SEC Charges Securities Professionals in Insider Trading Scheme Using Coded E-Mail Messages
FOR IMMEDIATE RELEASE
Washington, D.C., March 24, 2010 — The Securities and Exchange Commission today charged a Wall Street investment banker, another securities professional, and one of their friends in a clandestine insider trading ring that netted approximately $1 million in illicit profits by trading ahead of at least 11 mergers, acquisitions, and other corporate deals.
The SEC alleges that Igor Poteroba, a high-ranking investment banker in UBS Securities LLC’s Global Healthcare Group in New York City, tipped his friend Aleksey Koval with highly confidential inside information about impending transactions involving pharmaceutical companies. Koval, who held positions at securities industry firms at the time, then traded in stocks and options of the companies targeted for acquisition. Koval also tipped their friend Alexander Vorobiev, who traded ahead of four of the deals. Among the means of communication used to illegally tip and trade on the inside information were coded e-mail messages that referred to securities and money as “frequent flyer miles” and “potatoes.” They coded one e-mail exchange about insider trading as a discussion about a Macy’s wedding registry.
“They thought it was clever to use code words such as frequent flyer miles and wedding registry gifts to conceal their insider trading scheme,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “These words were code for nothing more than ‘we are breaking the law.’”
Antonia Chion, an Associate Director in the SEC’s Division of Enforcement, added, “Securities professionals cannot exploit their positions of trust and confidence to illicitly enrich their friends and themselves.”
According to the SEC’s complaint, filed in federal district court in Manhattan, Poteroba, Koval, and Vorobiev are each Russian citizens who attended college in the 1990s at the University of New Haven in Connecticut. Poteroba joined UBS in its Healthcare Group in 1999 and was steadily promoted into an Executive Director position in 2006.
The SEC alleges that the scheme began as early as July 2005 when Poteroba illegally tipped Koval in advance of the acquisition of Guilford Pharmaceuticals Inc. by MGI Pharma. Poteroba later sent a coded e-mail to Koval about the insider trading opportunity, signaling that Poteroba had previously given money to Koval and wanted to use those funds in this transaction:
Poteroba: Keep me posted as to how * * * [m]any frequent flier miles you’ve got this far and how many you plan to get by Friday[.] Will be in Boston tomorrow[.] Plans for a trip look fine so far[.] Worst case we can get a refund by Monday, hopefully we do not[.]
Koval: As I mentioned, I just got into this frequent flyer program. I got five thousand of sign-in bonus miles but thinking maybe if I fly often, I will get additional three to five K miles.
Poteroba: On the frequent flyer program topic you mentioned, I think you should sign up for another flight, if you can, since they are providing bonus mileage soon[.]
According to the SEC’s complaint, Koval wired $5,000 into a brokerage account of Vorobiev that had been inactive for nearly six months. Koval then bought 2,100 shares of Guilford stock in the account at a total cost of $4,983. Both monetary amounts are consistent with the amount of 5,000 “sign-in bonus miles” referred to in the coded e-mails. A few days later, Koval wired an additional $4,800 into Vorobiev’s account and purchased an additional 2,030 shares of Guilford stock at a cost of $4,780. The money transfer and subsequent stock purchases are consistent with Koval’s coded statement that he “will get additional three to five K miles.” On July 21, 2005, Guilford publicly announced that it would be acquired by MGI Pharma, and Guilford’s stock closed 41 percent higher than the increase over the prior day’s closing price. That same day, Koval and Vorobiev sold most or all of the Guilford stock in their accounts as well as Guilford shares in a brokerage account in the name of Vorobiev’s wife.
With respect to subsequent insider trading transactions, the SEC’s complaint alleges that Poteroba continued to supply confidential information to Koval about various impending mergers. They continued to use coded e-mail messages to maintain communications during the insider trading scheme. For example, after Poteroba illegally tipped Koval with material, nonpublic information concerning ID Biomedical Corporation’s plans to be acquired, they exchanged instructions by referring to money as potatoes:
Subject Line: Potatoes
Poteroba: Let me know if you finished your recent harvest arrangements and how many kilos are available for my parents. They are in Turkey now and could use some once they are back.
Koval: This year the potato yield was not as high as the last one. Whatever is collected is now being transported in the warehouse, with special climate conditions, from where it is going to be available for delivery. My estimates are about 6.8 kilo per square yard. …Of course, some potato [sic] need to be left for the next year [sic] seeds [sic] but it should not be a concern since I have a vendor who will provide enough once the spring comes.
According to the SEC’s complaint, the “6.8 kilo” figure is an approximate reference to $7,000 that had been wired out of a brokerage account two weeks earlier and subsequently returned.
The SEC’s complaint alleges that Poteroba and Koval used another coded e-mail communication to conduct insider trading based on material, nonpublic information about an acquisition involving Molecular Devices Corporation:
Subject Line: Let me know if you’ve started your wedding registry at Macy’s
Poteroba: Happy to talk about sales items and etc. … sale ends soon …so hurry up.
Koval: Yep, I have set it up. Better do it now when they have [a] sale. I could not believe how many things one needs once engaged. Single life was much easier if you ask me. It is always [a] good idea to know about coupons available. I try to follow up on the rebates programs currently in place but often miss many due to lack of time. Thanks for pointing it out to me. … Although wedding day is not yet announced, I hope to get all the important items ahead of time: I even started buying small things that [are] usually not important until you need them.
Poteroba: Good points…sale ends on Friday…see if you can get registered for as many items as possible…more you get now…more you save…We should start tracking these events more actively.
According to the SEC’s complaint, Poteroba and Koval exchanged the coded messages to signal that Koval should purchase Molecular securities (“get registered for as many items as possible”) and that the opportunity to buy Molecular securities prior to the public announcement would last until Friday, Jan. 26, 2007 (“sale ends on Friday”).
The SEC alleges that some of the insider trading was conducted through brokerage accounts held in the names of Tatiana Vorobieva (Vorobiev’s wife) and Anjali Walter (Koval’s wife) and that portions of the proceeds from the illicit trading were received by Vorobieva and Walter. Accordingly, Vorobieva and Walter are named as relief defendants to recover investor assets now in their possession.
The SEC’s complaint charges Poteroba, Koval, and Vorobiev with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10-b5 thereunder, the general antifraud provisions of the federal securities laws, and Section 14(e) of the Exchange Act and Rule 14e-3 thereunder, the tender offer fraud provisions. The Commission seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and the imposition of financial penalties against the defendants, and disgorgement of illicit profits with prejudgment interest from the relief defendants.
The SEC thanks the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and FINRA for their cooperation and assistance in this matter. The SEC acknowledges the assistance of the Ontario Securities Commission. The SEC also acknowledges the cooperation of UBS Securities LLC.
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For more information about this enforcement action, please contact:
Associate Director, SEC Division of Enforcement