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19 named as inside traders
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March 14, 2000: 12:41 p.m. ET
Called the largest criminal insider trading case ever for number of accused, deals
By Staff Writer Martha Slud
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NEW YORK (CNNfn) - Federal authorities Tuesday charged 19 people with insider trading, accusing a temporary employee at investment banks Goldman Sachs & Co. and Credit Suisse First Boston Corp. of passing on confidential information about corporate mergers and buyouts to friends, neighbors and other stock traders he met in Internet chat rooms.
The case is the largest criminal insider trading case ever brought, in terms of the number of defendants and the number of corporate deals from which the inside information was allegedly stolen, said Mary Jo White, the U.S. attorney for the southern district of New York. It is also the first time a defendant has been charged with using the Internet to share inside information about stocks, authorities said.
Authorities alleged that defendant John Freeman, a graphic artist at Philip Morris Cos. Inc. (MO: Research, Estimates) who worked evenings as a word processor on assignments through temporary employment agency Custom Staffing in New York, gained access to "material, nonpublic information regarding numerous merger and acquisition transactions" during stints at Goldman Sachs and later at Credit Suisse First Boston.
Goldman Sachs and Credit Suisse First Boston were not accused of wrongdoing. In a statement, CSFB said it is "contacting its clients and will keep them fully informed. We are also cooperating fully with the authorities."
Freeman, 34, of Brooklyn, N.Y., is accused of tipping off at least 10 people - including friends, neighbors, co-workers, and others who he met in Internet chat rooms -- regarding confidential information about at least 23 different corporate deals from 1997 through January 2000. After getting information from Freeman, the other defendants then allegedly bought stock in the companies involved in the transactions, reaping significant profits, authorities said in a statement announcing the charges.
Freeman was arrested Jan. 6. Attempts to reach him Tuesday afternoon were unsuccessful.
"This is a case of insider trading with a decidedly modern twist - the use of the Internet to perpetrate an illegal scheme," said Lewis D. Schiliro, assistant director in charge of the New York office of the FBI. "These defendants thought that using the Internet would provide them anonymity. It did not."
The defendants include four principals or employees of broker dealers who allegedly traded on the inside information for their own accounts or for their clients, as well as three of Freeman's co-workers at Philip Morris, and a patron he met while waiting tables at a French restaurant in Manhattan. Some of those tipped off by Freeman then allegedly tipped off others about the transactions.
Authorities claim that the defendants purchased stock and options in public companies involved in mergers or acquisitions at the time, including telecommunications company Ciena Corp. (CIEN: Research, Estimates), industrial equipment maker Baker Hughes Inc. (BHI: Research, Estimates), and data communications provider Splitrock Services Inc. (SPLT: Research, Estimates).
Plot hatched in chat room?
Freeman allegedly instigated the scheme in mid-1997, when he met two other defendants, insurance agent James Cooper of Bowling Green, Ky., and Benton Erskine, the vice president of a laser printing company in Charleston, W.Va., in an Internet chat room for disgruntled investors in Headstrong Group, a helmet manufacturer. All three men had lost money in the company's stock, authorities said.
Freeman allegedly offered to pass inside information to Cooper and Erskine, in exchange for a portion of their trading profits, authorities said. Authorities contend that the transfer of confidential information continued when Freeman went to work on a temporary assignment for Credit Suisse First Boston.
Cooper allegedly reaped a trading profit of more than $227,000 from the scheme, by buying stock in at least 16 companies involved in deals that Freeman learned about, authorities contend. Erskine realized a profit of more than $273,000, also by trading in stocks in companies involved in at least 16 deals, according to authorities.
Neither Cooper nor Erskine could be reached for comment Tuesday. Cooper's phone number is unlisted, according to Bowling Green directory assistance. There was no telephone listing for Erskine in Charleston, W.Va.
Authorities said that in addition to trading for his own gain, Cooper tipped off others including his brother, a local dentist and his stockbroker. The stockbroker, Chad L. Conner, of the Bowling Green office of regional brokerage firm Morgan Keegan & Co., allegedly earned at least $2,700 for his own account and reaped more than $2.6 million in profits for five of his clients. Conner also allegedly tipped off his supervisor at the brokerage and a friend who worked for another brokerage.
Conner was arrested on March 4, the U.S. attorney's office said. He did not respond to a request for comment left at his office.
In a statement, Morgan Keegan said that the two employees charged in the case have been placed on administrative leave. The company has not been implicated "and is cooperating with law enforcement and regulatory officials," the statement said.
According to the allegations, Freeman was compensated by those he tipped off in several ways: cash payments, faux loans, checks that were sent to third parties who cashed them and funneled the money to him, and in one instance with cases of wine.
The case was filed in the U.S. District Court for the Southern District of New York. The defendants were charged with conspiracy to commit insider trading, which carries a maximum penalty of five years in prison and $250,000 in fines, or twice the gross gain resulting from the crime.
All but one of the 19 defendants are also charged with criminal insider trading, charges that carry a maximum penalty of 10 years in prison and $1 million in fines, or twice the gross gain resulting from the offense. The defendants also face civil charges of insider trading by the SEC. 
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