A California man and three friends allegedly tricked investment bankers into revealing insider information, which they then used to generate more than $4.4 million in illicitly-gained profits, according to prosecutors.
Day trader Steven Fishoff, of Westlake Village, Calif., his friends Ronald Chernin, of Oak Park, Calif., and Paul Petrello, of Boca Raton, Fla., and his brother-in-law Steven Constantin of Farmingdale, N.J., were each charged with substantive securities fraud and conspiracy to commit securities fraud in U.S. District Court for the District of New Jersey.
The U.S. Securities and Exchange Commission filed a parallel civil action against the four men.
Prosecutors allege that the men posed as portfolio managers and convinced investment bankers to share confidential information about upcoming secondary offerings, then traded ahead of at least 14 offerings.
“The defendants and their associates were entrusted with confidential, nonpublic information about companies, and, time and time again, they allegedly violated that trust," U.S. Attorney Paul Fishman said. “They allegedly rigged the game so they would always win, and their profits came at the expense of legitimate investors."
Fishoff is president and owner of Featherwood Capital Inc., a stock-trading operation run out of his home. Petrello, Chernin and Constantin were each listed as officers of Featherwood’s DBAs.
As part of the scheme, the conspirators convinced investment banks that they were portfolio managers interested in participating in confidentially marketed public offerings, which are offered to the bank's clients ahead of a company's public announcement. The banks typically bring potential investors "over the wall," making them promise to not ’t disclose the nonpublic information to others or trade an issuer’s stock ahead of an offering.
The criminal complaint alleges that Fishoff and his consiprators allegedly agreed to "wall cross," but then "flagrantly" violated these agreements and tipped each other off about the upcoming offerings. Fishoff and his conspirators then shorted the stock before the offering, assuring themselves profits on the sales after the price dropped in violation of SEC rules that forbid short-selling in a period immediately preceding a public offering.
The SEC alleges that they eventually expanded their scheme from short sales to buying stock ahead of a positive corporate announcement based on confidential information obtained about secret negotiations between two pharmaceutical companies, Biogen Inc. and Sangamo BioSciences, Inc., which they used to net more than $1.2 million in profit.
All four men were arrested at their homes on Wednesday.