VOL. 114 | NO. 52 | Thursday, March 16, 2000
The first federal cyberspace insider trading case, an $8
SEC files charges,
breaks trading scheme
The first federal cyberspace insider trading case, an $8.4 million scheme involving the largest number of people ever charged with allegedly profiting on illegal tips, was filed Tuesday.
The scheme was hatched in an online chat room and carried out by at least 19 defendants from New York to Tennessee.
It was the brainchild of a part-time computer graphics worker who pleaded guilty to stealing merger information from investment banks Goldman Sachs and Credit Suisse First Boston, where he was sent by a temporary employment agency.
Manhattan U.S. Attorney Mary Jo White called the scheme, which lasted more than two years, ``insider trading millennium-style'' because it was the first criminal Internet case charging illegal trading on non-public tips. She said it was also the largest criminal insider trading case ever filed, both in terms of the number of defendants and the number of deals. The investigation is continuing, she said.
The U.S. Securities and Exchange Commission also filed a related civil case against the defendants Tuesday in Manhattan federal court.
The architect of the scheme, 34-year-old John Freeman, pleaded guilty Tuesday afternoon to stealing information about 23 deals through both highly sophisticated and very simple means that ranged from piercing the investment banks' codes used to hide their clients' identities to rummaging through co-workers' desks and even the garbage.
He admitted passing tips to investors in a chat room as well as to a neighbor, acquaintances made through his wife, and friends he had made while employed at Philip Morris Cos. Inc. and at a Manhattan bistro where he worked as a waiter.
Freeman made the least amount of money in the scheme, about $70,000 to $110,000, primarily in the form of cash kickbacks. Others charged in the case made as much as $946,000 from insider tips, authorities said.
Officials said the scheme began in mid-1997 when Freeman lost money in an investment in Headstrong Group, a helmet manufacturer, and began to meet other disgruntled investors in an America Online ``chat room.''
Among them were defendants James Cooper, a Bowling Green, Ky., insurance agent and Benton Erskine, a Charlestown, West Virginia, day trader and owner of a computer supply store.
Freeman offered to pass inside tips to them for a percentage of their profits, authorities said. Cooper, who also pleaded guilty, is charged with trading in 16 deals and earning more than $227,000. He also tipped others, including his insurance agent brother and a dentist, both in Kentucky.
Cooper also opened a brokerage account at the Bowling Green branch of Morgan Keegan & Co., a Memphis-based brokerage. He allegedly told the broker he was getting inside information. The broker, Chad Conner, who is also charged in the case, also allegedly traded on the information and passed it to customers and family members.