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.