Cross-Market Insider Trading

The securities markets have been globalized to facilitate both legal and illegal trading activities. Last time we found a case of cross-market manipulation, this time cross-market insider trading.

Last week SEC charged Hafiz Naseem, an investment banker with Credit Suisse, with illegally divulging non-public information to a person believed to be a banker in Pakistan concerning the leveraged buyout of TXU Corp. by an investor group led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group. Naseem misappropriated the information from his employer, Credit Suisse, which served as a financial advisor to TXU in connection with the buyout.

In Feb 2007 Naseem telephoned the Pakistani banker on several occasions and disclosed non-public, material information about the proposed but unannounced TXU buyout. After receiving the insider information, the Pakistani banker purchased 6,700 TXU call option contracts with Mar 2007 expiration dates through UBS AG London, and made profits of approximately US$5m following public announcement of the buyout.

In addition, Naseem divulged pending, but unannounced, business combinations and deals involving eight other issuers, where Credit Suisse served as an investment banker or financial advisor in all of these deals. Naseem's phone calls from his work phone to the Pakistani banker's home and cell phones were made immediately before announcements of the proposed deals. The Pakistani banker also purchased securities in those companies in advance of public merger announcements, obtaining additional profits of more than US$2.4m.

Naseem opened a brokerage account in Pakistan in May 2006 and granted the Pakistani banker trading authority over that account to conceal his personal financial benefit from his misappropriations. SEC is seeking injunctive relief, disgorgement, and money penalties against Naseem.

SEC also identified another previously unidentified trader who purchased in advance of the public announcement regarding TXU. Francisco Javier Garcia, believed to be a resident of Switzerland, purchased TXU securities through Fimat Frankfurt and is believed to have done so on inside information.

When investigating into the tipping by Naseem, SEC had obtained the assistance provided by Credit Suisse in the process of identifying Naseem as well as the cooperation afforded by NYSE, Chicago Board Options Exchange, Swiss Federal Banking Commission and UK FSA in helping to piece together evidence from across the globe, such as phone and brokerage records, to uncover Naseem's unlawful insider trading.