SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16469 / March 14, 2000
Securities and Exchange Commission v. John Freeman, James Cooper, Benton Erskine, Anthony Seminara, Norman Lehrman, Linda Karlsen, Timothy Siemers, Norman Grossman, Lawrence Schwartz, Michael Akva, Robert Fricker, Richard Zelman, Bradley Burke, Benjamin Cooper, Chad L. Conner, Deon Benson, Gordon K. Allen, Jr., Jon Geibel, and William H. Borders II, 00 Civ. 1963 (VM) (Southern District of New York)
The Securities and Exchange Commission announced that it filed insider trading charges today against 19 defendants who, from 1997 through January 2000, engaged in a widespread insider trading scheme that produced over $8 million in illegal profits from trading in the securities of 23 public companies. The source of the inside information was a part-time word processor who was assigned by the temporary agency where he worked to two Wall Street investment banking firms, Goldman Sachs & Co. Inc., and Credit Suisse First Boston Corporation. Also among the defendants are four principals or employees of broker dealers who traded on the inside information for their own accounts and/or the accounts of their clients. The case was filed in the United States District Court for the Southern District of New York.
The Complaint charges that the source of the information was defendant John Freeman, 34, of Brooklyn, New York. From approximately October 1996 to January 2000, Freeman was employed as a graphic artist at Philip Morris Companies, Inc. At the same time, Freeman also worked evenings at an agency that provides temporary word processing services. From May 1997 to June 1998, Freeman was assigned by the agency to work at Goldman Sachs. From October 1998 to January 2000, Freeman was assigned to work at CS First Boston. As a temporary employee at the two firms, Freeman was able to gain access to material nonpublic information regarding numerous merger and acquisition transactions. Freeman is charged with misappropriating confidential information concerning at least 23 different transactions, and tipping directly at least ten others about the transactions. Some of those tipped by Freeman then tipped others about the transactions.
The Commission alleges that, based on information provided by Freeman, each of the defendants purchased the common stock and/or options of some or all of the following public companies: Oregon Metallurgical Corp., Lukens, Inc., Sano Corp., USF&G Corp., Regal Cinemas, Inc., Illinois Central Railroad Co., Coherent Communications Systems Corp., Baker Hughes, Inc., CIENA Corp., DSC Communications Corp., Camco International, Inc., Getchell Gold Corp., United States Satellite Broadcasting Co., SmarTalk Teleservices, Inc., Fingerhut Co., Mercantile Bancorporation, Inc., Wang Laboratories, Cogeneration Corp. of America, RailTex Inc., Medco Research, Inc., Splitrock Services, Inc., Cameron Ashley Building Products, Inc., and Jason, Inc. At the time that Freeman tipped the other defendants about these companies, each of the companies was involved in a significant transaction that involved the merger or sale of the company.
The Complaint alleges that Freeman was compensated by those that he tipped in a variety of ways. In return for the information, many of the defendants agreed to pay Freeman for his tips. Their payments took many forms. In some instances, cash was enclosed in unsigned birthday cards sent to Freeman in envelopes bearing no return addresses. In other instances, checks were sent to third parties who cashed them and funneled the money to Freeman. One defendant disguised his payment as a "loan" to a friend of Freeman, who then repaid the loan to Freeman. Another defendant paid Freeman in cases of wine.
The Complaint includes the following allegations about Freeman and the other defendants:
- The scheme began in mid-1997, when Freeman met defendants James Cooper and Benton Erskine in an internet chat room devoted to the performance of a stock in which all three had invested and lost money. James Cooper, age 41, is an insurance agent who resides in Bowling Green, Kentucky. Erskine, age 39, resides in Charleston, West Virginia. Erskine is the Vice President of a printing company in Charleston.
- Freeman had never met either James Cooper or Erskine before he began communicating with them via the internet in mid-1997. In the course of their on-line communications, Freeman informed James Cooper and Erskine that he was assigned to the word processing department of Goldman Sachs. The three then agreed upon a plan to profit from any inside information Freeman could garner about merger and acquisition transactions being planned by Goldman Sachs' clients.
- On numerous occasions, Freeman passed material nonpublic information to James Cooper and to Erskine regarding merger and acquisition transactions on which either Goldman Sachs or CS First Boston was working. Freeman often passed such information to James Cooper and Erskine by using private chat rooms and instant messaging capabilities of America On-Line. In return, James Cooper and Erskine agreed to pay Freeman a portion of their trading profits.
- James Cooper purchased securities in at least 16 companies that were the subject of merger and acquisition transactions Freeman learned about while working at Goldman Sachs and CS First Boston, and realized trading profits of over $227,000. For his part, Erskine traded in the stock of companies involved in at least 16 of the deals, and reaped profits of more than $273,000.
Bowling Green Tippees
- In addition to trading for his own account, James Cooper tipped at least three individuals who live in Bowling Green: his brother, defendant Benjamin Cooper; a friend, defendant Deon Benson, a local dentist; and his stockbroker, defendant Chad L. Conner. James Cooper also caused another friend, formerly a resident of Bowling Green, to trade on eight occasions, earning over $60,000.
- Benjamin Cooper, 35, works with his brother James, also as an insurance agent. Benjamin Cooper was tipped by his brother about fourteen announcements, and made at least $149,000 from trading on that information.
- Following tips from James Cooper, Benson, 41, purchased the securities of 10 companies, and realized trading profits of $838,000.
- Conner, 35, is a stockbroker in the Bowling Green office of Morgan Keegan & Co., Inc., a regional broker dealer headquartered in Memphis, Tennessee. After Conner was tipped by James Cooper, he caused five of his clients, all Bowling Green residents, to trade before 3 to 16 deal announcements. Collectively, those clients had profits of over $2.6 million. On one occasion, Conner traded in his own account after being tipped by James Cooper, earning at least $2700. Conner also tipped at least two other residents of Bowling Green: his supervisor, defendant William H. Borders, II, and a friend, defendant Gordon K. Allen, Jr.
- Borders, 37, is the branch manager of the Morgan Keegan office where Conner was employed. He was tipped both by Conner and by Benson (who was Borders' client). With inside information he received from Conner and from Benson, Borders traded for his own account, and reaped profits of $84,150.
- Allen, 35, is a principal of G2 Investments, Inc., a broker-dealer located in Nashville, Tennessee. Allen generated profits of over $415,000 by trading on tips on at least 13 deals. Allen, in turn, tipped a colleague at G2 Investments, defendant Jon Geibel of Nashville. Geibel, 29, made over $94,000 in profits by trading on inside information in at least seven deals. Allen and Geibel together made an additional $377,000 in insider trading profits from two other accounts that they controlled jointly. The two also caused another colleague at G2 Investments to purchase securities on two deals, realizing profits of at least $47,000.
Phillip Morris Tippees
Les Halles Tippees
- Freeman also tipped two individuals he had met when he had worked as a waiter at the Les Halles restaurant in New York City: defendants Timothy Siemers and Norman Grossman. Siemers, age 33, resides in New York City, New York. He is a waiter at Les Halles. Siemers purchased in his accounts the securities of 18 companies and realized profits of at least $285,000. This figure includes a $28,000 profit in an account in Siemers' name that he shared with Freeman. In addition, Siemers' brothers purchased securities before at least eight transactions; together they made over $36,000.
- Grossman, age 54, resides in Long Island City, New York. He is a retired New York City school teacher and a frequent patron of Les Halles. Following tips from Freeman, Grossman purchased the securities of nine companies, and realized trading profits of over $445,000.
Friends and Neighbors
- Freeman tipped three of his friends and/or neighbors: defendants Lawrence Schwartz, Michael Akva, and Richard Zelman. Schwartz, age 59, resides in New York City. He is the owner of L&M Larjo Construction Company. Schwartz purchased the securities of 22 companies after being tipped by Freeman and realized profits of at least $822,000.
- Akva, resides in Flushing, New York. He is a car salesman. Akva purchased the securities of at least seven companies after being tipped by Freeman, and realized profits of at least $100,000. Akva and Freeman also tipped a friend of Akva, defendant Robert Fricker. Fricker, 46, lives in Kew Gardens Hills, New York, and he owns a construction company. He purchased the securities of four companies and realized trading profits of over $946,000.
- Zelman, age 32, resides in Nyack, New York, and is a former neighbor of Freeman. He is self-employed. With Freeman's agreement, Zelman caused a friend to purchase the securities of four companies, realizing profits of over $200,000.
- Freeman also told defendant Bradley Burke, who, like Freeman, was a temporary agency employee assigned to CS First Boston, about the scheme. Burke, age 38, resides in New York City. Burke was assigned to CS First Boston approximately one week after Freeman. In the spring of 1999, Burke approached Freeman about participating in the insider trading scheme. Freeman agreed that if Burke would provide information about impending deals, Freeman would disclose the information to his tippees, and Burke would receive a share of the trading profits. Burke told Freeman about several possible deals, but only one of those transactions occurred. Burke also tipped directly defendant Siemers, a mutual friend. Freeman gave Burke cash from certain of the tippees, as payment for the information Burke provided.
Each of the defendants is charged with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In addition, the following defendants are charged with violations of Section 14(e) of the Exchange Act and Rule 14e-3 by trading on inside information relating to securities for which tender offers were made: Freeman, Allen, Benson, Conner, Benjamin Cooper, James Cooper, Erskine, Geibel, Grossman, Karlsen, Lehrman, Schwartz, Seminara, Siemers and Zelman. The SEC seeks injunctive relief, disgorgement, civil penalties and other appropriate relief with respect to each of the defendants.
The Commission coordinated its investigation with that of the Securities and Commodities Fraud Task Force in the Office of the United States Attorney for the Southern District of New York, which filed related charges today. The Commission also acknowledges the assistance provided by the American Stock Exchange, the New York Stock Exchange, the Chicago Board Options Exchange, NASD Regulation Inc., and the Philadelphia Stock Exchange.
The Commission's investigation into these matters is continuing.