November 28, 2023

Investment Banking

Let Your Investment Banking Do The Walking

Wall Street Stock Tipsters Risk Hefty Salaries for Paltry Gains

(Bloomberg) — Sometimes crime really doesn’t pay.

Brijesh Goel had made it from investment banker to a principal at Apollo Global Management when he was arrested for allegedly passing deal tips during his time at Goldman Sachs Group Inc. For now, prosecutors claim he made $85,000 from the scheme.

It’s a staggeringly low number for a banker with Goel’s potential: A vice president at Goldman can make $750,000 a year, while a principal at Apollo can make upwards of $1 million with the promise of much more to come. 

Between regulators’ increased surveillance tools and the generally sloppy technique by people who don’t think of themselves as criminals, insider trading is an incredible risk for a career-ending crime that can result in jail time.

“They do it because they think they’re never going to get caught,” said Jeffrey Cramer, a former prosecutor who is now a senior managing director at security and investigations firm Guidepost Solutions LLC. “It’s free money.”

Often they’re right, Cramer said. A tip discreetly passed while lining up a golf shot may never come to the attention of prosecutors or regulators. But when it does, the consequences can be catastrophic.

Read More: Ex-Goldman Banker Tipped Squash Buddy on Deals, US Alleges 

Goel pleaded not guilty, and his lawyer, Reed Brodsky, has said that “the government rushed to charge Brijesh on the apparent say-so of one person” without giving his client the chance to speak to them. “Brijesh looks forward to demonstrating his innocence.”

Goel, 37, left his job as a vice president at Goldman last year for Apollo, which said it learned of the charges Monday morning and placed Goel on “indefinite leave.” Goel’s friend, Akshay Niranjan, who most recently worked as a director in foreign exchange trading at Barclays Plc, is no longer employed with the firm, a person with knowledge of the matter said.

“Middle of the road” annual pay for investment banking vice presidents was around $750,000 in 2021, according to Christopher Connors, a compensation consultant at Johnson Associates. Directors in investment banking can make over $1 million a year, he said.

Niranjan, who had a close relationship with Goel after they met in business school, allegedly put on trades based on confidential information passed by Goel about mergers Goldman was considering financing or deals in which it was acting as a financial adviser.

Though Niranjan hasn’t been charged — a person with knowledge of the matter says he is cooperating with the investigation and recorded calls with Goel — he was named as a co-defendant alongside Goel in a lawsuit over the trades by the US Securities and Exchange Commission. Robert Anello, a lawyer for Niranjan, declined to comment on the case.

The SEC and the Financial Industry Regulatory Authority have developed new tools in recent years to detect illegal trades that in the past would have flown below their radar. The SEC uses one called Artemis, after the Greek goddess of the hunt, and welcome shorthand for Advanced Relational Trading Enforcement Metrics Investigation System. Artemis taps SEC information to analyze suspicious trading patterns and relationships among multiple traders.

But for all the fancy technology, insider trading cases still often have more prosaic roots: a complaint from an unhappy former romantic partner or a person facing criminal charges who talks to investigators, or the recipient of a tip trades recklessly or passes the tip on to others.

Read More: Ex-McKinsey Partner Gets 2 Years for Trading on Goldman Deal 

Prosecutors moved swiftly to charge Puneet Dikshit, a former McKinsey & Co. partner who led a team advising Goldman Sachs on its acquisition of GreenSky Inc., for insider trading on the deal. He was charged just two months after his trades, suggesting regulators may have been alerted by suspiciously high levels of options trading around the deal announcement. He was sentenced to two years in prison after pleading guilty to making $455,000 off the deal. 

Partners at the top consulting firms can make upwards of $1 million, according to Connors.

Former Perella Weinberg Partners LP banker Sean Stewart was sentenced to two years in prison in 2019 after a jury found he had tipped his father about impending health care mergers. Stewart made no money himself, though prosecutors claimed his dad used $10,055 of his illicit trading profits to pay for a photographer at Stewart’s wedding.

The small-time gains contrast with a few who went in big on insider trades. Former SAC Capital Advisors portfolio manager Mathew Martoma was convicted of making $276 million for the firm. Raj Rajaratnam of Galleon Group LLC was convicted of a scheme that prosecutors said netted $72 million. And Swiss trader Marc Demane Debih admitted to making $70 million from an international ring that traded on information stolen by bankers.

In addition to thinking they won’t get caught, many executives and finance professionals are risk-takers with confidence in their ability to minimize the chance of detection, said Donald Langevoort, a law professor at Georgetown University.

“These people tend to be type-a personalities for whom the ability to trade on status is a big ego boost, so that the rewards are in fact greater than the pecuniary ones,” he said. And they may misunderstand the law or rationalize that they’re not breaking it, he said. “They think that material information is only a sure thing rather than a speculative bet, or that only current officers and directors are really at risk for prosecution.”

As for Goel, his lawyer told the judge at the arraignment that his client “was shocked by his arrest.”

“That’s often the case with insider trading arrests, isn’t it?” the judge said.

The Goel case is US v. Goel, 22-cr-00396, US District Court, Southern District of New York (Manhattan).

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