(Photo by air done / iStock)
Apparently eating a napkin with incriminating evidence written on it is not enough to ward off insider trading charges.
In the latest probe to touch an Am Law 100 firm, the U.S. Securities and Exchange Commission and federal prosecutors in New Jersey have charged Steven Metro, a managing clerk at Simpson Thacher & Bartlett in New York, and Morgan Stanley stockbroker Vladimir Eydelman with taking part in an insider trading scheme that netted $5.6 million in illicit profits.
According to a 72-page civil complaint filed Wednesday by the SEC in Newark, Metro obtained nonpublic information on deals involving Simpson Thacher clients that he passed on to Eydelman through a mutual friend acting as the middleman.
The middleman, who is not named because he is cooperating with regulators, passed the tips to Metro during meetings at a Manhattan coffee shop and near the clock and information booth at Grand Central Terminal. The SEC claims Metro told the middleman about deals involving Simpson Thacher clients—such as Liberty Media’s $530 million investment in SiriusXM Radio in February 2009—and that the middleman would jot down on a napkin or Post-it note the ticker symbol of the stock to be purchased, which he would then pass onto Eydelman. The SEC claims the unnamed middleman later destroyed the evidence by swallowing it or chewing it up and spitting it out.
The government’s 24-page criminal complaint states that both the middleman and Metro met in 1995 as first-year classmates at the Touro Law Center in Central Islip, N.Y. Metro, who obtained a law degree from the Long Island law school but never practiced as an attorney, joined Simpson Thacher in 1999 and filed pleadings on behalf of lawyers at the firm.
Eydelman allegedly traded on the inside information and kicked back a portion of the proceeds to Metro, who used the middleman to invest some of the cash he made. Federal prosecutors claim the scheme resulted in more than $33 million in illegal trades by Eydelman on behalf of himself, family members and clients. The criminal complaint outlines 13 deals—all but one of which were completed—involving Simpson Thacher clients on which Metro disclosed inside information.
The scheme allegedly began when Simpson Thacher helped SiriusXM avoid bankruptcy in early 2009 by securing an investment from cable giant John Malone’s Liberty Media. That deal saw former Simpson Thacher partner Gary Sellers—now of counsel with the firm in New York—snag Am Law Daily Dealmaker of the Week honors.
Other deals on which Metro and Eydelman are accused of conspiring to trade in advance of their public disclosure include Simpson Thacher’s representation of Tyco International on its $2 billion buy of Brink’s Home Security Holdings in January 2010; People’s United Financial on its $60 million buy of Smithtown Bancorp in July 2010; Toshiba Medical Systems on its $273 million acquisition of Vital Images in April 2011; Arch Coal on its $3.4 billion purchase of International Coal Group from distressed investor Wilbur Ross in May 2011; and Office Depot on its $1.2 billion all-stock merger with rival OfficeMax in February 2013.
Simpson Thacher’s star private equity clients—the engine of the firm’s robust M&A group—also saw several large deals by some of their current and former portfolio companies get caught up in the insider trading scheme. Those transactions include private equity firm The Blackstone Group’s $4.1 billion sale of portfolio company Graham Packaging in April 2011; private equity client Silver Lake’s $645 million acquisition of flash memory product manufacturer Smart Modular Technologies that same month; a private equity consortium’s $2 billion buy of Payless ShoeSource parent Collective Brands in May 2012; and buyout giant KKR’s $1.3 billion sale of mattress maker Sealy to Tempur-Pedic in September 2012.
Simpson Thacher’s private equity pipeline of transactional work allegedly had Metro excited about the firm’s prospects for 2014. “Right now it’s all been private equity, private equity. … I think this year, it’s going to be a good year,” Metro said in a meeting recorded by the middleman on Jan. 28 during which federal prosecutors claim the Simpson Thacher employee promised to provide tips on future M&A deals.
David Sorkin, a former Simpson Thacher partner who joined KKR in late 2007 as its first general counsel, declined to comment on the case against Metro through a spokeswoman. Other Simpson alums—such as former M&A cochair and Blackstone senior managing director and chief legal officer John Finley, Silver Lake managing director and chief legal officer Karen King and SiriusXM general counsel Patrick Donnelly—did not respond to requests for comment on the matter. Nor did Office Depot chief legal officer Elisa Garcia, Arch Coal general counsel Robert Jones, Tyco general counsel Judith Reinsdorf or People’s United Financial general counsel Robert Trautmann.
Metro, 40, lives in Katonah, N.Y., where property records show he paid $610,000 for a home in 2006. In a lengthy statement provided to The Am Law Daily by a Simpson Thacher spokeswoman via crisis communications firm Sard Verbinnen, the Am Law 100 giant said that it was unaware of Metro’s alleged actions until Wednesday morning. At that point, according to the firm, he was fired.
“Today’s charges against a former clerical employee of the firm are deeply disturbing and unprecedented in our long history,” Simpson Thacher said. “This behavior is completely inconsistent with our values, our culture and the strict policies we have in place to protect client confidences. We have zero tolerance for such behavior and hold ourselves to the highest standards of professional and ethical conduct.”
Simpson Thacher said in its statement that it plans to cooperate fully with law enforcement authorities and vows to scrutinize its internal procedures.
“We have strong internal controls in place and will review our systems and procedures to determine if there are ways in which they could be further strengthened,” the firm added. “Client confidentiality is of the utmost important to Simpson Thacher and we are reinforcing that principle to all of our lawyers and administrative staff.”
Metro himself did not return an email message sent to his Simpson Thacher work account requesting comment on the criminal and civil charges against him. His attorney, James Froccaro Jr. of Port Washington, N.Y., told The Am Law Daily that his client would enter a not guilty plea at a court hearing Wednesday afternoon in Newark before U.S. Magistrate Judge Madeline Cox Arleo.
“We look forward to him being vindicated,” says Froccaro, who is representing Metro on the criminal insider trading allegations along with colleague Michael Rosen.
As for Eydelman, prosecutors claim the 42-year-old Colts Neck, N.J., resident used some of the proceeds from his alleged crimes to purchase a home, expensive jewelry and a new 2011 Maserati Grand Turismo for $117,700. Broker and investment adviser records on file with the Financial Industry Regulatory Authority show he worked at Oppenheimer & Co. from January 2003 to September 2012 before leaving that month for Morgan Stanley. FINRA lists three “disclosure events” for Eydelman, including two customer disputes and one regulatory event.
The first matter involving Eydelman is a $13,500 arbitration settlement in 2000 related to a complaint filed against him by a broker when he was working at Walsh Manning Securities. The second involves a 2003 complaint filed against him by FINRA predecessor the National Association of Securities Dealers that resulted in a $10,000 fine and an order that he pay $24,000 in restitution to customers for charging “excessive commissions and markups on principal or agency transactions totaling $102,500.”
Eydelman did not admit or deny wrongdoing in the 2003 case. Another complaint filed against him by Oppenheimer in 2013 over customer allegations “that their accounts were excessively traded on margin in highly speculative, volatile and unsuitable securities” is listed as pending.
Eydelman has retained William Silverman, a former federal prosecutor and current white-collar and government investigations partner with Greenberg Traurig in New York, to represent him in the SEC case. Silverman did not immediately respond to a request for comment about the charges against his client, who has been placed on leave by Morgan Stanley.
Paul Fishman, a former partner at Friedman Kaplan Seiler & Adelman who has served as U.S. attorney for the District of New Jersey since late 2009, is overseeing the criminal case against Metro, while Eydelman is being prosecuted by assistant U.S. attorneys Shirley Emehelu, Joseph Gribko and Marion Percell. Metro is facing nine counts of securities fraud and four counts of tender offer fraud; Eydelman faces the same number of tender offer fraud charges and eight securities fraud charges.
“These defendants are charged with using confidential information that Metro stole from his employer to reap huge illegal profits,” Fishman said in a statement. “They allegedly rigged the system by exploiting sensitive information that was not available to other investors. This kind of activity undermines the integrity of our financial markets and weakens investor confidence.”
Daniel Hawke, chief of the SEC enforcement division’s market abuse unit, led the team investigating Metro and Eydelman, along with co–deputy chief Robert Cohen, senior counsel Jason Burt and Carolyn Welshhans and associate director Antonia Chion. Assistant chief litigation counsel Stephan Schlegelmilch and Bridget Fitzpatrick will prosecute the civil case against both defendants.
The allegations against Eydelman and Metro are the latest in the federal government’s crackdown on insider trading, one that has ensnared attorneys at several prominent firms.
Last year Hunton & Williams declined to comment on whether one of its partners inadvertently tipped off a defendant accused of trading on information related to Pfizer’s $3.6 billion acquisition of King Pharmaceuticals in 2010. In November 2012, The Am Law Daily identified a former Cravath, Swaine & Moore associate who unwittingly served as a source of confidential information at the heart of a $1 million insider trading case brought by federal prosecutors in Manhattan against two former stockbrokers.
A year later, Matthew Kluger, a former associate at Cravath, Fried, Frank, Harris, Shriver & Jacobson and Wilson Sonsini Goodrich & Rosati, was disbarred in Washington, D.C.—11 months after he was disbarred in New York following his 2011 guilty plea to insider trading charges. Kluger was sentenced to 12 years in prison last year, the longest sentence ever handed down in an insider trading case.
Arthur Cutillo, a former IP associate Ropes & Gray, was charged in a high-profile insider trading case brought against hedge fund the Galleon Group in 2009. He pleaded guilty two years later and was sentenced to 30 months in prison. Like Kluger, Cutillo has also been disbarred in New York, as has ex–Ropes & Gray associate Brien Santarlas, who was sentenced in December 2011 to six months in prison for his role in the Galleon Group case. (Santarlas cooperated with prosecutors.)
In October 2009, former Dorsey & Whitney partner Gil Cornblum committed suicide a day before he and a former law school classmate were poised to plead guilty to insider trading charges in New York and Toronto.