NEW YORK, March 28 (Reuters) - Vladimir Eydelman, the former Morgan Stanley and Oppenheimer Holdings broker arrested on insider trading charges last week, could expose some former clients and the firms to regulatory and legal actions, lawyers and securities industry veterans said.
Eydelman, who was charged with fraud on March 19 by the U.S. Securities and Exchange Commission and the Justice Department, allegedly made more than $5.6 million in illicit profit over three-and-a-half years for himself, friends and more than 50 clients, by trading stocks and options of companies involved in undisclosed merger deals and tender offers that were leaked by a law-firm employee.
The cloak-and-dagger details of the insider operation - including how a middleman swallowed Post-It notes scribbled with ticker symbols to be traded - made headlines.
Still, it’s the more mundane details such as due diligence in hiring that could choke Oppenheimer and Morgan Stanley if regulators extend their investigations, lawyers said.
The Financial Industry Regulatory Authority (FINRA) has said that examining procedures at brokerage firms for weeding out the bad apples is one of its priorities this year.
Eydelman, 42, had a history of job-hopping, a record of customer complaints and an apparent burst of productivity in recent years, according to the lawsuits and FINRA filings.
Though he settled down more recently to work at just two firms over the last 13 years - he was at Oppenheimer for almost ten years before moving to Morgan Stanley in September 2012 - the lawsuits abound with examples of areas where Eydelman apparently evaded compliance overseers.
In one example, Eydelman - who had discretion to trade in many of his clients’ accounts - told an informer that in order to obtain such discretion he had forged the name of one Oppenheimer customer, who later complained to the firm about account losses, according to the SEC complaint.
“Eydelman left Oppenheimer shortly after the customer filed the complaints,” the SEC said.
Morgan Stanley fired Eydelman two days after he was arrested. Spokesman Jim Wiggins declined to discuss any other aspect of the case, including the firm’s process in hiring and supervising him, or whether it would reimburse clients if they have to give up their gains.
Two of the 12 insider-trading incidents cited in the suits occurred while Eydelman was at Morgan Stanley.
The 42-year-old New Jersey resident had about 445 client accounts at Oppenheimer, and 262 at Morgan Stanley, according to the SEC.
Oppenheimer is reviewing Eydelman’s activities, including how he was supervised, for any signs of wrongdoing.
“Our review has not disclosed any information that would have brought these issues to the firm’s attention,” spokesman Stefan Prelog wrote in an email.
The SEC suit noted some details that may have merited scrutiny. The Chicago Board Options Exchange and the New York Stock Exchange, for example, separately questioned Oppenheimer about some 2010 trades Eydelman began making in Brinks Home Security shortly before Tyco International said it would buy Brinks. The trades netted more than $770,000 for Eydelman’s accounts.
Such details could put Oppenheimer and Morgan Stanley at risk.
“Civil charges against firms for failing to supervise their employees in a rash of recent insider trading cases are a possibility,” David Rosenfeld, associate regional director of the SEC’s New York regional office, told a group of lawyers two days after the complaints were filed.
He declined to discuss the Eydelman case specifically.
Several lawyers who read the complaints said they would have expected Morgan Stanley to have placed Eydelman on heightened supervision after former Oppenheimer clients filed a $2 million arbitration claim against him last August. It accuses him of trading excessively on margin in their accounts in “highly speculative, volatile and unsuitable securities.” The arbitration remains open.
Several lawyers who specialize in suing brokers said regulators could force Eydelman’s customers to return illicit gains, even if they were unaware of the alleged scheme.
“It would be tough for them to argue that they can keep money from the fruits of nonpublic information,” said Cary Lapidus, a former SEC enforcement attorney who now has a private practice in San Francisco.
Eydelman is fighting the charges and is free on $1 million bail. His lawyer did not return numerous calls for comment.
In the five years prior to joining Oppenheimer in 2001, Eydelman had worked at four small firms, according to his public disclosure form available on the FINRA website.
He paid a $10,000 fine and returned $24,000 to clients while working at Morgan Wilshire Securities in Long Island, New York between 1998 and 2000.
He also settled a 1996 complaint of churning - or trading excessively in client accounts to generate commissions - while working at the now-defunct Walsh Manning Securities with a $13,500 payment, according to his FINRA records.
“Those aren’t small claims,” said Doug Black, who trained and recruited brokers in a 30-year career at UBS Wealth Management Americas and predecessor firms. Black now runs SpringReef Partners, which helps rich investors and nonprofit organizations choose financial advisers.
The Justice Department’s criminal lawsuit also highlights some conspicuous lifestyle factors - such as Eydelman’s 2011 purchase of a $117,000 Maserati - that some lawyers say should have caught his employers’ attention.
The SEC lawsuit notes that his personal trading gains were supplemented by “bonuses from his employers based on his performance ... driven in large part by the profits garnered through the insider trading scheme.”
A former Morgan Stanley legal official said it was unrealistic to expect hiring managers to investigate specific trades by a prospect whose commissions are burgeoning.
“Morgan Stanley would only see a guy building a book of business,” he said.
The Morgan Stanley spokesman declined to respond to comments of Black and the former employee.
Black said the Eydelman case reflects a revenue-centered culture endemic at large brokerage firms, where managers who are compensated for recruiting brokers ask few questions when “production” is on the upswing.
“You have this huge platform and branch system and you need scale to support it,” Black said. “Every empty seat is lost revenue.”
David Tufts, the former manager of the Oppenheimer branch where Eydelman worked, told “Research” magazine in 2009 that the secret of his 30-year managerial success was his hands-off style.
“Leave them alone and let them create the business they want to create,” he said. “If you lose someone doing a million bucks, it’s going to take three to replace them that first year.”
Tufts, who no longer manages the branch, declined to discuss Eydelman.
Other veterans said that attitude is changing fast, and will likely be accelerated by the charges against Eydelman.
“The large banks are working to improve their due diligence in hiring,” said Mark Shelton, who resigned as general counsel of UBS AG Americas and head of investigations at its parent bank this year to become a partner at Gibson, Dunn & Crutcher. “They’ve learned lessons in the past couple of years.” (Additional reporting by Suzanne Barlyn; Editing by Linda Stern and Bernadette Baum)