U.S. court opens rogue trading case against Estonian firm, two brokers

  • 2005-11-09
  • By Kairi Kurm
Attorneys for Lohmus, Haavel & Viisemann, the investment firm whose employees have been accused by the U.S. Securities and Exchange Commission of using insider information to profit on stock trades, appeared in a U.S. district court on Nov. 8 as the first step in a rogue trading case that has put Estonia in the international spotlight. The court made no decision and instead issued preliminary injunctions to both LHV and traders Kristjan Lepik and Oliver Peek, whose lawyers were not present. The court gave the two defendants another chance to appear on Nov. 23. Amy Greer, district trial counsel at the U.S. SEC's district office in Philadelphia, told The Baltic Times, "LHV has been cooperating with the SEC in connection with this matter, and we anticipate the firm's continued cooperation."

Greer said the court also ordered Lepik to return 156,499 euros that he allegedly withdrew from a U.S. account once news of the scandal broke on Nov. 2. The SEC has claimed that the firm's employees profited from trade on U.S. public companies by using more than 360 confidential press releases belonging to Business Wire, a real-time business news agency used by brokers and traders around the world. The watchdog believes that the traders may have racked up some $7.8 million in profits on the illegal trades. In Estonia, LHV is trying to distance itself from the two traders, who apparently used personal - not company - accounts when trading on U.S. stocks. It was unclear whose computers they used when trading.

The employment contracts of Lepik, Peek and three other employees suspected of participating in the illegal trading, have been suspended, Rain Tamm, LHV chairman, told The Baltic Times. Peek was a member of LHV's investments services team, and Lepik an LHV partner and head of the bank's trading department. Meanwhile, Rain Lohmus, one of the firm's founders, and whose account was reportedly involved in illegal trading, stepped down from his position as chairman of the firm's council. Many were surprised to learn that Lohmus had also been a client of Oliver Peek. "Usually we do not comment on our customers' data, but we found that it was important to say [Lohmus was involved]," said Tonis Haavel, one of the firm's founders.Lohmus left for Moscow on Nov. 2, the morning news of the scandal broke, and didn't return before Nov. 4. Haavel couldn't say if Lohmus had been aware of possible illegal trading. According to one report, Lohmus opened a $2-million account with LHV Trader in April this year, with the money eventually being deposited with U.S.-based Interactive Brokers. As a result of subsequent transactions, the size of his account swelled to $8.3 million by November.According to the SEC, the illegal trading activity involved five different accounts, including those of Peek and Lepik. Peek reportedly received $2 million and Lepik $200,000 in nine months this year.

"The in-house investigation is ongoing, and we are giving [the SEC] the information they request. It is very voluminous," Haavel told The Baltic Times.The firm LHV claims that young men were trading as private individuals. In every statement, it emphasizes that the investment bank had nothing to do with any possible illegal trading of its former employees, and that the company has in no way profited from any such trading. Still, the accusations have damaged the company's reputation. Several customers have pulled their funds from LHV's accounts, and Vilniaus Akropolis, Lithuania's largest mall operator, cancelled its contract with LHV. Vilniaus Akropolis had been planning an IPO with the firm. The SEC has frozen the accounts of about 180 LHV customers. Currently only those who used the LHV Trader investment services on the U.S. market through certain brokers cannot receive their money."Our lawyers have spoken to [the SEC]. The commission is in principle ready to unfreeze the accounts of our other clients. When it will happen, we don't know," Haavel said, adding that LHV has a total of 4,500 customers. "According to the securities' act, companies like us keep clients' assets totally separate." The firm's partners have pledged to increase owners' equity to $1 million if necessary to cover the claims. The SEC investigation was launched after a drug company, InKine, noticed a spike in trading on its shares on June 23, just before news was released about a planned merger. About 46 percent of the volume came from Estonian traders, who earned some $300,000 by selling the shares immediately after the merger was announced. The same scheme was used in July when various earning announcements were released by eBay and Yahoo. In those cases, even larger sums were used. Business Wire made a statement defending the integrity of its data system, stating that traders could not have acquired secret access. Still, Tamm told the press that Peek and Lepik may have come across a security gap in Business Wire's system.Estonia's Financial Supervision Authority has started a separate supervisory procedure into the matter.

Meanwhile, a U.S.-based hedge fund manager, speaking on the condition of anonymity, told The Baltic Times that she had assumed on June 23 that whoever placed the order was related to InKine, Salix, one of the investment banks advising on the deal, or perhaps lawyers who had worked on the transaction. "I just knew someone got very lucky that day, and I assumed it wasn't luck that prompted them to take that big of a piece of some biotech firm in Philly no one had ever heard of before," she said. "I had no idea who placed them. Just that someone sure was very timely and bold."In the fund manager's opinion, had the traders been "less greedy" on InKine, they never would have been caught, since the total share volume that day would have been within "normal" ranges. She said that their other deals would have never aroused suspicion anywhere except among the inside compliance people of LHV and U.S. brokers Cyber Trader and InterActives. The latter are supposed to alert regulators if a client is making too many so-called "in-the-money-trades" ahead of a major news stories, she said.Jakob Frenkel, a former SEC enforcement lawyer and former U.S. federal criminal prosecutor, told The Baltic Times, "In cases like this, the SEC probably will demand penalties of $15 - 20 million, plus recovery of the profits from trading. But the SEC will first need to build its case and bring into the grasp of the U.S. courts the individuals charged."Frenkel, who is now with Shulman, Rogers, Gandal, Pordy & Ecker, added, "Of greater concern should be whether the SEC is working with U.S. federal or Estonian criminal prosecutors with the objective of criminal prosecutions and jail as the consequence. The allegations are of the type that would suggest the SEC will try to get criminal prosecutions too."The fund manager said that, if those traders cooperate, they might only pay a civil fine and avoid prosecution. "I think the Estonian securities regulators will deal with them, unless the Department of Justice wishes to make 'examples' of them."Other local investment bankers panicked about what the scandal could do to the industry's reputation. Allan Martinson, managing partner of Martinson Trigon Venture Partners, said, "I can't see a single person who won from this case. LHV lost, and the work of many years disappeared. Investors lost, Estonia lost, even the U.S.A. lost. This lost is a fact. What caused the loss, a crime or a work accident, is not that important. The effect of LHV story is bigger than the conviction or justification of two boys," he said.As the U.S. fund manager said, "In a way, I respect how bright those boys were. I hope they cooperate - much more leniency is given to those who admit they made a mistake and clean up their act -at least over here [in the U.S.A.]. The regulators are overworked, and they hate it when people lie or refuse to cooperate. It makes them have to work much harder which means other matters get overlooked."