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Big guns involved in insider trading scam

May 09, 2007

NEW YORK/KARACHI, May 8: While the prime suspect, a Pakistani banker, involved in insider trading has already appeared in the media, certain top bankers in Pakistan are filled with fear about finding their names in the limelight, suggested banking sources on Tuesday.

The sources informed Dawn that the report of a high-level investigation about the possible involvement of more Pakistani bankers was yet to be disclosed to the media.

When approached, the State Bank of Pakistan was tight-lipped over the issue. The chief spokesman refused to comment on the scandal. The sources revealed that a few days earlier, the State Bank had conducted an inquiry into the scam but it was being guarded as it involved some big names.

One Pakistani banker, Ejaz Rahim, left for Canada a month ago and reportedly accepted that a probe was being conducted against him by the Securities and Exchange Commission, USA. Bankers in Pakistan feared that he could disclose a few more names to avoid harsh punishment.

A spokesperson of the Securities and Exchange Commission said on Monday that investigation into Pakistani banker Hafiz Naseem’s complex web of international insider trading was ongoing which also includes two Indians Sunil Sehgal and Seema Sehgal and a Colombian Francisco Javier Garcia. The official, however, declined to divulge the name of the Karachi-based banker who acted as the ‘tippee’ and used the information to make huge profits.

Katherine S. Addleman, Associate Regional Director of the SEC’s Fort Worth Regional Office, told Dawn that the Pakistani banker had agreed to cooperate with the investigators and also consented to freeze his accounts in the United States. He has an account at UBS Investment. (UBS provides wealth management services to US clients. This includes both investment advisory and brokerage services).

Naseem was an employee of Credit Suisse that was an adviser on the nine deals. He used to pass on information to Ejaz Rahim who executed trades before the deals were announced. Rahim, a former head of Investment Banking Group at Faysal Bank, said he was being investigated by the US Securities and Exchange Commission for having links with Naseem.

The scam appeared in the press last Thursday when Naseem, 37, was arrested in New York and charged with 26 counts of conspiracy and securities fraud. He is accused of leaking details about nine deals, including the largest-ever $32 billion leveraged buyout of TXU.

A banker disclosed that even earlier Hafiz Naseem was found involved in illegal banking practices in American Express in Pakistan where Ejaz Rahim was also employed.

“Due to his influential family background, no case was made against him,” said the banker. Rahim has a reputation of being a sharp banker and a fast money-maker who multiplied his wealth to the tune of millions of dollars in just a decade.

The banking fraternity is up in arms as this has dealt quite a blow to the reputation of the industry in the international banking arena. It is feared that the recent influx of investment by foreign banks will suffer a setback because of the fraud.

The SEC complaint said that between January 29 and February 20, 2007, based on the insider information provided by Naseem, Seema Sehgal, through her account at Charles Schwab & Co Inc sold the option contracts, realising trading profits of approximately $144,600. Similarly, Sunil Sehgal, through his account at Clark Dodge & Co, sold the option contracts, realising trading profits of approximately $127,000.

Garcia, on the other hand, used that information to purchase at least 260 TXU Corp call option contracts through an omnibus account at Fimat Banque Frankfurt Zweigniederlassung. Forty of the options had a March expiration date with a strike price of $60 and $220 of the options had April expiration dates with a $62.50 strike price. The option contracts were cleared through Fimat USA LLC. Following the announcement, Garcia’s trading profits were approximately $150,500.

On February 23, 2007, an ‘unnamed Pakistani banker’ purchased 6,700 TXU call option contracts through an omnibus account at UBS AG London. All the options expired in March 2007, 3,500 of the option contracts had a strike price of $57.50 and the remaining 3,200 had a strike price of $60. The option contracts were cleared through UBS Securities LLC. Following the announcement, the Pakistani banker accumulated trading profits of approximately $5 million.

The report also charged that on February 5, 6, 7, 8 and 23, 2007, Naseem, in breach of his duty to Credit Suisse and its client, telephoned the Pakistani banker and conveyed to him non-public, material information concerning the proposed TXU leveraged buyout and other information. He made these calls from his office phone at Credit Suisse in New York to the banker’s cellphone.

This was not the first time that Naseem conveyed material, non-public information to this associate. He began misappropriating material, non-public information shortly after he joined the Swiss bank. The information involved pending business combinations. The calls were made close to announcements of pending mergers involving, in addition to TXU, the following issuers: Hydril Company, Trammell Crow Co, John Harland Co, Energy Partners Ltd, Veritas DGC Inc, Jacuzzi Brands, Caremark Rx Inc, and Northwestern Corporation. Notably, Credit Suisse served as an investment banker or financial advisor in all the mergers.

Ms Addleman said: “This action and the continuing investigation into the tipping by Naseem is a remarkable example of the public and private sector working together to unravel a complex web of international insider trading. The SEC is especially appreciative of the tremendous assistance provided by Credit Suisse in the process of identifying Naseem and the cooperation afforded by the NYSE, Chicago Board Options Exchange, Swiss Federal Banking Commission and the Financial Services Authority of the United Kingdom in helping to piece together evidence from across the globe, such as phone and brokerage records, to uncover Naseem’s unlawful insider trading.”