Are Post-it notes the new “breakfast of champions?”

Earlier this month, Frank Tamayo, a former mortgage broker and middleman in a longstanding insider-trading scheme, was sentenced to a year and a day in federal prison. According to the Securities and Exchange Commission (SEC), he pled guilty to criminal charges arising from his role in an insider trading scheme that involved trading in advance of more than a dozen pending corporate transactions. Tamayo obtained material, nonpublic information relating to these transactions from Steven Metro, an employee of the law firm Simpson Thacher. Tamayo then passed on these tips to his stockbroker, Vladimir Eydelman, who traded on the basis of the information. The illegal trading resulted in approximately $5.6 million in profits.

Edible evidence

The SEC’s complaint alleged that after receiving the tips from Metro, Tamayo typically met Eydelman near the clock at the information booth at Grand Central Terminal, and then chewed up or ate the post-it notes or napkins after using them to show Eydelman the ticker symbol of the company that would be acquired.

The SEC alleged that Eydelman then returned to his office and typically gathered research about the target company, which he emailed to Tamayo to create a false paper trail with a justification for the trading. Eydelman then allegedly traded for himself, Tamayo, and other customers. Tamayo allegedly allocated a portion of his profits for eventual payment back to Metro in exchange for the inside information, and Metro also traded personally in advance of at least two deals.

Eating a $3+ million hit

Both Eydelman and Metro pleaded guilty in connection with their roles in the scheme. Tamayo and Eydelman previously entered into settlements with the SEC in each consented to be permanently enjoined from future violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rule 10b-5 and 14e-3, as well as Section 17(a) of the Securities Act of 1933.

The settlements also require Tamayo to disgorge more that $1 million of his ill-gotten gains, and Eydelman to disgorge $1,236,657 of his ill-gotten gains and to pay a monetary penalty of $1,236,657. Eydelman also is barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally statistical rating organization; and barred from participating in any offering of a penny stock.

Metro was sentenced on September 14, 2016, to 46 months in prison. Eydelman has not yet been sentenced.

The SEC’s litigation against Metro is ongoing and the Commission is seeking his disgorgement of ill-gotten gains plus prejudgment interest, financial penalties, and an anti-fraud injunction.

Was no one watching?

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement says frequently that firms “must ensure that their supervisory systems and procedures are designed to recognize and follow up on red flags.”

Stuff happens. And whether or not Eydelman’s compliance team were watching, the SEC and FINRA were watching this episode of “Mission Impossible” unfold.

Be prepared!

You know, as a Broker-Dealer, RIA, or FCM, you and your compliance team must create, implement, maintain, confirm, and review written supervisory policies and procedures to ensure regulatory compliance, reduce reputational exposure and avoid related financial consequences.

Are you watching?

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