Last week, an Australian research analyst who formerly worked for a global investment bank, pleaded guilty in a Manhattan federal court to trading on inside information ahead of IBM’s acquisition of a software company in 2009.
Background of the Case
Last week, Trent Martin, a former securities analyst with Royal Bank of Scotland Group Plc in Stamford, CT, pleaded guilty in U.S. District Court in New York to one count of conspiracy to commit securities fraud and two counts of securities fraud for his role in an insider trading case involving IBM’s $1.2 billion acquisition of software company SPSS in 2009.
Prosecutors accused Martin of receiving inside information from a lawyer who was part of the legal team that represented IBM in the deal. The information was shared with Martin in confidence. Based on their longstanding history of sharing confidences, the attorney expected that Martin would not share the information or use it to trade.
However, Martin bought SPSS common stock based on the inside information he was given, and subsequently shared the information with his roommate, Thomas Conradt, who worked as a stock broker at Euro Pacific Capital based in Westport, CT. Conradt bought SPSS common stock and then provided this information to David J. Weishaus, a co-worker at Euro Pacific.
Martin allegedly made $7,900 in profit from this illicit trade, while Conradt and Weishaus made $2,538 and $129,290, respectively. According to prosecutors, the three defendants plus two unnamed co-conspirators at Euro Pacific made more than $1 million by trading on this inside information before the SPSS acquisition. Martin was arrested in Hong Kong late last year and extradited to the United States in March.
“I knew my actions were wrong and in violation of the law and I apologize to the court for my conduct,” Martin said when he appeared in court last week.
Conradt pleaded guilty to insider trading charges in April, whereas Weishaus pleaded not guilty.
Bail Deal Struck
In a bail deal struck with U.S. District Judge Andrew Carter, Martin will be allowed to live with his parents in Sydney, Australia until his sentencing or other mandatory court hearings.
The conspiracy count against Martin carries a maximum sentence of five years in prison and a fine of $250,000, or twice the gross gain or loss from the offense. As part of his plea agreement, Martin agreed to forfeit his share of the proceeds gained from the crime. Martin is scheduled to be sentenced by Judge Carter on March 14, 2014.
The case is U.S. v. Conradt et al, U.S. District Court, Southern District of New York, No. 12-cr-00887.
The Martin case is a straight forward insider trading case involving a former sell-side research analyst and as such we think all research firms and investment analysts should take notice.
However, what we found particularly interesting is the fact that in the FBI Press Release of last week’s guilty plea, the government put this case in the context of President Obama’s Financial Fraud Enforcement Task Force. Preet Bharara serves as a co-chair of the Securities and Commodities Fraud Working Group of this task force.
In concert with the efforts of this task force, the Justice Department has filed nearly 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,900 mortgage fraud defendants over the past three fiscal years.
In addition, the government has previously made it known that they have gathered information on at least 50 hedge funds and affiliated people, 300 hours of wiretaps containing conversations between hedge fund employees and sources, and collected thousands of pages of instant messages and email in their insider trading investigation.
In other words, we expect that the government has both the motivation and the information to continue to bring insider trading and other financial fraud cases for the next few years. What this case also proves is that the Feds aren’t limiting their investigations to hedge funds, but they will also go after research analysts if they have a case.