The US Department of Justice and the Securities and Exchange Commission filed criminal and civil charges, respectively, against a former government official who obtained confidential information from his former agency, and then provided it to a hedge fund manager for trading.
According to the SEC, Sanjay Valvani a hedge fund manager, realized US $32 million in illicit profits after receiving information about the likely approval by the Federal Drug Administration of a new generic drug and trading upon it. He received this information, charged the SEC in a civil complaint filed in federal court in New York, from Gordon Johnston, a former senior FDA officer, whom he had hired as a consultant. Mr. Johnston obtained this information through a former colleague at the FDA, said the SEC. In response, the SEC alleged that, in addition to trading on the information himself, Mr. Valvani shared this information with another former hedge fund manager, Stefan Lumiere, who likewise traded on the insider tips.
Mr. Johnston has pleaded guilty and admitted to his conduct in the DOJ criminal action.
The DOJ and SEC also filed criminal and civil charges against Mr. Lumiere and Christopher Plaford, another former hedge fund manager, for overstating the value of credit securities in funds they managed.
These individuals accomplished this, charged the DOJ and SEC, by instructing certain “friendly” broker-dealers of the specific prices they wanted for illiquid securities held by the funds and having the brokers send the prices back to them to be used as benchmarks for the funds’ valuations. The DOJ and SEC also charged that, on occasion, Mr. Plaford would purchase securities at higher than market prices (i.e., so-called “painting the tape”) to inflate the value of the securities and the value of the funds’ portfolio that included the securities.
Mr. Plaford has pleaded guilty to his criminal charges and admitted his role in the process.
In another matter, Rohit Bansal, the former Goldman Sachs & Co. and Federal Reserve Bank of New York employee, who illicitly obtained confidential information from the Fed while employed by GSCO for use by GSCO, agreed with the Financial Industry Regulatory Authority to be permanently barred from associating with any FINRA member. Mr. Bansal previously pleaded guilty to criminal charges related to this matter. (Click here for details in the article, “Alleged Criminal Conduct Snares Multiple Ex-Financial Services and Regulator Defendants in New York” in the November 8, 2015 edition of Bridging the Week.)
My View: It is precisely because of incidents like those involving Mr. Johnston and Mr. Bansal that industry representatives are so concerned about the proposal of the Commodity Futures Trading Commission in Regulation Automated Trading to require the proprietary source code of algorithmic traders to be made readily available to its staff and employees of the Department of Justice. Although regulators strive hard to prevent improprieties by their employees, they cannot prevent such incidents. Algorithmic traders potentially covered by Reg AT are very concerned that source code obtained by government regulators through a too low standard could make its way to competitors. Inadvertent leaks because of cybersecurity breaches are also a worry. This is why any provision adopted by the CFTC related to its or the DOJ’s ability to access source code must include sufficient protections against inadvertent leaks and disclosures. (Click here for an overview of industry comments to Regulation AT in the article, “Industry Comments to Regulation AT Argue CFTC Proposed Rules Too Prescriptive; Registration and Source Code Requirements Particularly Objectionable” in the March 20, 2016 edition of Bridging the Week.)