Over the past several years, much has been made about the supposed incompetence of the Securities and Exchange Commission. The regulator failed to realize Bernie Madoff had been running an illegitimate Ponzi scheme, despite more or less being told by Bernie Madoff himself, "I am running an illegitimate Ponzi scheme." It went after David Einhorn, when it should have been going after Allied Capital, the company the hedge fund manager told them was committing fraud. Its proposal for stepping up investigators' games was to start a Fraud College.* Until recently, it employed individuals in the office responsible for "ensuring exchanges follow guidelines concerning...computer audits, security, and capacity" who had "little or no experience with exchange technical matters." At this point, there have been so many stories about the SEC getting things wrong that the default is to assume it fucked up, even when that is not actually the case. What's more, even when Team Schapiro is on top of its game, resources are so strained that many scams that should be caught fall through the cracks. So you can maybe understand why a group of "high school buddies," along with a few other guys they recruited at wine club, who were engaged in securities fraud for several years, weren't too worried about getting caught.
The group, which included three health-care executives, a chiropractor and the owner of a spa-supply company called Yeah Baby, allegedly made more than $1.7 million by passing on secret information about mergers and acquisitions and earnings announcements of at least seven pharmaceutical companies, according to prosecutors and the Securities and Exchange Commission. The alleged scheme included high-school friends of Mr. Lazorchak, his former boss and members of his former boss's wine-making club. Those charged are: Mr. Lazorchak, who was the director of financial reporting at Celgene; Mark Cupo, Mr. Lazorchak's former boss at Sanofi-Aventis, where he was director accounting and reporting; Michael Castelli, Mr. Cupo's friend from his wine-making club; Michael Pendolino, Mr. Lazorchak's high-school friend who now works as a chiropractor in New Hampshire; Mark Foldy, a former marketing executive at StrykerCorp.; and Yeah Baby owner Lawrence Grum who was introduced to Mr. Cupo by Mr. Castell. Mr. Lazorchak, 42 years old, attended Colonia High School in Colonia, N.J., along with Messrs. Pendolino, 43, and Foldy, 42, according to the criminal complaint. Messrs. Castelli, 48, and Grum, 48, were classmates at another unnamed high school, according to the SEC...As recently as two months ago, one of the alleged members of the scheme was confident that investigators would fall short of cracking the case. "If they ever come to me, I know what I'm doing," Mr. Grum told another person involved in the alleged scheme who had agreed to cooperate with criminal investigators, according to the complaint...Ultimately, Mr. Grum said the SEC wouldn't come after them. "The SEC's got to pick their battle because they have a limited number of people and huge numbers of investors to go after," he said.
Another reason for Grum's cockiness? The code words and phrases he and his buds used that they were prettay, prettay, prettay sure no one could crack.
According to a criminal complaint filed in Newark, N.J., by U.S. Attorney Paul Fishman, the men allegedly used codes or incorporated secret information in legitimate social conversations at basketball games, dinner with friends or morning jogs. In one case, one member of the alleged scheme sent an unindicted co-conspirator the number of a pay phone outside a Virginia K-Mart store to communicate. They referred to at least one financial deal as the "Fat Man," and used phrases like "fat man has a friend" and "the fat man walks alone" to update one another on the status of the deals, according to the complaint. The words "I have some vacation pictures for you" were allegedly used to refer to cash payments made to tippers in amounts ranging from $500 to $10,000 at a time.
1. Bless these idiots' hearts.
2. Are we to assume "The Fat Man is taking a long lunch" meant "buy 1,000 shares," "I gotta great shot of you in the pool with the swim-up bar" was code for "something huge is coming," and "The Fat Man switched to fat-free ranch" was what they said when they got a tip that a takeover was about the fall through?
3. Another reason everyone was confident that they'd never never do time, even on the off-chance the SEC came sniffing? They had binders.
Those who carried out the trading allegedly tried to hide their activity by compiling binders of research to serve as a false basis for their trading and actively trading in some securities to create a pattern of long-standing positions in a stock, prosecutors said...In the recorded conversation, Mr. Grum said: "Search my phone records, search anything—I know nobody at that company," he said. "There's no link,' he said. "And that's what they do to link up everybody. That's how they triangulate," he said, according to the complaint. Mr. Grum explained that he had maintained a notebook for five years that included research that could be used to justify the alleged trades.
Anyway, this should all make for a great story at the Colonia High Class of '88's 25 year reunion, coming up next year!
SEC Charges Ring of High School Buddies with Insider Trading in Health Care Stocks [SEC]
Securities And Exchange Commission v. John Lazorchak, Mark Cupo, Mark Foldy, Michael Castelli... [SEC]
Buddies, Colleagues and, Prosecutors Allege, Inside Traders [WSJ]
Celgene, Sanofi Executives Charged With Insider Trading [Bloomberg]
*Though sadly I don't think this ever happened.