Securities Fraud Charges Lodged By SEC Against UBS, Morgan Stanley and Bear Stearns Employees for Insider Trading

We thought huge, brazen insider trading cases went out with Gordon Gekko and Ivan Boesky in the eighties. Apparently not. The SEC charged 14 defendants with securities fraud in one of the boldest insider trading rings in recent years. A total of $15 million was misappropriated.

UBS, Morgan Stanley and a few hedge funds were front and center. Mitchel Guttenberg, an executive director of research at UBS, allegedly provided inside information about UBS research analysts changing opinions on stocks to a hedge fund manager named Erik Franklin. Not only did Franklin trade on the inside information since 2001, his broker buddies at Bear Stearns did too.

Meanwhile, at Morgan Stanley, a lawyer in the compliance department allegedly tipped off her attorney husband and a high school friend about impending mergers. They traded on the inside information and also tipped the same broker buddies at Bear Stearns. The SEC figured out the overlapping schemes because of unusual trading in Adobe, one of the stocks involved in a merger handled by Morgan.

Here are the relevant questions raised by these bold securities fraud schemes: does the actions of broker-dealer employees tipping hedge funds call for the SEC to regulate hedge funds? Or, is the SEC’s regulation of the trading activities of counterparties (ie brokerage firms) which do business with hedge funds enough? We’ll see what happens when more insider trading cases come to light.