the securities lying in the demat account of these persons shall be frozen to the extent of the remaining value.

Source:

http://www.sebi.gov.in/cms/sebi_data/attachdocs/1454682584239.pdf

US Second Circuit Court of Appeals yesterday dismissed Gupta’s appeal
Gupta, 67, had moved the court seeking a “certificate of appealability” but in the ruling the court “denied” the motion and “dismissed” his appeal.

“Appellant has not shown that ‘jurists of reason would find it debatable whether the district court was correct in its procedural ruling’ …as to whether Appellant’s claim was procedurally defaulted,” Circuit Judges Susan Carney and Christopher Droney said in their ruling.

Gupta’s two-year prison term ends in March next year and ever since his conviction in June 2012, he has filed several appeals, including to the US Supreme Court, to overturn his conviction and prison term but the courts have rejected his arguments and affirmed his sentence.

The former McKinsey chief is currently serving his prison term in a federal prison in Ayer, Massachusetts.

Gupta had last filed an appeal in August in the US Court of Appeals against the July ruling by Jed Rakoff who had rejected Gupta’s appeal saying his argument that the evidence of personal benefit presented at trial was insufficient to sustain his conviction is “both too late and too little”.

In his appeals, Gupta cited a recent landmark decision by the appeals court that had said that for an insider-trading conviction prosecutors must show that a defendant received a personal benefit for passing illegal tips.

Gupta sought to vacate his sentence and the judgment against him on the basis of an argument that the trial court’s instruction to the jury concerning the “personal benefit” element of an insider trading violation was “erroneous” and there was insufficient evidence of such benefit.

Rakoff had also denied Gupta’s bid to seek a “certificate of appealability” that would have given the IIT and Harvard alumnus another legal recourse to challenge his conviction.

Rakoff, who had presided over Gupta’s trial and sentenced him to the two years’ imprisonment, had said that even though Gupta is a “man of many laudable qualities,” the “hard fact remains” that he committed a serious crime.

Source:
http://www.business-standard.com/article/international/gupta-s-latest-bid-to-reverse-insider-trading-conviction-fails-115123000290_1.html

Deepwater Horizon Rig

According to the Securities and Exchange Commission, after the explosion on the Deepwater Horizon oil rig on April 20, 2010, Seilhan was designated to BP’s Incident Command Center in Houma, Louisiana, where he was responsible for overseeing the initial oil collection and clean-up operations.  In his position as Incident Commander, Seilhan learned of nonpublic information relating to the seriousness of the disaster, including initial oil flow estimates from the sunken rig that were significantly greater than the public estimate of  5,000 barrels per day.  Indeed, those private estimates were between 52,700 and 62,200 barrels per day – a 10x increase than that provided to the public.

After he learned of this information, Seilhan sold his and his family’s entire $1 million portfolio of BP securities, including common shares and options.  By doing so, Seilhan and his family were able to avoid over $100,000 in losses as BP’s share price eventually declined 48%.  Later, after BP announced it had successfully capped the well, Seilhan  repurchased shares of the BP Stock Fund (composed nearly entirely of BP shares) at a lower basis.

While the Commission acknowledged the assistance of the Department of Justice’s Deepwater Horizon Task Force, there is no indication that criminal charges will be filed.

Keith A. Seilhan, a senior responder for BP during the Deepwater Horizon oil spill, agreed to settle claims that he violated federal securities laws by selling his family’s entire $1 million portfolio of BP securities after he learned that the public estimations of the spill’s magnitude were grossly understated.  Without admitting or denying the allegations, Seilhan agreed to pay (i) $105,409 of ill-gotten gains; (ii) $13,300 in prejudgment interest; and (iii) a civil penalty of $105,409.

A copy of the SEC’s Complaint is here and embedded below:

Source:

http://www.forbes.com/sites/jordanmaglich/2014/04/17/sec-accuses-former-bp-employee-of-insider-trading-during-deepwater-horizon-spill/

Rakesh Agarwal vs. SEBI.

Rakesh Agarwal, was the Managing Director of ABS Industries Ltd. (ABS), was involved in negotiations with Bayer A.G regarding their intentions to takeover ABS. It was alleged by SEBI that prior to the announcement of the acquisition, Rakesh Agarwal, through his brother in law, Mr. I.P. Kedia had purchased shares of ABS from the market and tendered the said shares in the open offer made by Bayer thereby making a substantial profit. The investigations of SEBI affirmed these allegations. He was an insider as far as ABS is concerned. By dealing in the shares of ABS through his brother-in-law while the information regarding the acquisition of 51% stake by Bayer was not public, the appellant had acted in violation of Regulation 3 and 4 of the Insider Trading Regulations.

Rakesh Agarwal contended that he did this in the interests of the company. He desperately wanted this deal to click and pursuant to Bayer’s condition to acquire at least 51% shares of ABS, he tried his best at his personal level to supply them with the requisite number of shares, thus, resulting in him asking his brother-in-law to buy the aforesaid shares and later sell them to Bayer.

The SEBI directed Rakesh Agarwal to “deposit Rs. 34, 00,000 with Investor Education & Protection Funds of Stock Exchange, Mumbai and NSE (in equal proportion i.e. Rs. 17, 00,000 in each exchange) to compensate any investor which may make any claim subsequently.” On an appeal to the Securities Appellate Tribunal (SAT), Mumbai, the Tribunal, however, held that the part of the order of the SEBI directing Rakesh Agarwal to pay Rs. 34,00,000 couldn’t be sustained, on the grounds that Rakesh Agarwal did that in the interests of the company (ABS) to help Bayer A. G acquire his company.

%d bloggers like this: