Insider Trading Scandal at Goldman and Merrill

by Mark Cassidy April 19 2006, 23:47
Prosecutors recently charged three employees at Goldman Sachs and Merrill Lynch with participating in a $6.7 million insider trading scheme. [1]  Authorities claim that Stanislav Shpigelman, an analyst at Merrill, sold inside information on upcoming mergers and acquisitions to Eugene Plotkin, an associate at Goldman, and David Pajcin, a former Goldman analyst. [2]  Plotkin and Pajcin then used this information to buy stocks before the public announcement of the deals and then sell them after the announcements for a significant profit. [3] The trio also recruited two employees of a printing plant in Wisconsin that publishes Business Week. [4]  The plant employees stole advance copies of the magazine and informed Plotkin and Pajcin of companies mentioned favorably in the “Inside Wall Street” column. [5]  As a favorable mention in the column usually leads to an increase in the price of those stocks, the conspirators were able to purchase the stocks prior to publication and then sell them for a profit. [6] Authorities became aware of the conspiracy when Pacjin’s aunt, Sonja Anticevic, a retired seamstress in Croatia, made more than $2 million on a two day investment in Reebok after the company announced its acquisition by Adidas. [7]  The SEC’s market surveillance department’s suspicion was aroused by of the unusually large number of options Ms. Anticevic had purchased prior to the announcement of the Reebok deal. [8]  Subsequent investigations led to her nephew David Pajcin who is cooperating with authorities against Shpigelman and Plotkin. [9] Both Goldman and Merrill have cooperated with authorities and warned their staffs about unethical behavior. [10]  Even though prosecutors have not charged either firm with complicity in the scheme, the fall-out for Merrill could be costly. [11]  Companies who had their information leaked by Shpigelman may decline to do business with Merrill in the future and the conspiracy may have compromised deals currently in development.  Going forward, Merrill will have to take additional measures to ensure security if it does not want to lose clients. This case is indicative of the security problems faced by businesses that handle sensitive and confidential information.  No matter what measures a business takes to prevent unethical behavior, employees still may engage in fraud; the fall out from which can greatly damage the business’ reputation and cost significant amounts of money. [1] Stephanie Kirchgaessner, Goldman and Merrill Staff Charged With Insider Trading, FT.com, Apr. 12, 2006, http://news.ft.com/cms/s/eb584f68-c96d-11da-94ca-0000779e2340.html [2] Id. See also, Jenny Anderson, Wall Street Employees Charged With Insider Trading, nytimes.com, Apr. 12, 2006, http://www.nytimes.com/2006/04/12/business/12inside.html?_r=1&ei=5087%0A&en=d2b225ef2b0b1434&ex=1145073600&adxnnl=1&adxnnlx=1145074314-IHXk5RHvgJ8TDzfq5UQ8vw&oref=slogin [3] Kirchgaessner, Supra, Note 1. [4] Anderson, Supra, Note 3. [5] Id. [6] Id. [7] Id. [8] Id. [9] Id. [10] James Polti, Merrill Lynch Warns Staff on Ethical Behavior, FT.com, Apr. 12, 2006, http://news.ft.com/cms/s/c55f148c-ca43-11da-852f-0000779e2340.html [11] Anderson, Supra, Note 3.

FDIC Increases Deposit Insurance For Retirement Accounts

by Mark Cassidy March 29 2006, 23:47
On April 1st the Federal Deposit Insurance Corporation (“FDIC”) will increase its deposit insurance coverage of retirement accounts from $100,000 to $250,000. [1]  This change represents the first boost to coverage in over twenty-five years. [2]  Despite coverage for non-retirement accounts staying at the current level of $100,000, the increase in coverage for retirement accounts will be beneficial to consumers and banks alike. [3] The last increase in deposit insurance coverage took place in 1980 when it was raised from $40,000 to $100,000. [4]  However, many Americans now have much more than $100,000 in retirement savings.  [5]  This meant they were forced to bank at multiple institutions in order to have all of their retirement funds insured. [6]  Under the new law, individuals will be able to have up to $250,000 in retirement funds at one bank. [7]  This will make banking easier for consumers and increase profits for banks. Despite the caps, it is still possible to have all of one’s funds at a single institution and have them insured as retirement and non-retirement accounts are treated differently for insurance purposes. [8]  Retirement accounts, no matter which type, are added together and the total is insured up to $250,000. [9]  Non-retirement accounts are not totaled, rather each category of account is insured separately up to $100,000. [10]  For instance an individual may have a checking account, a joint account with their spouse, a retirement account, and trust account benefiting their spouse and child.  The checking account will be insured up to $100,000.  The joint account will be divided in half and each half treated separately. [11]  This means that a couple may have up to $200,000 in a joint account and it will still be insured as each spouse’s $100,000 share is insured separately. [12]  As noted above retirement accounts will now be insured up to $250,000. [13]  Trust accounts receive up to $100,000 of insurance protection per beneficiary, not depositor. [14]  Thus an individual could have a $200,000 trust naming his wife and child as beneficiaries and the full $200,000 would be insured. [15]  Under this system one could have $650,000 (or more if the trust has more than two beneficiaries) deposited at one institution and still have their funds insured by the FDIC. While the increase in coverage for retirement accounts has been welcomed, some feel that the FDIC should have also raised its coverage for regular accounts as the insurance cap of $100,000 does not account for the inflation of the past twenty-six years.  [16]  To keep place with inflation it is claimed that coverage on regular accounts should be raised to $235,000 or at least doubled. [17]  Additionally, the $100,000 insurance cap favors large banks over small ones as consumers are more willing to trust major banks with accounts that exceed the insurance cap and leave some funds uninsured. [18] While it is not a panacea, the increase in FDIC deposit insurance coverage for retirement accounts is a change that should be welcomed by all Americans.  Consumers will now be able to have fewer accounts resulting in fewer hassles and fewer bank fees, while banks will be able to handle the entire retirement savings of individuals rather than only receiving a share. [1] Laura Bruce, Deposit Insurance Reform: What it Means to Consumers, Yahoo, March 16, 2006, http://biz.yahoo.com/brn/060316/18251.html?.v=1 [2] PR-29-2006, FDIC Insurance for Retirement Accounts Increased to $250,000 Higher Coverage Takes Effect April 1; Basic Insurance Limit for Other Accounts Stays at $100,000, March 14, 2006, http://www.fdic.gov/news//news/press/2006/pr06029.html [3] Bruce, Supra, Note 1. [4] Id. [5] FDIC Consumer News, Special Bulletin April 2006, What You Should Know About Higher FDIC Coverage for Retirement Accounts, http://www.fdic.gov/consumers/consumer/news/special/specialApril06.pdf [6] Id. [7] Id. [8] Id. [9] Id. [10] Id. [11] Id. [12] Id. [13] Id. [14] Id. [15] Id. [16] Bruce, Supra, Note 1. [17] Id. [18] Id.

Illegal Long-Distance Tax Continues To Be Enforced

by Mark Cassidy March 1 2006, 23:45
Despite the invalidation of communications excise tax, I.R.C. § 4251, by numerous federal courts the IRS is demanding that collection of the tax continue. [1] The three percent communications excise tax was originally imposed in 1898 as a temporary luxury tax to help fund the Spanish-American war. [2] The tax applies to a number of communications services among which is long-distance or “toll telephone” service and is paid by everyone, both individuals and businesses, who makes long-distance calls. [3] For purposes of the communications excise tax, the IRS defines toll telephone service as “a telephonic quality communication for which . . .there is a toll charge which varies in amount with the distance and elapsed transmission time of each individual communication.” (emphasis added) [4] The IRS contends that the word “and” in the statute should be read as “either,” while those fighting the tax contend that “and” should be read naturally as a conjunctive requiring that the toll charge vary according to both distance and time. [5] Since the tax was first enacted, the billing of long distance service has changed significantly. Many individuals and business now pay a monthly flat fee for long distance service rather than paying a rate based on the distance of the call and its length. [6] Nevertheless, the IRS has continued to enforce the tax. For most individuals the amount of tax paid is very small, but for businesses, it can be a significant amount of money. [7] A number of businesses have filed suit demanding that the IRS stop collecting the tax and refund monies already paid. The IRS has lost every time. In two cases, the court granted summary judgment finding the IRS’ argument of reading “and” as “either” lacked merit. [8], [9] The potential loss of revenue to the government is significant. If the tax is repealed the government will need to refund three years of payments. [10] By the IRS’ estimation this could result is a nine billion dollar refund to individuals and businesses. [11] Due to the amount of money at stake the IRS is asking that collection of the tax continue and will not process refund claims while litigation continues. [12] The IRS declined to seek review by the Supreme Court after losing in the 11th Circuit and will soon be facing a class action suit seeking to stop collection of the tax and force the IRS to issue refunds to taxpayers who not requested a refund. [13], [14] It is doubtful that the IRS will capitulate and cease enforcing the tax. As long it is cost effective to fight the suits, the IRS will no doubt keep collecting the tax and pay-off those who sue. However, the upcoming class action may force the IRS to amend the code to reflect the new realities of long-distance billing. Either way this “temporary” tax to fund a war that ended over a hundred years ago will be with us for the foreseeable future. [1] I.R.S. Notice 2005-79 (Nov. 14, 2005). [2] Officemax, Inc. v. U.S., 428 F.3d 583, 585 (6th Cir. 2005). [3] I.R.C. § 4251(b)(1) (2006). [4] I.R.C. § 4252(b)(1) (2006). [5] Officemax, 428 F.3d at 584. [6] Mary Dalrymple, Merchants Fight IRS Over Telephone Taxes, Yahoo, Feb. 19, 2006, http://news.yahoo.com/s/ap/20060219/ap_on_bi_ge/telephone_taxes_1. [7] Id. [8] Fortis, Inc. v. U.S., No. 03 Civ. 5137 (JGK), 2005 U.S. Dist. LEXIS 2104 (S.D.N.Y. 2005). [9] Officemax, 428 F.3d at 600. [10] Dalrymple, supra, note 6. [11] Officemax, 428 F.3d at 584. [12] I.R.S., supra, note 1. [13] American Bankers Ins. Group v. U.S., 408 F.3d 1328 (11th Cir. 2005). [14] Dalrymple, supra, note 6.

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