The Federal authorities arrested an investment banker on Thursday and charged him with illegally leaking confidential information on nine deals, including the $45 billion buyout of the Texas energy giant TXU, says the New York Times.
The junior investment banker, Hafiz Muhammad Zubair Naseem, 37, who worked in Credit Suisse's energy banking group in Manhattan, is accused of calling an unidentified banker in Pakistan and tipping him about deals shortly before they were publicly announced.
The Pakistani banker, in turn, traded on that information in accounts owned by Mr Naseem and himself. He also leaked it to several well-known financial executives in Pakistan, who also profited. All told, the participants made more than $7.5 million, investigators said.
The accusations were made in criminal and civil complaints filed late yesterday afternoon by the United States attorney's office in Manhattan and the Securities and Exchange Commission.
Mr Naseem, a native of Pakistan who lives in Rye Brook, N.Y., was arrested late yesterday at Credit Suisse offices at Madison Square Park in the Flat Iron District after returning to work from a personal trip to Pakistan, according to people close to the situation.
Position holder in MBA from Lahore University of Management of Sciences he joined American Express Bank in Lahore and later went for 2nd MBA to New York University from where he joined J.P. Morgan and later to Credit Suisse.
He was taken to the Federal Bureau of Investigation's offices in Lower Manhattan, where he emerged, clad in a dark slacks and white shirt, as he was transported to a federal jail in Brooklyn. He is expected to be arraigned today in Federal District Court in Manhattan.
The boom in mergers and acquisitions and leveraged buyouts has produced a flurry of suspicious-trading cases. In the last two years, the S.E.C. and the Justice Department have brought several high profile insider-trading cases involving people at top Wall Street banks.
One involved a former Goldman Sachs fixed-income trader, a former Merrill Lynch analyst and extended relatives in Croatia. In a case brought this year, the government accused 13 people of passing around illegal information, including Morgan Stanley's former in-house counsel, a former research executive at UBS and several former traders at Bear Stearns.
And there are signs the suspicious activity continues. Earlier this week options trading increased significantly ahead of reports that the News Corporation had offered $5 billion for the Dow Jones Company.
"The S.E.C has made insider trading ahead of mergers and acquisitions one of its top priorities," Linda Chatman Thomsen, the commission's director of enforcement, said in a statement. But insider-trading cases can be difficult to unravel and hard to prosecute, which makes the speed at which charges were filed in this case remarkable. The TXU transaction, for example, was announced in late February.
"In today's information age there's at least the perception that some people have more information than others," said Evan Barr, a lawyer at Steptoe & Johnson and a former federal prosecutor. "There is a sense among prosecutors that insider trading is a more attractive charge to bring in front of a jury rather than something abstract like accounting fraud. The average juror sees insider trading as someone lining their own pockets."
A lawyer for Mr Naseem, Craig S. Warkol, could not be reached. Mr Naseem is in the process of being fired by Credit Suisse, according to a person close to the situation.
In a statement, Credit Suisse said yesterday that it was "shocked and extremely disappointed that an employee would violate not only our trust, but the trust of our clients. The bank said that it "immediately brought the activities of this employee to the attention of the relevant authorities" and would continue to work with them.
After an inquiry from the federal investigators in March, Credit Suisse helped identify Mr Naseem as someone of interest. Although Mr Naseem continued to work at the bank, he returned to Pakistan for a visit and did not return until a few days ago.
He is accused of leaking information about pending deals between April 2006 and this February, prosecutors said. He joined Credit Suisse in March 2006 after a stint at J.P. Morgan. His desk at Credit Suisse was near a printer that turned out documents with information about potential deals for both his group and for others, investigators said. Mr Naseem "regularly and repeatedly" called the Pakistani banker at his home and on his cellphone in advance of a potential deal, federal prosecutors and regulators contend. Shortly after receiving such a call, the banker would buy securities based on the news.
Then, once a public announcement was made, he would quickly sell. He executed dozens of trades, often in an offshore account. Mr Naseem authorised the Pakistani banker, who is identified in the criminal complaint as "co-conspirator 1" to operate a brokerage account on his behalf, according to the deposition of the Federal Bureau of Investigation agent in charge of the case.
After confirming in an e-mail message that the banker "can do whatever he wants," the agent said that Mr Naseem concluded one message with the comment: "Let the fun begin."
The nine deals in the Naseem case included the mergers or buyouts of the North-western Corporation, Energy Partners, Veritas DGC, Jacuzzi Brands, Trammell Crow, Hydril Company, Caremark Rx, and the John H. Harland Company. But the most notable one was the $45 billion buyout of TXU.
On February 26, TXU said it would be acquired by an investor group led by Kohlberg Kravis Roberts, the Texas Pacific Group, and Goldman Sachs in what is the biggest buyout deal ever. Credit Suisse, as it was for the other deals, was an adviser.
In early February, Mr Naseem had called the Pakistani banker's cellphone from his office in New York and conveyed to him confidential information about the proposed TXU deal, according to the S.E.C. complaint. He continued to call up until February 23.
On that date, the Pakistani banker bought 6,700 call options, which gave him the right to buy TXU shares at a prices between $57.50 and $60 by March 2007, through a brokerage account at UBS in London.
When the TXU deal was announced on February 26, its stock shot up $7.91 from the day before, to $67.93. The Pakistani banker realised trading profits of about $5 million, according to the S.E.C. complaint. Other investors similarly benefited, regulators contend. From January 29 to February 20, Seema and Sunil Seghal, who are believed to be British citizens, bought several hundred TXU call option contracts, which expired in March and April 2007. Together, they made more $271,600 in profits.
In late February, Francisco Javier Garcia, believed to be a resident of Switzerland, bought similar TXU securities through Fimat Banque Frankfurt based on inside information, according to the S.E.C. He reaped trading profits of more than $150,500.