Randomly Noted

Some good quotes from Robert Khuzami, head of the Securities and Exchange Commission’s enforcement division, as he laid out how people associated with an “expert networking” or “matchmaking” firm allegedly shared inside information about some of the big companies that employed them with hedge fund employees.

Said Khuzami in a statement issued today: “Today we pull back the curtain and reveal that the only matching that was going on here was to match theft with greed.”

And lest anyone not understand what’s allegedly involved, Khuzami employed analogy to good use. He said: “These trusted employees chose to steal information that belonged not to them, but to the company and its shareholders. They lined their pockets with tens of thousands of dollars by trafficking in that stolen information in a manner that is not unlike an employee who drives to the loading dock late at night and fills the trunk of his car with valuable office equipment and sells it to his neighbor.”

Next time career day comes around to local grade schools, don’t be surprised if some ambitious third grader raises his hand and announces he wants to grow up to be a whistleblower.

College courses and a new major are sure to follow. Maybe whistleblowing can be housed under criminal justice study, or, perhaps, sociology.

Who could blame the apocryphal youngster cited above, especially after recent news that a former employee of GlaxoSmithKline PLC picked up a cool $96 million for information that helped lead to a $750 million settlement between the comany and the Department of Justice.

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One of the cases the Securities and Exchange Commission filed today against alleged insider traders just leaves you wondering where have people been the past few years. This is the case involving a Disney administrative assistant who apparently had access to press releases before they were distributed – and in particular, earnings releases. So, she agreed to pass them along to her boyfriend who ahead of time would contact 20 or more hedge funds to see if they were interested on trading on inside information.  He contacted them via anonymous letters. One of the funny things about the SEC press release on this is that it talks about how 20-plus hedge funds were sent the letter but how only several of them contacted the SEC. Hats off to those several but what about the others?

The SEC refers to this as a brazen insider trader case. I suppose one could find stronger words: maybe dumb? Glad the Feds nailed these guys but if you want a good read about “Amateur Hour Comes To Wall Street,” well, here it is. See the SEC complaint and press release by clicking here.

My colleagues report that some or all of the four Rio Tinto employees on trial in China for alleged bribery said they accepted payments of one sort or another. Given the  lack of clarity and transparency in the process – which began with their detentions last summer – it’s impossible to know whether the defendants are acting voluntarily or under duress. Also, we don’t know what has happened to the alleged bribers – the employees of Chinese steel mills who offered the alleged bribes to the Rio Four. Are they getting away with alleged crimes? Have they been secretly detained, tried and punished? Why is it we know about the people who allegedly accepted bribes but not those who paid them, and whose enterprises allegedly benefited? You may recall that the saga began last July when China imprisoned the Rio employees – one Australian citizen and four Chinese nationals – on allegations they stole national secrets. Later, Beijing decided it was a routine criminal matter. Even as the closed trial began today in Shanghai, Rio Tinto’s CEO Tom Albanese was shaking hands with Chinese Premier Wen Jiabao in Beijing’s Great Hall of the People.

The press releases come regularly, announcing the Securities and Exchange Commission taking action against this alleged scam and that one.

Good news. The SEC certainly is interested in being seen on top of things enforcement-wise, especially after the spectacular failure to detect the supreme scamster, Bernard Madoff, for so many years.

It’s depressing in that humankind seems endlessly capable of launching new schmes to defraud. It’s depressing in that a certain sector of humankind seems endlessly susceptible to scams.

Whatever the SEC and other watchdogs are up to and capable of detecting, caveat emptor has to still be the standard for investors. At a minimum, the bad guys are only caught by the securities cops after they’ve done some hoodwinking.

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As distressing as some of the enforcement ‘misses’ by the Securities and Exchange Commission have been (read Madoff), it’s even more distressing to contemplate the semingly bottomless well of malfeasance in the securities industry.

The details of the latest insider trading charges revealed Thursday by prosecutors are shocking in the number of people involved and the reasonable deduction that if this alleged ring was stopped there likely are plenty more out there.

Robert S. Khuzami, who recently joined the SEC as the head of  enforcement, had some tough but true things to say about insider trading that apply to any kind of securities fraud. This quotes are from a prepared statement for Thursday’s press conference announcing the charges.

“We expose the apparent ease with which these Wall Street professionals, corp0rate insiders, analysts and lawyers disregarded the rules and their duties to clients and shareholders for kickbacks and easy profits.

“Their misconduct threatens to undermine confidence upon which our capital martkets depend.

“These men and women had obligations to their employers, their clients and our markets.”

That’s an interesting notion, an obligation to the markets themselves.

Check out the WSJ’s Deal Journal blog for “Sopranos”-quality details from the government’s criminal complaint against the alleged insider-trading suspects: Prepaid cellphones concealing allegedly illicit calls; bags of cash transported here and there; and a B-movie nickname, the “Greek.” Then there’s the remark from the U.S. Attorney’s press conference: one of the suspects was known as “Octopussy,” apparently because he had his arms in all sorts of shady dealings. At this point in the financial crisis we shouldn’t really be shocked by yet another revelation of alleged criminality and immorality in and around Wall Street (“Wall Street” being loosely defined as banks and funds of all stripes and in all venues, including the City of Manhattan.) But I find myself marveling at the chutzpah of this widening ring of alleged bad guys and gals – how on earth did they think they would get away with it? WSJ.com provides the Securities and Exchange Commission’s chart linking various suspects to one another. What’s not clear is whether this was a tightly managed ring or a case of Six Degrees of Separation between a couple dozen (or more) broadly unrelated people on the East and West coasts. Stay tuned!

Raj Rajaratnam, the billionaire hedge fund manager arrested Friday and charged with insider trading, is apparently connected to a case in his native Sri Lanka that involves money transfers that should have been reported to the local government.

Rajaratnam, with the help of a Sri Lankan Parliament member, transferred $1 million from Galleon (his hedge fund) into an account of Nexia Corporate Consultants in late 2006, according to a Sept. 26, 2009,  article in the Daily Mirror of Sri Lanka.  Rajaratnam then followed with his own $2 million transfer in early 2007, according to the article. The money was to be used to buy shares of Union Bank of Colombo, the article said.

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You have to wonder if even this made-up exchange would have raised eyebrows at the Securities and Exchange Commission.

EXAMINER: Mr. Madoff, how do you explain the remarkable returns you generate year after year even when others aren’t doing well.

BERNIE MADOFF: Ouija.

EXAMINER: Mr. Ouija, one of your employees? Is he a fund manager? (The examiner scribbles the name on a piece of paper with the words next to it: DON’T BOTHER TO FOLLOW UP)

BERNIE MADOFF: No, Ouija Board. (At which point Bernie pulls one out of his briefcase. He and the examiner place the board on their knees with their hands moving across the top. Moments later Bernie claims to hear a voice, whispering – “Bernie, buy July IBM 120 calls, sell September American Express 33 puts…”)

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The news from the inspector general of the Securities and Exchange Commission is nothing short of shocking. And grizzled journalists aren’t supposed to shock easily.

SEC Inspector General David Kotz reported on how the SEC failed to expose the fraud perpetrated by Bernard Madoff, despite getting six warnings over 16 years.

The inspector general found no influence by Madoff or his family, but it is a tale of astonishing incompetence that makes one worry and wonder about the capabilities of the U.S. markets watchdog.

Here’s just one paragraph from the article on the report by The Wall Street Journal’s Kara Scannell. The whole article and the whole IG report are worth reading.

“The report described how the SEC staff at times didn’t follow through on leads, failing to seek information from a third party because reviewing such information could be too time cinsuming. In another instance, an SEC examiner looked into an institution that Mr. Madoff had said he used to clear his trades. The examiner learned from the institution there was no trading activity by Mr. Madoff during the period under review. The SEC associate director in examinations never followed up or informed the rest of the staff, according to the report.”