The U.S. Securities and Exchange Commission investigation of Holly Becker and her hedge- fund investor husband, Michael Zimmerman, is the highest-profile insider-trading case against a Wall Street analyst in 20 years, lawyers said.
The SEC told Becker and Zimmerman it plans to sue them for insider trading, people familiar with the matter said. The agency is investigating trades Zimmerman made in 1999 when he worked at Leon Cooperman’s Omega Advisors Inc. and Becker was at Citigroup Inc.’s Salomon Smith Barney unit, the New York Times said yesterday, citing an unidentified person. The SEC is also investigating trades Zimmerman made in 2000, the people said.
The case could help the SEC set a precedent based on laws passed since it lost its last major suit against an analyst. In 1983, the U.S. Supreme Court reversed the agency’s censure of Ray Dirks, who helped his broker-dealer firm’s customers trade on insider information about Equity Funding of America. A 1997 Supreme Court ruling changed the law, making it easier to prove that outsiders, such as Dirks, engaged in insider trading if they “misappropriated” the information.
“It represents another step, and probably the next logical step, in the SEC’s effort to firm up” insider-trading rules, said James Schropp, a former SEC attorney who now works for Fried Frank Harris Shriver & Jacobson in Washington. Schropp said that the case against Dirks was the last occasion he could recall that the SEC brought against an analyst.
Becker didn’t return a voice mail at her office seeking comment. The message on her voicemail said she is on maternity leave. Zimmerman, who left Omega in January 2000 to join SAC Capital Advisors, another hedge fund, couldn’t immediately be reached for comment. Omega and SAC Capital aren’t being investigated. Both companies declined comment.
Becker is on leave from Lehman Brothers Inc., which suspended her last August. Kerrie Cohen, a spokeswoman for Lehman, which isn’t being investigated, declined to comment. Becker had joined Lehman in March 2000.
Insider-trading investigations of Wall Street officials are common, such as those that targeted junk-bond king, Michael Milken, arbitrageur Ivan Boesky, Drexel Burnham Lambert Inc. investment banker Dennis Levine and ImClone Systems Inc. founder Sam Waksal. Until recently the SEC had not focused on analysts.
The planned charges against Becker, named best Internet analyst by Institutional Investor magazine in 2001 and 2002, follow two years of investigations into Wall Street analysts for conflicts of interest caused by close ties to bankers. The SEC is putting the final touches on a $1.4 billion settlement with investment banks over the issue and regulators have accused former analysts Henry Blodget and Jack Grubman of using favorable research to win investment banking business.
The 1997 court ruling the SEC now has at its disposal involved James H. O’Hagan, a lawyer at the law firm of Dorsey & Whitney. He bought call options in a takeover target company while his law firm was helping a client prepare the tender offer.
The SEC had lost the earlier Ray Dirks case because the justices ruled there could be no insider trading if a defendant had no fiduciary duty to the company whose stock was involved. As an analyst, Dirks had no such duty, they ruled.
In the O’Hagan case, the court said insider trading could be proved if the person sued had a fiduciary relationship with any person, firm or company whose information was “misappropriated” and used secretly to make stock trades.
In an earlier case, in 1984, R. Foster Winans was accused of leaking the contents of 27 of the Wall Street Journal’s “Heard on the Street” columns, which he co-wrote, to two stockbrokers.
A U.S. appeals court in New York found Winans too had a fiduciary relationship that was sufficient to justify an insider trading suit his employment with the newspaper. If the SEC sues Becker and Zimmerman in New York, the appeals-court rule would apply to them, lawyers said.
“As a general proposition of law, if you are trading on inside information and you know it, criminal liability can attach,” said John Potter, a lawyer with Covington & Burling in Washington, D.C. and a former federal prosecutor. “Both the tipper and the tippee can be held liable. The tippee can be held liable if the tippee knows he’s trading on material nonpublic information.”
One hurdle SEC lawyers have to overcome is to prove that Becker gave inside information to Zimmerman, who was living with her at the time, though not yet her husband.
“Anytime you have an insider trading case, you’re necessarily trying to prove it through circumstantial evidence,” said Michael A. Perino, a securities law professor at St. John’s University School of Law in New York. “The relationship between the parties, the papers that record the transaction to prove that the information was passed, and the timing of trades is crucial.”
The SEC has been investigating allegations that Zimmerman made trades on stock of Amazon.com Inc. after Becker prepared reports on the Internet retailer, the people said. The agency is also investigating his trades of Avon Products Inc., EBay Inc. and Drugstore.com with advance information about the contents of research reports provided by Becker, the Times reported.
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