federal prosecutors

In Hours, Thieves Took $45 Million in A.T.M. Scheme

May 10, 2013 by NewsMaker Leave a Comment

In two precision operations that involved people in more than two dozen countries acting in close coordination and with surgical precision, thieves stole $45 million from thousands of A.T.M.’s in a matter of hours.

In New York City alone, the thieves responsible for A.T.M. withdrawals struck 2,904 machines over 10 hours starting on Feb. 19, withdrawing $2.4 million.

The operation included sophisticated computer experts operating in the shadowy world of Internet hacking, manipulating financial information with the stroke of a few keys, as well as common street criminals, who used that information to loot the automated teller machines.

The first to be caught was a street crew operating in New York, their pictures captured as, prosecutors said, they traveled the city withdrawing money and stuffing backpacks with cash.

On Thursday, federal prosecutors in Brooklyn unsealed an indictment charging eight men — including their suspected ringleader, who was found dead in the Dominican Republic last month. The indictment and criminal complaints in the case offer a glimpse into what the authorities said was one of the most sophisticated and effective cybercrime attacks ever uncovered.

It was, prosecutors said, one of the largest heists in New York City history, rivaling the 1978 Lufthansa robbery, which inspired the movie “Goodfellas.”

Beyond the sheer amount of money involved, law enforcement officials said, the thefts underscored the vulnerability of financial institutions around the world to clever criminals working to stay a step ahead of the latest technologies designed to thwart them.

“In the place of guns and masks, this cybercrime organization used laptops and the Internet,” said Loretta E. Lynch, the United States attorney in Brooklyn. “Moving as swiftly as data over the Internet, the organization worked its way from the computer systems of international corporations to the streets of New York City, with the defendants fanning out across Manhattan to steal millions of dollars from hundreds of A.T.M.’s in a matter of hours.”

The indictment outlined how the criminals were able to steal data from banks, relay that information to a far-flung network of so-called cashing crews, and then have the stolen money laundered in purchases of luxury items like Rolex watches and expensive cars.

In the first operation, hackers infiltrated the system of an unnamed Indian credit-card processing company that handles Visa and MasterCard prepaid debit cards. Such companies are attractive to cybercriminals because they are considered less secure than financial institutions, computer security experts say.

The hackers, who are not named in the indictment, then raised the withdrawal limits on prepaid MasterCard debit accounts issued by the National Bank of Ras Al-Khaimah, also known as RakBank, which is in United Arab Emirates.

Once the withdrawal limits have been eliminated, “even a few compromised bank account numbers can result in tremendous financial loss to the victim financial institution,” the indictment states. And by using prepaid cards, the thieves were able to take money without draining the bank accounts of individuals, which might have set off alarms more quickly.

With five account numbers in hand, the hackers distributed the information to individuals in 20 countries who then encoded the information on magnetic-stripe cards. On Dec. 21, the cashing crews made 4,500 A.T.M. transactions worldwide, stealing $5 million, according to the indictment.

While the street crews were taking money out of bank machines, the computer experts were watching the financial transactions from afar, ensuring that they would not be shortchanged on their cut, according to court documents.

Nicole Perlroth, Frances Robles and Mosi Secret contributed reporting.

This article has been revised to reflect the following correction:

Correction: May 9, 2013

An earlier version of this article misspelled the surname of a former prosecutor in the computer crime division of the Justice Department. She is Kim Peretti, not Paretti.

Article source: http://www.nytimes.com/2013/05/10/nyregion/eight-charged-in-45-million-global-cyber-bank-thefts.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: federal prosecutors, financial institutions, heists

Chinese Man Pleads Guilty in Copyright Violation Case

January 8, 2013 by NewsMaker Leave a Comment

Nearly five years ago, a Chinese man named Xiang Li registered several domain names, including www.crack99.com, and embarked on an ambitious, and ultimately illegal, venture.

Mr. Li, who was based in Chengdu, paid a network of computer experts to scour the Internet to find commercial software they could “crack,” meaning they bypassed security protocols designed to prevent unauthorized access or reproduction.

Ultimately, Mr. Li offered more than 2,000 pirated software products that could be used as applications in the military, engineering, space exploration, mathematics and explosive simulation, and sold them at a fraction of their retail price, which federal prosecutors said was over $100 million.

Among his biggest customers were an electronics engineer at NASA and the chief scientist at a government military contractor, but his clients also included students, inventors and small-business owners. Mr. Li sold the products for $20 to $1,200, accepting payments by Western Union and MoneyGram, according to government documents.

But Mr. Li’s criminal enterprise officially ended last year when he was arrested by undercover agents. On Monday, he pleaded guilty in Federal District Court in Delaware to one count of conspiring to steal copyrighted software. He faces a maximum of five years in prison.

Mr. Li, who is 36, could not be reached for comment, nor could his lawyer, Mingli Chen. Mr. Li’s wife, Chun Yan Li, was also indicted on charges of participating in the illegal scheme; she remains at large, presumably in China, officials said.

Mr. Li was arrested in June 2011 in Saipan in the Northern Mariana Islands during a meeting that had been arranged by undercover agents posing as American businessmen. The agents arranged the meeting under the guise of picking up their purchase of pirated software, design packaging and 20 gigabytes of proprietary data, and to discuss a plan to transmit cracked software over the Internet so they could resell it to small businesses in the United States.

After the arrest, agents recovered six disks from Mr. Li containing an assortment of data pirated from an unidentified American software company, including military and civilian aircraft image models and a software module containing data about the International Space Station.

Edward J. McAndrew, one of the prosecutors on the case, said Mr. Li’s arrest was among the largest criminal copyright cases to be successfully prosecuted by the government.

Mr. McAndrew and his colleague, David L. Hall, explained in court documents that once Mr. Li obtained cracked software, he would advertise it on his Web sites, which also included www.cad100.net and www.dongle-crack-download.com. Mr. Li’s customers would then wire him money, some of which he deposited in an account at the Bank of China. From February 2008 to June 2011, Mr. Li and his customers exchanged more than 25,000 e-mails about pirated products, according to the government, which obtained a search warrant for his Gmail account.

Mr. Li used his Gmail account to orchestrate more than 500 illegal transactions with customers in at least 28 states and more than 60 foreign countries, according to court documents. Software was pirated from more than 200 manufacturers.

Mr. McAndrew said none of the pirated software obtained by the undercover agents from Mr. Li contained classified material. But Mr. McAndrew said the government could not determine whether any classified material was distributed to other buyers since it did not have access to all the pirated products that Mr. Li sold.

One of Mr. Li’s biggest customers was Cosburn Wedderburn, a NASA electronics engineer, who bought 12 cracked software programs with a retail value exceeding $1.2 million. Another was Dr. Wronald Best, chief scientist at an unidentified government contractor that provides services to the United States military and law enforcement, like radio transmissions, microwave technology and vacuum tubes used in military helicopters. Dr. Best exchanged more than 260 e-mails with Mr. Li to obtain 10 cracked software programs, with a retail value of more than $600,000, prosecutors said.

Both Mr. Wedderburn and Dr. Best pleaded guilty to one count of conspiracy to commit criminal copyright infringement. Both are awaiting sentencing.

Starting in January 2010, undercover agents began buying pirated software from Mr. Li’s Web sites, receiving electronic files with the pirated software or hyperlinks that allowed the agents to download the software from servers in the United States.

In all, the agents paid the Lis $8,615 for the software.

For instance, in January 2010, the agents bought a pirated copy of Satellite Tool Kit 8.0, a software product from Analytical Graphics that has a retail value of more than $150,000. The software includes several functions used by the military and intelligence communities, including three-dimensional warfare simulations.

Mr. Li’s e-mails suggest he was aware of the illegality of his venture, prosecutors say. “I am not a crack production engineers (my job is to collect)(.) This is an international organization created to crack declassified document (s),” he said in a 2009 e-mail. In another he wrote, “I need to use your money to seek the help of experts to cracker master I earn 10 percent of the profits.”

One customer asked who did the cracking. “Experts crack,” Mr. Li wrote. “Chinese people. Sorry can not reveal more.”

Article source: http://www.nytimes.com/2013/01/09/business/chinese-man-pleads-guilty-in-copyright-violation-case.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: federal prosecutors, small business owners, undercover agents

DealBook: Defense Opens Insider Trade Case With Attack on Witnesses

November 14, 2012 by NewsMaker Leave a Comment

David Karp/Associated PressAnthony Chiasson, the former hedge fund manager, faces insider trading charges.

Jurors were presented with a stark choice in the insider trading trial of two former hedge fund managers. The defendants were either the senior links in a “corrupt chain” of Wall Street traders, or scapegoats for the criminal conduct of their subordinates.

On Tuesday, a jury heard opening arguments in the trial of Anthony Chiasson, a co-founder of the now-defunct Level Global Investors, and Todd Newman, a former portfolio manager of Diamondback Capital Management. They are accused of conspiring with six others to earn roughly $70 million from illegal trading in technology stocks.

The other six defendants have pleaded guilty and are cooperating with the prosecution. Two of the six, Jesse Tortora, a former Diamondback analyst, and Spyridon Adondakis, who goes by Sam, a former analyst at LevelGlobal, are expected to be the government’s main witnesses.

They “will paint a picture of a corrupt network of professionals who chose to break the rules and to trade on inside information all in order to make a quick buck,” said Richard C. Tarlowe, a prosecutor.

Yet the defense spent much of Tuesday attacking the credibility of the government witnesses. “The biggest mistake Todd Newman ever made, and the reason he’s sitting here today, is because he hired Jesse Tortora,” Stephen Fishbein, a lawyer representing Mr. Newman, said in his opening statement.

“Sam Adondakis is an easy, practiced liar,” said Reid H. Weingarten, a lawyer for Mr. Chiasson. “His word cannot be trusted.”

Early this year, federal prosecutors in Manhattan charged the eight Wall Street traders with participating in a “tight-knit circle of greed” that relied on secret financial information provided to them by corporate insiders at the computer company Dell and the chip maker Nvidia.

The trial, in Federal District Court in Manhattan before Judge Richard J. Sullivan, is expected to last six weeks. If convicted, the defendants could be sentenced to at least 25 years in prison, though they probably would receive far less time.

On Tuesday, prosecutors described how confidential information moved “across a corrupt chain of people” and ultimately into the hands of Mr. Chiasson, 39, and Mr. Newman, 47. That information, Mr. Tarlowe said, gave the defendants “an unfair advantage over honest investors who were playing by the rules.”

The prosecution previewed several pieces of evidence, including e-mails and instant messages among the defendants and their analysts. The communications, according to the government, suggest that in 2008 the managers had secret information about Dell’s gross margin numbers, crucial figures in its earnings release. With access to those inside numbers, Level Global made $50 million and Diamondback about $2.8 million by betting against Dell stock before the company released its earnings, the prosecution said.

Lawyers for the defense spent much of their opening statements trying to distance their clients from those accused of being their co-conspirators.

Mr. Tortora and Mr. Adondakis, with a few of the other defendants, worked together earlier in their careers as technology industry analysts at Prudential Equity Group in San Francisco. Mr. Weingarten, a lawyer for Mr. Chiasson, said that the group referred to themselves as “the clique” and likened themselves to “Fight Club,” a 1999 cult film about a secret, underground fight club.

“The first rule of the fight club is that there is no fight club,” Mr. Weingarten said, paraphrasing a famous line from the movie.

The clique “traveled together, partied together, drank together, vacationed in the Hamptons together,” he said. “They were very close, and they shared information as well.”

But neither Mr. Chiasson nor Mr. Newman was part of this clique, and they were far removed from the original sources of inside information, their lawyers insisted. Instead, the two defendants were depicted as upstanding, hardworking portfolio managers whose investments were grounded in legitimate research.

Both defendants processed so much data over the course of a trading day, their lawyers said, that they would not have been aware of improperly obtained data. To underscore that point, lawyers for Mr. Newman showed the jury a slide highlighting how in a given year, Mr. Newman made 32,222 trades, or roughly 128 trades a day, in the stocks of 366 companies.

The defense lawyers said that Mr. Tortora and Mr. Adondakis had falsely accused their clients to protect themselves. In November 2010, Mr. Tortora had lost his job at Diamondback and was living in Florida. When F.B.I. agents knocked on his door and presented him with evidence of insider trading, his only way out was to help the government, Mr. Fishbein, Mr. Newman’s lawyer, said.

“Make Todd Newman a scapegoat so Jesse Tortora does not have to face the consequences of crossing the line,” said he said.

Mr. Weingarten urged the jury, which includes a dog walker and a retired postal worker, not to resent the extraordinary wealth of Mr. Chiasson, who is worth tens of millions of dollars.

“It’s crazy how we pay people in our society,” Mr. Weingarten said. He noted that his “beloved” New York Yankees paid Alex Rodriguez many millions of dollars a year, only to pinch-hit for him this year in the bottom of the ninth inning of a playoff game.

“In 2007, he made A-Rod kind of money,” Mr. Weingarten said, referring to Mr. Chiasson. “I know you will not hold his economic success against him.”

Article source: http://dealbook.nytimes.com/2012/11/13/defense-opens-insider-trade-case-with-attack-on-witnesses/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: federal prosecutors, government witnesses, technology stocks

DealBook: Trial to Open in $68 Million Insider Trading Case

November 13, 2012 by NewsMaker Leave a Comment

Mike Segar/ReutersAnthony Chiasson, who co-founded the Level Global Investors, faces charges of insider trading.

In the sharp-elbowed world of Wall Street, Anthony Chiasson and Todd Newman stood out as two of the good guys.

Both were hard-working, below-the-radar types who eschewed the flashy lifestyle embraced by many millionaire hedge fund traders. Mr. Chiasson’s mother told reporters that her son’s idea of a fun weekend was to return to his hometown, Portland, Me., to attend church. Mr. Newman, also originally from New England, worked out of Boston, where he is raising a family in Needham, Mass., a low-key suburb.

Yet federal prosecutors say Mr. Chiasson and Mr. Newman were criminals, operating “a tight-knit circle of greed” along with six others who trafficked in secret information about technology companies.

On Tuesday, Mr. Chiasson, 39, a co-founder of the now-defunct Level Global Investors, and Mr. Newman, 47, a former portfolio manager at Diamondback Capital Management, are set to stand trial in Federal District Court in Manhattan. Prosecutors say they were part of a conspiracy that made about $68 million illegally trading the computer company Dell and the chip maker Nvidia.

The other six traders have pleaded guilty. Some are expected to testify against Mr. Chiasson and Mr. Newman.

Mr. Chiasson’s and Mr. Newman’s trial is expected to shed light on the trading strategies and techniques of SAC Capital Advisors, based in Stamford, Conn., a hedge fund giant run by the investor Steven A. Cohen.

SAC Capital, which has one of the best investment track records on Wall Street, has become a breeding ground for hedge fund managers. Both Level Global and Diamondback were started by traders who trained under Mr. Cohen. And one of the six traders who have admitted to the conspiracy was employed at SAC Capital.

The case is one of the larger prosecutions brought by the government in its broad investigation into insider trading, which has yielded 69 convictions and resulted in prison sentences for dozens of hedge fund traders. Last month, Rajat K. Gupta, a former director of Goldman Sachs, was sentenced to two years in prison after a jury found him guilty of leaking boardroom secrets about the bank to the former hedge fund billionaire Raj Rajaratnam, who is serving an 11-year term.

Most of the defendants in the insider trading cases have pleaded guilty, but of the eight who have taken their cases to trial, all have been found guilty.

The case is the outgrowth of the Federal Bureau of Investigation’s raid two years ago this month of Level Global and Diamondback. Last January, Preet Bharara, the United States attorney in Manhattan, brought the criminal case against Mr. Chiasson, Mr. Newman and six others.

Among those accused of being co-conspirators with the defendants are Spyridon Adondakis, a former trader at Level Global who worked under Mr. Chiasson, and Jesse Tortora, a onetime Diamondback employee. Both men have pleaded guilty to insider trading charges. They have cooperated with prosecutors and are expected to testify against their former colleagues.

Charles Krupa/Associated PressTodd Newman was a portfolio manager at Diamondback Capital Management.

Lawyers for Mr. Chiasson and Mr. Newman are expected to attack the cooperators, accusing them of trying to curry favor with the government by accusing their bosses of being involved in their illegal trading scheme.

The former SAC Capital trader who admitted being part of the scheme is Jon Horvath. Mr. Horvath admitted passing confidential information to his portfolio manager, who was named an unindicted co-conspirator in the case. The portfolio manager is Michael Steinberg, according to a person with direct knowledge of the case who requested anonymity because he was not authorized to discuss it publicly.

Barry Berke, a lawyer for Mr. Steinberg, declined to comment.

The reported conspiracy’s origins are traced to Sandeep Goyal, a former Dell employee who left the technology industry to take a job on Wall Street. While working as a tech-stock analyst at the money manager Neuberger Berman, Mr. Goyal tapped a contact inside Dell to obtain advance word about the computer maker’s financial results. He then gave that information to his network of contacts on hedge fund trading floors, and it ultimately reached Mr. Chiasson and Mr. Newman, prosecutors say.

Mr. Goyal has pleaded guilty to insider trading charges; the unnamed Dell executive has not been charged in the case. Earlier in their careers, Mr. Goyal, Mr. Tortora and Mr. Adondakis all worked together at the Prudential Equity Group, and they socialized together in Manhattan and the Hamptons.

The F.B.I. raid had a devastating effect on Level Global, which was forced to close shortly after the federal agents seized trading records and hardware from the firm. Diamondback has remained in business. This year, it paid about $9 million to settle a lawsuit brought against it by the Securities and Exchange Commission related to the Dell trades. It also struck a nonprosecution agreement with the Justice Department.

Level Global made by far the most profit in the conspiracy, pocketing about $57 million by betting against Dell stock ahead of a negative earnings announcement, prosecutors say.

Mr. Chiasson and David Ganek started Level Global in 2003 shortly after leaving SAC Capital. At Level Global’s peak, they managed about $4 billion in assets and had marquee clients like New York’s state pension fund. They used the name Level, Mr. Chiasson once said, because it was “a palindrome which connotes balance and adaptability — two key investing traits.”

Mr. Chiasson’s reserved style contrasted with that of Mr. Ganek, a more voluble type. While Mr. Chiasson steered clear of New York society, Mr. Ganek and his wife, the novelist Danielle Ganek, became fixtures at Manhattan charity events and art auctions. Mr. Ganek has not been charged in the case.

Mr. Newman, who is accused of making about $3.8 million in illegal profit, worked at the Tudor Investment Corporation, one of the world’s most prominent hedge funds, before joining Diamondback. He was part of a tight network of hedge fund traders based in Boston who specialized in technology stocks.

Lawyers for Mr. Chiasson and Mr. Newman tried to make their cases two separate trials, arguing that they were not part of a single purported conspiracy. Judge Richard J. Sullivan denied that request.

Reid H. Weingarten, a partner at Steptoe Johnson who defended Bernard J. Ebbers, the former WorldCom chief executive, and Gregory Morvillo of the Morvillo law firm, represent Mr. Chiasson. Representing Mr. Newman are Stephen Fishbein and John A. Nathanson, both of Shearman Sterling.

Trying the case for the government are Antonia M. Apps and Richard C. Tarlowe, one of the prosecutors who secured a conviction of Mr. Gupta, the former Goldman director.

A 12-person jury has been impaneled after two days of jury selection. Lawyers dismissed a number of potential jurors with connections to the case, including a doorman at Mr. Chiasson’s luxury Upper East Side apartment building and a former business-development executive at SAC Capital.

Article source: http://dealbook.nytimes.com/2012/11/12/trial-to-open-in-68-million-insider-trading-case/?partner=rss&emc=rss

Filed Under: Business News Tagged With: breeding ground, federal prosecutors, insider trading

DealBook: In Hunt for Securities Fraud, a Timid S.E.C. Misses the Big Game

December 15, 2011 by NewsMaker Leave a Comment

Lucas Jackson/Reuters Robert Khuzami, the S.E.C.’s enforcement director.

Does the Securities and Exchange Commission suffer from trialphobia?

Ever since Judge Jed S. Rakoff rejected the S.E.C.’s settlement with Citigroup over a malignant mortgage securities deal, the agency has been defending its policy to settle securities fraud cases. But the public wants a “Law Order” moment, and who can blame them?

Of course, there was one criminal trial. Federal prosecutors in Brooklyn brought a case against two Bear Stearns hedge fund managers who blew up the firm’s internal fund, eventually leading to the demise of Bear. They were acquitted.

But so far, there’s been no civil trial in a major case directly related to the biggest economic fiasco of our time: the financial crisis.

The S.E.C. contends that it has received more than $1.2 billion in penalties from financial crisis cases, having accused 81 people and entities, 39 of them chief executives and other senior officers. And it doesn’t avoid trials altogether. The agency has averaged almost 14 trials a year from 2008 to 2010, compared with about eight from 2001 to 2003. Finally, in cases that haven’t yet gone to trial, the S.E.C. has charged some low-level bankers from big Wall Street firms — but no masters of the universe.

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As for the near future, the agency might actually have a financial crisis trial. Right now, it looks as if cases against the mortgage bank IndyMac, the brokerage firm Stifel Nicolaus and the executives who blew up the Reserve Primary money market fund could go to court. But do you see the pattern? None of those is a major investment bank. The S.E.C. is just not hauling in the big boys.

That could change if the S.E.C. sued Citigroup. As Judge Rakoff noted, Citigroup is a “recidivist,” repeatedly flouting securities laws. In its settlement with the bank, the agency cited only one mortgage securities deal, but as my ProPublica colleague Jake Bernstein and I wrote, there are many more that look just as rotten.

Yet the reason for putting Citigroup in the dock goes beyond the bank itself. The S.E.C. is not getting big enough settlements out of the largest banks. It’s not bringing enough financial cases. It isn’t going after the big banks’ top executives. It’s being way too cautious in its interpretation of its role as defender of the fairness and sanctity of the markets. The frustration, shared by Judge Rakoff and the rest of humanity, is all the greater because the agency rarely, if ever, gets anyone to admit guilt when they settle.

This renders the settlements little more than turning on the light in a kitchen full of roaches. Instead of teaching the banks a lesson, the settlements merely show how the bad actors are scattered everywhere — and the public watches the banks scurry into the pantry to feast some more.

To the S.E.C., this view is profoundly unfair.

The agency’s message is, “if you want to resolve a case short of a contested proceeding, come in and be prepared to provide the type of relief we would obtain at the end of a trial,” said Lorin L. Reisner, the S.E.C.’s deputy director of enforcement.

“And where that’s not available, we’ll go to the mat.”

On a case-by-case basis, the S.E.C.’s argument for settling is strong. While the public loves a court case, lawyers often believe that trials are failures. They are expensive, time-consuming and capricious, especially in financial cases that are often so complex they challenge even sophisticated juries.

Generally, securities regulators can rack up more enforcement actions by settling. And the agency would do only civil trials anyway; it’s the Justice Department that undertakes criminal trials, which probably are a greater deterrent to white-collar crime.

Fair enough. But here’s the rub: By taking this doctrine too far, the S.E.C. has undermined its negotiating position.

Agency officials continually advertise how few resources they have, how costly trials are and how irresponsible it is to shareholders to force a trial when a reasonable settlement can be won instead.

Last month, for example, Robert S. Khuzami, the agency’s head of enforcement, trumpeted the S.E.C.’s “record-breaking performance during a period of resource constraints.”

In doing so, the agency has Beltway blinkers on. Sure, it’s speaking to Congress, but Wall Street is also listening. When it complains, even legitimately, about its budget or how costly and difficult trials are, the S.E.C. is inadvertently showing its belly to Wall Street in a sign of submission. It’s whimpering that it will shy away from a trial, afraid of draining its coffers.

When it’s not signaling its fear about spending money, S.E.C. officials are often talking about how complex financial crisis cases are. In a recent conversation with James B. Stewart of The New York Times, Mr. Khuzami almost sounded as if he were Citigroup’s counsel, a role for which he is well suited since he held that role at Deutsche Bank before joining the S.E.C. In that interview, he made Citigroup’s case for it. But the bank’s lawyers get paid enough and don’t need his help.

Above all, the S.E.C. worries about losing. That means it doesn’t push cases that would broaden definitions of securities fraud, the ambitious cases that penetrate the gray areas and eliminate murk as a defense against wrongdoing.

In his interview with Mr. Stewart, Mr. Khuzami worried aloud that Citigroup might have made the proper disclosure in its mortgage deal when it mentioned that it was possible the deal might have an adverse impact on its customers. Might have? It absolutely did have a clear adverse impact. If you raise an issue as a mere hypothetical when you know for a fact that it’s occurring, isn’t that misleading? Shouldn’t that be tested? And tested in court, so that a precedent is set?

To overcome its greatest fear, the S.E.C needs to realize that it can win even if it loses. A trial against a big bank could be helpful regardless of the outcome. It would generate public interest. It would put a face on complex transactions that often are known only by abbreviations or acronyms. Litigation would cost the bank money, too. And it could cast the way Wall Street does business in such an unflattering light that even if the bank won, it might bring about better behavior.

A trial would show boldness. And when the S.E.C. found itself at the negotiating table again, it would feel a new respect.

Jesse Eisinger is a reporter for ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest. Email: jesse@propublica.org. Follow him on Twitter (@Eisingerj).

Article source: http://feeds.nytimes.com/click.phdo?i=4a8746b9463ca8991d0589efb33f4e54

Filed Under: Business News Tagged With: bear stearns hedge fund, federal prosecutors, securities and exchange commission

DealBook: For Wall Street Watchdog, All Grunt Work, Little Glory

December 2, 2011 by NewsMaker Leave a Comment

ROCKVILLE, Md. — Last week, when a former Boston Red Sox infielder faced accusations of insider trading, the Securities and Exchange Commission got credit for levying a $100,000 fine. The Department of Justice in May heralded a guilty plea from a one-time senior executive at the Nasdaq Stock Market who traded on secret information. And earlier this year, after a lawyer was accused of stealing insider tidbits, federal prosecutors in New Jersey boasted of the arrest.

But in each case, the federal government was not the first to detect the potential fraud. Rather, the initial alarm bells were sounded by an obscure group of private-sector analysts stationed here in suburban Maryland.

In an office park 20 miles outside Washington, the Financial Industry Regulatory Authority, Wall Street’s nonprofit self-regulator, has quietly built a small army of market police. Since Wall Street’s financial crisis in 2008, this fledgling fraud task force has entered the front lines of fighting insider trading, even if the group rarely earns the credit.

Finra’s fraud group is akin to being the sous chef to the S.E.C. and other government regulators: the team prepares evidence against America’s most-wanted traders, but receives little of the glory when the cases are served.

“We identify the dots so other people can connect them,” said Cameron Funkhouser, an executive vice president at Finra and the head of the insider trading group, known in regulatory speak as the Office of Fraud Detection and Market Intelligence. “We’re a clearinghouse of regulatory intelligence.”

The group has no shortage of cases to pursue. The federal government’s renewed crackdown on insider trading is playing out on multiple fronts, prompting a roughly 50 percent rise in S.E.C. enforcement actions over the last two years and 52 criminal convictions in New York.

And now, as the government’s purse strings tighten, more and more cases are coming from Finra, a nonprofit watchdog whose coffers are relatively plush. The fraud detection group’s roster has ballooned to more than 130 people, a roughly 20 percent jump since late 2009, when the group opened its doors.

Mac William Bishop/The New York TimesCameron Funkhouser, the head of fraud detection at the Financial Industry Regulatory Authority.

“We don’t have the bureaucratic baggage of the S.E.C.,” Mr. Funkhouser said. “People used to say, ‘We don’t really regulate that, it’s not in our jurisdiction.’ We don’t care.”

The role of aggressive regulator is an unlikely twist on Finra’s reputation. It has no subpoena power and, at best, has a spotty track record for detecting fraud.

Born out of the 2007 merger between the National Association of Securities Dealers and the New York Stock Exchange’s regulatory arm, Finra has traditionally stuck to monitoring 600,000-plus stockbrokers. It failed, critics say, to detect fraud and wrongdoing in the lead-up to the financial crisis. In 2008, the peak of the crisis, Finra filed 1,073 disciplinary actions, down from 1,204 two years earlier.

After the crisis, Finra’s board in October 2009 issued a report rebuking the organization for missing R. Allen Stanford’s investment scheme, among other problems. That same day, Finra announced the birth of the fraud detection group.

Finra already had a new whistle-blower unit, but Stephen Luparello, Finra’s vice chairman, decided to centralize the efforts into a larger group, paying particular attention to Ponzi schemes and insider trading.

Industry lawyers say the group’s expansion has sharpened Finra’s regulatory teeth. Last year, the group referred more than 500 potential fraudsters to the S.E.C. or other federal law enforcement agencies. Public Enemy No. 1 — suspected insider traders — made up 244 of the referrals, a record for Finra.

“Cam’s widely recognized as having a nose for fraud,” said Barry R. Goldsmith, a partner at the law firm Gibson Dunn, who was the senior enforcement official at the National Association of Securities Dealers. Mr. Funkhouser, a tenacious lawyer whose Finra career has spanned nearly three decades, “is an ‘I smell a rat’ kind of guy,” he said.

The group’s bread-and-butter inquiries aim at suspicious trading, usually by hedge funds and retail investors, ahead of mergers or startling earnings announcements. Finra opens an investigation after more than 90 percent of mergers.

The sleuthing often begins with a scan of the group’s specialized computer software, the Securities Observation News Analysis and Regulation, or Sonar as it’s known by the team. The program allows Finra to pinpoint mergers or other news, and then connect the events to an unusual price and volume movement in a stock.

The group then examines who worked on the merger, aiming to trace whether lawyers and bankers carry even minor connections to the traders. To help connect the dots, Finra analysts do what any dogged investigator would do: seek guidance from Facebook and Twitter. Once, Finra caught a former Lehman Brothers trader leaking inside information that he gleaned from his wife, a public relations executive.

The fraud group’s office here is replete with a “war room” — a basic conference room where six Finra managers gather every Wednesday to discuss the most promising insider trading cases. Occasionally, Mr. Funkhouser will even answer the group’s whistle-blower phone line, a task typically done by junior staff, or give tipsters his personal cellphone number.

While Mr. Funkhouser is the face of the crew, he has a deep, if eclectic, bench.

The head of the whistle-blower unit, Joe Ozag, was a terrorism detective for the United States Capitol Police and a former broker at Morgan Stanley. Anthony Cavallaro and Paul Lane once prosecuted homicides and robberies at the Manhattan district attorney’s office. The head of the insider trading group, Sam Draddy, was a high-ranking S.E.C. official in Washington.

The group’s sole high-ranking female member, Laura Gansler, wrote the book that formed the basis for the movie “North Country,” starring Charlize Theron. Mr. Funkhouser calls Ms. Gansler “the brain” of the group.

The group has become a source of pride for Finra, especially after the bruising days of 2008. Richard G. Ketchum, Finra’s chief executive, often dispatches e-mails to Mr. Funkhouser’s team after the S.E.C. files a case that originated at Finra. “Great win,” his notes say.

“It’s critical,” Mr. Ketchum said in an interview, “for investor protection and it’s critical for our reputation.”

Article source: http://feeds.nytimes.com/click.phdo?i=d9f5900437581eba1168f04a3bba3b21

Filed Under: Business News Tagged With: federal prosecutors, grunt work, nasdaq stock market

‘Today’ Repeats Help Fill NBC’s Late-Night Lineup

November 28, 2011 by NewsMaker Leave a Comment

Ms. Gifford and Ms. Kotb, of course, are known to share a drink on the air on a regular basis, perhaps making their show well-suited for a repeat after last call.

Actually, it had nothing to do with alcohol and everything to do with NBC’s sudden need to fill an overnight time slot vacated by “Poker After Dark.” That program was removed from the schedule on a Friday at the end of September, days after federal prosecutors accused the program’s sponsor, Full Tilt Poker, of defrauding customers.

NBC slid Ms. Gifford and Ms. Kotb into the time slot the following Monday.

The repeat is a testament to NBC’s dependence on “Today” — already four hours each weekday — and to the endurance of the top-rated morning show. With the 2 a.m. repeat, “Today” now makes up fully 20 percent of NBC’s weekday schedule.

For NBC News, which produces “Today,” the repeat is an opportunity to have the fourth hour of the show sampled by an audience that may not be awake or home at 10 a.m.

Tammy Filler, a senior producer for “Today” who is in charge of the fourth hour, said she pictured some of the viewers as “late shift workers, insomniacs and parents up late with their babies.”

“You need a lot of laughter if you are watching TV at that hour, and that is something Kathie Lee and Hoda can deliver,” she said.

During the week of Nov. 7, the most recent week of available ratings, the 2 a.m. repeat had a surprisingly healthy average viewership of around 683,000 (on top of the 2.3 million the show averages in the morning).

The repeat gives NBC a bit of extra advertising inventory, as well: the five-minute-long break for local news that takes place about 10:25 a.m. becomes a five-minute-long block of ads overnight.

Article source: http://feeds.nytimes.com/click.phdo?i=5cdfb1f75dce78a91442cf312b9ffdf1

Filed Under: Business News Tagged With: federal prosecutors, kathie lee, kotb

DealBook: Gupta Faces Criminal Charges

October 26, 2011 by NewsMaker Leave a Comment

Seokyong Lee/Bloomberg NewsRajat K. Gupta, a former director of Goldman Sachs.

Federal prosecutors are expected to file criminal charges on Wednesday against Rajat K. Gupta, the most prominent business executive ensnared in an aggressive insider trading investigation, according to people briefed on the case. He is expected to surrender to authorities on Wednesday.

The case against Mr. Gupta, 62, would extend the reach of the government’s inquiry into America’s most prestigious corporate boardrooms. Most of the defendants charged with insider trading over the last two years have plied their trade exclusively on Wall Street.

The charges would also bring to a head a stunning fall from grace of a trusted adviser to political leaders and chief executives of the world’s most iconic companies.

A former director of Goldman Sachs and Procter Gamble and the longtime head of McKinsey Company, the elite consulting firm, Mr. Gupta has been under investigation over whether he leaked corporate secrets to Raj Rajaratnam, the hedge fund manager who was sentenced this month to 11 years in prison for trading on illegal stock tips. While there has been no indication yet that Mr. Gupta profited directly from the information he passed to Mr. Rajaratnam, securities laws prohibit company insiders from divulging corporate secrets to those who then profit from it.

The case against Mr. Gupta, who lives in Westport, Conn, would tie up a major loose end in the long-running investigation of Mr. Rajaratnam’s Galleon Group hedge fund. Yet federal authorities continue their campaign to ferret out insider trading on multiple fronts. This month, for example, a Denver-based hedge fund manager and a chemist at the Food and Drug Administration pleaded guilty to such charges.

A spokeswoman for the United States attorney in Manhattan declined to comment.

Gary P. Naftalis, a lawyer for Mr. Gupta, did not respond to requests for comment. Mr. Naftalis has previously said that his client did nothing wrong.

Mr. Gupta, in his role at the helm of McKinsey, was a trusted adviser to business leaders including Jeffrey R. Immelt of General Electric and Henry R. Kravis of the private equity firm Kohlberg Kravis Roberts Company. An Indian from Kolkata and a graduate of the Harvard Business School, Mr. Gupta has also been a philanthropist, serving as a senior adviser to the Bill and Melinda Gates Foundation. Mr. Gupta also served as a special adviser to the United Nations.

His name emerged just a week before Mr. Rajaratnam’s trial in March, when the Securities and Exchange Commission filed an administrative proceeding against him. The agency accused Mr. Gupta of passing confidential information about Goldman and Procter to Mr. Rajaratnam, who then traded on the news.

The details were explosive. Authorities said Mr. Gupta gave Mr. Rajaratnam advanced word of Warren E. Buffett’s $5 billion investment in Goldman Sachs during the darkest days of the financial crisis in addition to other sensitive information affecting the company’s share price.

At the time, federal prosecutors named Mr. Gupta a co-conspirator of Mr. Rajaratnam, but never charged him. Still, his presence loomed large at Mr. Rajaratnam’s trial. Lloyd C. Blankfein, the chief executive of Goldman, testified about Mr. Gupta’s role on the board and the secrets he was privy to, including earnings details and the bank’s strategic deliberations.

The legal odyssey leading to charges against Mr. Gupta could serve as a case study in law school criminal procedure class. He fought the S.E.C.’s civil action, which would have been heard before an administrative judge. Mr. Gupta argued that the proceeding denied his constitutional right to a jury trial and treated him differently than the other Mr. Rajaratnam-related defendants, all of whom the agency sued in federal court.

Mr. Gupta prevailed, and the S.E.C. dropped its case in August, but maintained the right to bring an action in federal court. The agency is expected to file a new, parallel civil case against Mr. Gupta as well. It is unclear what has changed since the S.E.C. dropped its case in August.

An S.E.C. spokesman declined to comment.

The case could be a challenge for the government. Many of the defendants convicted of insider trading, including Mr. Rajaratnam, have been caught on wiretap swapping secret information.

At Mr. Rajaratnam’s trial, the government played a recorded conversation between Mr. Gupta and the hedge fund manager in July 2008. On that call, Mr. Gupta divulged that Goldman was considering a purchase of either Wachovia or American International Group. Evidence that Mr. Rajaratnam traded on this information was never presented, however.

Two of the most incriminating calls played pertain to alleged tips from Mr. Gupta. But those calls were conversations between Mr. Rajaratnam and his employees, which could make them inadmissible in a trial of Mr. Gupta.

In one call played for the jury, Mr Rajaratnam told a colleague, “I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share.” In the other, the hedge fund manager said to his trader, ’”I got a call saying something good is going to happen to Goldman.”

The S.E.C.’s original case also outlined evidence that could potentially be used at trial. That includes Mr. Gupta’s phone records of on Sept. 23, 2008. That day, the Goldman board met via telephone to consider Mr. Buffett’s $5 billion investment in Goldman.

“Immediately after disconnecting from the board call, Gupta called Rajaratnam from the same line,’’ the S.E.C. filing says. A minute later, Galleon funds bought more than 175,000 shares of Goldman just before the market closed, the agency says, and later netted a $900,000 profit when the deal was announced.

Though he had an enviable résumé and earned millions of dollars a year at McKinsey, Mr. Gupta became fixated on the extraordinary wealth showered on hedge fund managers and private equity chiefs. Consultants are well paid, but the compensation pales in comparison to those Wall Street titans.

Around the time of his retirement in 2007, he and Mr. Rajaratnam helped start New Silk Route, a private equity firm focused on investments in India. Though Mr. Rajaratnam never had an active role in the firm, he and Mr. Gupta were good friends, having met through their philanthropic interests.

Mr. Gupta periodically visited Mr, Rajaratnam’s hedge fund, Galleon, on Madison Avenue and 57th Street in Manhattan. The two would order Indian or Chinese takeout and kibitz in Mr. Rajaratnam’s office. Mr. Gupta became an investor in Galleon’s hedge funds.

As part of his foray into Wall Street, Mr. Gupta took a senior adviser post at K.K.R., the firm co-founded by his friend Mr. Kravis. During Mr. Rajaratnam’s trial, prosecutors played a tape of the hedge fund manager gossiping with a friend about Mr. Gupta’s ambitions.

“My analysis of the situation is he’s enamored with Kravis, and I think he wants to be in that circle,” Mr. Rajaratnam said. “That’s a billionaire circle, right?”

William K. Rashbaum contributed reporting.

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Filed Under: Business News Tagged With: corporate boardrooms, federal prosecutors, food and drug administration

Troubled Poker Site May Be Bought by French Entrepreneur

September 30, 2011 by NewsMaker Leave a Comment

Full Tilt Poker players may yet be able to cash out.

The embattled poker site said Friday that it had signed an agreement to be acquired by the investment company of George Tapie, a prominent French entrepreneur.

Under the agreement, Groupe Bernard Tapie would repay Full Tilt Poker players the hundreds of millions of dollars they have been unable to collect since the company was indicted in April by the Justice Department.

At the time, federal prosecutors accused the site, and two other offshore poker houses, of fraud and money laundering. Prosecutors shut down access to the sites for Americans.

Then, earlier this month, prosecutors separately filed civil charges against Full Tilt, asserting that the site’s owners and managers had siphoned off hundreds of millions of dollars that were supposed to be held in the accounts of individual players.

Under the terms of the agreement between Groupe Bernard Tapie and the management of Full Tilt, the acquisition deal would not go through unless there is a resolution to the civil suit.

Barry Boss, a lawyer for the corporate entities behind Full Tilt, stressed that the agreement announced Friday was merely a prelude to a formal acquisition, pending resolution of the civil suit.

Nevertheless, he said, “It’s a significant development and one that definitely gives a renewed since of optimism that the players will get paid.”

The Justice Department declined comment, and a representative of Groupe Bernard Tapie could not be reached for comment. Mr. Tapie’s son Laurent said in an interview with the Web site iGamingFrance that the company would be talking to the Justice Department next week. He said that there were no plans to change the site’s name, but that a change of management would be in store if the deal goes through.

Bernard Tapie is a flamboyant French businessman and a friend of President Nicolas Sarkozy. Previously a socialist minister, Mr. Tapie changed party loyalties in 2007 to support Mr. Sarkozy. He has made his fortune by purchasing distressed and bankrupt entities.

The involvement of a French businessman adds yet another geographic front to the complicated international saga of Full Tilt, which has been pursued by American prosecutors and is based in Ireland.

Earlier this week, Full Tilt had its operating license revoked by the Alderney Gambling Control Commission, which is based on the Irish Channel island of Alderney, where Full Tilt is registered.

Mr. Boss said the commission ruled that Full Tilt had not been up front with gaming authorities about the amount of cash it had on hand to pay back players. According to prosecutors in the United States, Full Tilt told players that it kept their funds in secure accounts, even as management was lining its pockets with those funds.

The prosecutors say Full Tilt owners and managers paid themselves $440 million since April 2007 but, as of March of this year, owed players $390 million.

In revoking the license, the Alderney Gambling Control Commission left room for a new owner to come in and re-establish a license, according to Mr. Boss.

Article source: http://feeds.nytimes.com/click.phdo?i=3c2f74f7577b4e76ead31dd1690fe383

Filed Under: Business News Tagged With: federal prosecutors, money laundering, optimism

DealBook: Court Overturns 5 Gen Re and A.I.G. Fraud Convictions

August 2, 2011 by NewsMaker Leave a Comment

Douglas Healey/Bloomberg NewsRonald E. Ferguson, the former chief executive of General Re.

8:22 p.m. | Updated

A federal appeals court has thrown out the criminal convictions of five former insurance executives, delivering a blow to the Justice Department in one of the prominent cases brought during last decade’s corporate accounting scandals.

Ronald E. Ferguson, the former chief executive of General Re, which is owned by Warren E. Buffett’s company, Berkshire Hathaway, was convicted by a jury of fraud and conspiracy in a closely watched trial in 2008. Convicted alongside Mr. Ferguson were the Gen Re employees Elizabeth A. Monrad, Robert D. Graham and Christopher P. Garand; and Christian M. Milton of American International Group.

A panel of the United States Court of Appeals for the Second Circuit in Manhattan said in an opinion issued Monday that the trial judge had unfairly prejudiced the defendants by admitting certain evidence related to fluctuations in A.I.G.’s stock price.

It is unclear whether federal prosecutors will retry the five former executives. A spokesman for the United States attorney’s office in Connecticut, which tried the case, did not return requests for comment.

The trial centered on a complex reinsurance transaction initiated more than a decade ago. In October 2000, Gen Re helped A.I.G. structure an accounting maneuver that the government said had artificially manipulated A.I.G.’s financial statements. The deal increased A.I.G.’s loss reserves — a crucial indicator of performance for insurance companies — by $500 million in 2000 and 2001.

The controversial transaction, combined with other accounting issues at A.I.G., led to the resignation of Maurice R. Greenberg, the insurance giant’s longtime chief executive. Mr. Greenberg, who left the company in 2005, was not charged in the case. He still faces a separate civil action brought by the New York attorney general’s office.

In Monday’s ruling, Chief Judge Dennis G. Jacobs, writing for a unanimous three-judge panel, said that the trial judge erred in admitting evidence showing that news of the reinsurance deal caused a 12 percent decline in A.I.G.’s stock price.

Judge Jacobs wrote that a number of other problems at A.I.G., including accusations that it had manipulated its earnings, could have factored into the company’s stock price drop.

By allowing prosecutors to link the decline in A.I.G. shares to the questionable transaction “prejudicially cast the defendants as causing an economic downturn that has affected every family in America,” Judge Jacobs wrote.

“The defendants’ substantial rights were affected,” he wrote.

The appeals court also said that the Federal District Court Judge Christopher F. Droney, of Connecticut, had erred in his jury instructions.

The five defendants were sentenced to prison terms of one year to four years but were all on bail pending appeal. Befitting a prominent corporate-fraud trial, the defendants were represented by some of the country’s most highly regarded appellate lawyers, including Seth P. Waxman, the former solicitor general of the United States.

“We’re very gratified by the decision and we look forward to a new trial,” said Frederick P. Hafetz, a lawyer for Ms. Monrad.

The 77-page opinion surveyed the history of the prosecution and highlighted a core issue at the heart of the government’s case: Was the transaction in question merely an aggressive accounting technique or something more sinister? In detailing a telephone call in October 2000 between Mr. Ferguson and Mr. Greenberg that discussed the potential transaction, the court noted that it may “have been an unlawful agreement to deceive A.I.G. stockholders.”

Or, said the court, “it may have been a high-level brainstorming session about using accounting rules aggressively — but lawfully — to achieve an accounting objective.”

In 2006, A.I.G. paid $1.64 billion to resolve government investigations into its accounting practices.

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Filed Under: Business News Tagged With: federal prosecutors, garand, mr ferguson