On March 24, 2010, the Securities and Exchange Commission (SEC) alleged in a Complaint (SEC Complaint) filed in the United States District Court for the Southern District of New York that Defendant Igor Poteroba, an investment banker in UBS Securities LLC's Global Healthcare Group in New York City, tipped his friend Defendant Aleksey Koval with confidential inside information about impending transactions involving pharmaceutical companies. Koval, who held positions at securities industry firms at the time, then traded in stocks and options of the companies targeted for acquisition. Koval also tipped their friend Defendant Alexander Vorobiev, who traded ahead of four of the deals.
Further, the SEC Complaint alleges that some of the insider trading was conducted through brokerage accounts held in the names of Vorobiev's wife, Tatiana Vorobieva, Koval's wife, Anjali Walter. Also, the Complaint alleges that portions of the proceeds from the illicit trading were received by Vorobieva and Walter. Accordingly, Vorobieva and Walter are named as Relief Defendants to recover investor assets now in their possession.
See, Securities and Exchange Commission v. Igor Poteroba, Aleksey Koval and Alexander Vorobiev (SDNY March 24, 2010)
Poteroba, Koval, and Vorobiev have known each other for more than ten years. Poteroba, Koval, and Vorobiev were born in Russia; Koval and Vorobiev were both born in the city of Kemerovo.
Between 1992 and 1997, Poteroba, Koval, and Vorobiev attended the University of New Haven, in New Haven, Connecticut as undergraduates. Poteroba graduated in 1995, Koval left in 1996, and Vorobiev graduated in 1997.
Poteroba and Koval shared a common residence address during part of this time. Between 1995 and 1998, Poteroba and Koval were enrolled in the MBA program at Baruch College in New York City. Poteroba received his MBA degree in 1997, and Koval received his the following year.
At various times between 1997 through 2008, Vorobiev has used as his mailing address a number of the residences in New York and New Jersey where Poteroba and Koval resided, together or separately.
The SEC Complaint alleges that from at least 2005 to the present, Koval traded in the tipped securities in an on-line brokerage account maintained in Vorobiev's name. This account was initially maintained at RushTrade Securities. RushTrade acquired Terra Nova Financial, LLC in 2006, and named the combined entity Terra Nova Financial (RushTrade and Terra Nova are collectively referred to as "Terra Nova").
The account records for Vorobiev's brokerage account at Terra Nova (the "Terra Nova Account") show that Koval has never been formally authorized to trade in Vorobiev's Terra Nova Account. Despite this, on numerous occasions over a period of at least four years, Koval has accessed the Terra Nova Account and executed trades in the tipped securities.
It is alleged that since 2005, both Vorobiev and Koval have transferred funds into and out of the Terra Nova Account. Further, from January 2008 to the present, Koval has withdrawn a total of nearly $125,000 in regular monthly withdrawals from Vorobiev's Terra Nova Account.
UBS's Healthcare Group was retained by one of the parties as a financial adviser in ten of the eleven Business Combinations identified in the SEC Complaint (see list below), and in regard to the eleventh Business Combination, UBS sought, but ultimately failed, to be retained as an adviser to one of the participating entities. The SEC Complaint alleges that the insider trading netted approximately $1 million in illicit profits by trading ahead of at least 11 mergers, acquisitions, and other corporate deals.
Among the means of communication allegedly used to illegally tip and trade on the inside information were coded e-mail messages that referred to securities and money as "frequent flyer miles" and "potatoes." One e-mail exchange about insider trading allegedly was disguised as a discussion about a Macy's wedding registry.
Frequent Flyer Miles: The SEC Complaint alleges that as early as July 2005, Poteroba illegally tipped Koval in advance of the acquisition of Guilford Pharmaceuticals Inc. by MGI Pharma. Poteroba later sent a coded e-mail to Koval about the insider trading opportunity, signaling that Poteroba had previously given money to Koval and wanted to use those funds in this transaction:
Poteroba: Keep me posted as to how * * * [m]any frequent flier miles you've got this far and how many you plan to get by Friday[.] Will be in Boston tomorrow[.] Plans for a trip look fine so far[.] Worst case we can get a refund by Monday, hopefully we do not[.]
Koval: As I mentioned, I just got into this frequent flyer program. I got five thousand of sign-in bonus miles but thinking maybe if I fly often, I will get additional three to five K miles.
Poteroba: On the frequent flyer program topic you mentioned, I think you should sign up for another flight, if you can, since they are providing bonus mileage soon[.]
According to the SEC's Complaint, Koval wired $5,000 into a brokerage account of Vorobiev that had been inactive for nearly six months. Koval then bought 2,100 shares of Guilford stock in the account at a total cost of $4,983. Both monetary amounts are consistent with the amount of 5,000 "sign-in bonus miles" referred to in the coded e-mails.
A few days later, Koval wired an additional $4,800 into Vorobiev's account and purchased an additional 2,030 shares of Guilford stock at a cost of $4,780. The money transfer and subsequent stock purchases are consistent with Koval's coded statement that he "will get additional three to five K miles."
On July 21, 2005, Guilford publicly announced that it would be acquired by MGI Pharma, and Guilford's stock closed 41 percent higher than the increase over the prior day's closing price. That same day, Koval and Vorobiev allegedly sold most or all of the Guilford stock in their accounts as well as Guilford shares in a brokerage account in the name of Vorobiev's wife.
Potatoes: After Poteroba illegally tipped Koval with material, nonpublic information concerning ID Biomedical Corporation's plans to be acquired, the SEC Complaint further alleges that they exchanged instructions by referring to money as potatoes:
Subject Line: Potatoes
Poteroba: Let me know if you finished your recent harvest arrangements and how many kilos are available for my parents. They are in Turkey now and could use some once they are back.
Koval: This year the potato yield was not as high as the last one. Whatever is collected is now being transported in the warehouse, with special climate conditions, from where it is going to be available for delivery. My estimates are about 6.8 kilo per square yard. …Of course, some potato [sic] need to be left for the next year [sic] seeds [sic] but it should not be a concern since I have a vendor who will provide enough once the spring comes.
According to the SEC's Complaint, the "6.8 kilo" figure is an approximate reference to $7,000 that had been wired out of a brokerage account two weeks earlier and subsequently returned.
Macy's: While allegedly conducting insider trading based on material, nonpublic information about an acquisition involving Molecular Devices Corporation, the SEC Complaint alleges that the transaction was obliquely referenced via emails referencing a Macy's wedding registry:
Subject Line: Let me know if you've started your wedding registry at Macy's
Poteroba: Happy to talk about sales items and etc. … sale ends soon …so hurry up.
Koval: Yep, I have set it up. Better do it now when they have [a] sale. I could not believe how many things one needs once engaged. Single life was much easier if you ask me. It is always [a] good idea to know about coupons available. I try to follow up on the rebates programs currently in place but often miss many due to lack of time. Thanks for pointing it out to me. … Although wedding day is not yet announced, I hope to get all the important items ahead of time: I even started buying small things that [are] usually not important until you need them.
Poteroba: Good points…sale ends on Friday…see if you can get registered for as many items as possible…more you get now…more you save…We should start tracking these events more actively.
According to the SEC Complaint, Poteroba and Koval exchanged the coded messages to signal that Koval should purchase Molecular securities ("get registered for as many items as possible") and that the opportunity to buy Molecular securities prior to the public announcement would last until Friday, Jan. 26, 2007 ("sale ends on Friday").
The SEC Complaint charges Poteroba, Koval, and Vorobiev with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10-b5 thereunder, the general antifraud provisions of the federal securities laws, and Section 14(e) of the Exchange Act and Rule 14e-3 thereunder, the tender offer fraud provisions. The SEC seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and the imposition of financial penalties against the defendants, and disgorgement of illicit profits with prejudgment interest from the relief defendants.
Please remember that the above allegations are merely that, and all Defendants are presumed innocent until proven guilty.
On March 24, 2010, Preet Bharara, the United States Attorney for the Southern District of New York, announced the arrests of Igor Poteroba and Alexei P. Koval for their alleged participation in an insider trading scheme. The four-count criminal Complaint (Criminal Complaint), alleges that from 2005 through at least February 2009, Poteroba allegedly agreed to leak confidential information about UBS and six of its clients to Koval. The leaked information related to forthcoming announcements about mergers or acquisitions involving the following six publicly traded healthcare companies:
(collectively, the "Healthcare Companies").
In violation of his duties of trust and confidence, the Criminal Complaint alleges that Poteroba disclosed the UBS Inside Information to Koval, who in turn disclosed the UBS Inside Information to another co-conspirator ("CC-1"). It is further alleged that Koval, CC-1, and others earned total profits of at least approximately $870,000 from the scheme.
Poteroba and Koval each are charged with one count of conspiracy to commit securities fraud and three counts of securities fraud.
The conspiracy charge carries a maximum sentence of five years in prison and a maximum fine of the greater of $250,000, or twice the gross gain or gross loss fromthe offense. Each securities fraud count carries a maximum sentence of 20 years in prison and a maximum fine of $5 million.
On Sept. 21, 2010, a final judgment was entered by consent against Poteroba enjoining him from future violations of Section 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder.
On September 28, without admitting or denying any of the findings except as to the SEC's jurisdiction and the entry of the permanent injunction against him, Poteroba consented to the issuance of the Order that permanently bars him from association with any broker, dealer, or investment adviser.
On November 2, 2010, a judgment was entered against Relief Defendant Walter. Without admitting or denying the allegations contained in the SEC Complaint, Walter consented to and was ordered to pay $85,353 in disgorgement of illegal proceeds.
The SEC's civil action against defendants Koval and Vorobiev, and relief defendant Tatiana Vorobieva remains pending.
On December 21, 2010, Poteroba pled guilty to three counts of securities fraud and one count of conspiracy to commit securities fraud. The securities fraud counts each carry a maximum sentence of 20 years in prison and a maximum fine of $5 million. The conspiracy count carries a maximum sentence of five years in prison and a maximum fine of $250,000, or twice the gross gain or loss from the offense. Poteroba agreed as part of his plea agreement to forfeit at least $465,095.21, representing the amount of proceeds obtained as a result of the securities fraud offenses.
On March 21, 2011, Poteroba was sentenced to 22 months in prison, three years of supervised release, and fined $25,000. Poteroba will eventually be ordered to pay restitution in an amount to be determined; and he was ordered to forfeit $465,095.21, representing the amount of foreseeable proceeds obtained as a result of the securities fraud offenses.
Press reports suggest that on May 20, 2010, an Indictment was filed against Koval. It appears that the Indictment was unsealed in June 2010 and he pled guilty on January 7, 2011.
On May 24, 2011, Koval was sentenced to 26 months in prison, two years of supervised release, and ordered to forfeit $1,414,290 in proceeds.