U.S. Alleges Inside Traders Used Spycraft, Ate Evidence; Three Ran Ring Using Information From Top M&A Law Firm, Prosecutors Say

U.S. Alleges Inside Traders Used Spycraft, Ate Evidence
Three Ran Ring Using Information From Top M&A Law Firm, Prosecutors Say
JENNIFER SMITH
Updated March 19, 2014 8:55 p.m. ET
Prosecutors allege stock tips were often swapped by a clock in New York’s Grand Central Terminal.Associated Press
Three men ran an insider-trading ring with information from one of New York’s premier mergers-and-acquisitions law firms, prosecutors say, taking care to chat in code and flash stock tips on napkins or sticky notes before gobbling them down under the clock inside the teeming great hall of Grand Central Terminal.

Steven Metro, 40 years old, a managing clerk at Simpson Thacher & Bartlett LLP, allegedly accessed the law firm’s computer system to mine information on deals and other sensitive corporate developments involving clients, according to prosecutors.
Mr. Metro shared tips with a friend during a series of meetings at bars and coffee shops that were arranged via text message, prosecutors allege. The friend allegedly then passed the tips—which included inside information on Tyco International Ltd. TYC -0.09% ‘s plans to buy Brink’s Home Security Holdings Inc. and the 2013 merger of OfficeMax Inc. andOffice Depot Inc. ODP +0.33% —on to his stockbroker, sometimes at Grand Central.
The broker-dealer, Vladimir Eydelman, 42, who most recently was employed at Morgan Stanley, MS +1.48% then traded on the information. Prosecutors said the alleged scheme ultimately netted about $5.6 million.
A lawyer for Mr. Eydelman declined to comment. A lawyer for Mr. Metro, James Froccaro, Jr., said his client intended to plead not guilty, while another attorney for Mr. Metro, Michael Rosen, said at a court appearance: “These are only allegations.”
Both defendants, who were arrested on Wednesday morning, were released after a brief court appearance in Newark, N.J., on $1 million bond apiece, secured by their respective properties. They face a number of criminal charges, including securities fraud, that could result in up to 20 years each in prison.
The friend, an unnamed mortgage broker from Brooklyn, is cooperating with prosecutors, the government said, and is expected to enter into a plea agreement. He could receive a reduction in his sentence based on that cooperation, according to the criminal complaint.
Simpson Thacher called the charges “deeply disturbing and unprecedented in our long history.” The firm, which was founded in 1884 and is known for its work in private equity and mergers and acquisitions, said it had no knowledge of Mr. Metro’s actions or the charges until Wednesday, when Mr. Metro was terminated.
Morgan Stanley spokesman James Wiggins said that the bank had been informed of the arrest on Wednesday and would “cooperate fully” with authorities, adding that Mr. Eydelman, who joined the firm from Oppenheimer & Co. in September 2012, had been placed on leave pending further review. Oppenheimer said it was cooperating with authorities and condemns “any form of insider trading.” The firm also said it learned of the charges on Wednesday.
It wasn’t immediately clear how the alleged scheme came to prosecutors’ attention, though trading exchanges and self-regulatory bodies often flag potentially suspicious activity to the Securities and Exchange Commission. Prosecutors said it began in February of 2009, when Mr. Metro and the middleman, who had attended law school together at Touro Law Center on Long Island, met up with a group of friends for drinks at a New York City bar.
The scheme involved an elaborate attempt at cloak-and-dagger tradecraft, prosecutors said.
According to the criminal complaint, the middleman usually met Mr. Eydelman, who lives in Colts Neck, N.J., by the large four-face clock at Grand Central. There, he would flash a piece of paper with the stock trading symbol of the company in question and then chew it up after the stockbroker committed the information to memory.
Throughout the alleged scheme, Mr. Metro and the middleman intentionally limited telephone calls and texts to seemingly innocuous statements, such as “let’s meet for coffee,” but then would meet to exchange inside tips, with Mr. Metro allegedly pointing to stock ticker symbols on his smartphone, according to a related civil complaint by the SEC.
Mr. Eydelman knew the source of his customer’s information was a friend who worked at a law firm and was referred to once by the middleman as the “boy at the law firm,” according to the SEC complaint. Mr. Eydelman, who traded on the inside information for himself and others, covered his tracks with a “paper trail of false and contrived emails” citing market research and other rationales intended to serve as legitimate bases for the illegal trading, according to the SEC complaint.
Mr. Metro, who is from Katonah, N.Y., saw little immediate benefit from his part in the alleged scheme, because his share of the profits—originally about $7,000—was rolled over into subsequent trades that increased his take to about $168,000, according to the criminal complaint.
Last fall Mr. Metro told the cooperating witness that he wanted to cash out his share. The request prompted Mr. Eydelman to say to the middleman in January, “Sooo, we got to figure out a way to get [him] some cash, right?” according to the complaint.
He responded, “Well, it’s not like I could take it exactly out of the checking account,” according to the criminal complaint. “No,” Mr. Eydelman said, “you got to give him cash, cash.”
Prosecutors said Mr. Metro continued to press his friend for money, which he said he needed to help pay costs associated with buying and renovating a new house that the witness, a mortgage broker, was helping facilitate.
In February Mr. Eydelman met up with the middleman and handed him a plastic shopping bag with a cigar manufacturer’s logo on it that contained $7,000 in cash, according to the complaint.
“Take these cigars, put it to good use,” Mr. Eydelman said.
Mr. Eydelman, who benefited from trading commissions, reaped “significant personal profits” which he used to buy a new 2011 Maserati Gran Turismo for $117,700 and expensive jewelry, the criminal complaint said.
The case, brought by the New Jersey U.S. Attorney Paul Fishman, highlights the particular vulnerability of big law firms, for whom confidentiality is paramount.
In 2011, prosecutors uncovered a 17-year-long insider trading ring that netted $32 million in profits that involved a lawyer who passed on information gleaned from his work at a number of high-profile law firms, as well as a trader and a mortgage broker who served as a middleman.
“Law firms are sanctuaries for the confidential treatment of client information, and this scheme victimized not only a law firm but also its corporate clients and ultimately the investors in those companies,” Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit, said.
Mr. Metro personally traded in advance of at least two announcements of transactions, according to the SEC complaint. Mr. Eydelman and the middleman shared the inside information with friends and family members, and Mr. Eydelman also used it to trade on behalf of more than 50 of his brokerage customers.