Insider trading ring reaped millions, SEC says

Two of the region's biggest takeovers -- Procter & Gamble Co.'s purchase of Gillette Co., and Adidas-Salomon AG's acquisition of Reebok International Ltd. -- were targets of a brazen international insider trading ring that netted nearly $7 million of illegal profits, according to federal investigators.

The scheme, hatched in late 2004 at a Russian sauna in Manhattan, stretched from Wisconsin to Croatia, according to a 59-page complaint filed yesterday by the Securities and Exchange Commission in New York. The operation allegedly involved two analysts in their 20s who shared insider information about six proposed corporate mergers with accomplices, including relatives and an exotic dancer. These people then bought securities before the deals were announced and reaped the profits when prices surged afterward, the complaint charges.

The plot's leaders also bribed two men to get jobs at a printing plant that publishes Business Week and steal advance copies of the magazine to obtain stock tips and use that illicit information to profit illegally, the SEC says.

Federal authorities yesterday arrested the two analysts, one at Merrill Lynch & Co. and one at Goldman Sachs Group Inc., charging them with insider trading and securities fraud. A printing plant worker was also arrested.

The eight-month investigation began in August after authorities noticed an unusually high volume of trading in Reebok securities before Adidas announced its $3.8 billion acquisition of the Canton sneaker maker.

''This was a huge ring. These people really set out to deliberately engage in insider trading over a period of a couple of years," said David Rosenfeld, associate director of the SEC's northeast regional office, which filed the civil complaint yesterday, along with a criminal complaint filed by the United States attorney in New York.

Defendants and their lawyers couldn't be reached for comment or denied wrongdoing.

Merrill Lynch and Goldman Sachs said they are cooperating with authorities.

Alexander S. Glovsky, cochairman of the Boston Bar Association's securities law committee, said that with an increase in mergers and acquisitions, regulators are eager to show Wall Street they are taking insider trading seriously. ''There's no doubt that this is a word of warning and a nice cautionary tale for junior investment bankers," Glovsky said.

The scheme began in 2004 in Manhattan at a Russian sauna called Spa 88 when Goldman Sachs analyst Eugene Plotkin and his friend David Pajcin recruited Stanislav Shpigelman, a Merrill Lynch investment banking analyst who worked in the mergers and acquisitions unit. They asked Shpigelman to provide them with insider information on Merrill Lynch clients, according to the complaints. The three agreed to share a percentage of any profits they made from Shpigelman's information.

A Harvard University graduate, Plotkin, 26, met Shpigelman, 23, while he was in college and helped him prepare for interviews at Wall Street firms.

After the initial meeting, Shpigelman supplied information on at least six acquisitions before they were made public, the SEC says. Shpigelman learned about the Gillette deal when he traveled to Cincinnati, home of P&G, to deliver takeover documents. He learned about the Reebok deal from co-workers at Merrill Lynch. Each time, Plotkin and Pajcin bought securities before the acquisitions were announced and sold them after the deals were publicized, according to the complaint. They allegedly traded either in their own accounts or through accounts of accomplices.

At the same time, Plotkin and Pajcin were working another angle, the SEC alleges. They recruited two men, 20-year-old Juan Renteria Jr. and Nickolaus Shuster, 24, to get jobs at a printing plant that published Business Week. The two then provided Plotkin and Pajcin, 29, with the names of stocks favorably mentioned in the magazine's influential ''Inside Wall Street" column one day before the publication hit the street, according to the complaints. The printing plant fired Shuster but he still dressed in his uniform and entered the plant for three more months, continuing to steal advance information from the column, authorities say.

In June, in order to avoid detection, Pajcin began setting up accounts in other people's names, including his aunt, Sonja Anticevic, a 63-year-old retired seamstress in Croatia, the SEC says. Pajcin gave his aunt 30,000 Euros to open a trading account in her name and allow him to execute trades through the account.

Several days before the Adidas-Reebok disclosure last summer, Anticevic purchased a large amount of Reebok securities. After the deal was made public on Aug. 3, the stock jumped 30 percent and Anticevic netted a profit of more than $2 million. This was the trading that caught authorities' attention, the SEC said.

Meanwhile, Pajcin also set up an account for Monika Vujovic, a 23-year-old New York exotic dancer Plotkin and Pajcin met at ''a gentleman's club," according to the complaint. They would trade through her account and share proceeds from any illicit trading activity.

The two men also discussed trying to get exotic dancers to get insider information from investment banker customers, according to the SEC, but they never followed through with the idea.

Pajcin and Plotkin also made agreements with several other people who made trades using the inside information, according to the SEC. These people included Plotkin's father, Mikhail Plotkin; Henry Siegel; Elvis Santana; and Perica Lopandic, the SEC said.

Lopandic, a German national, in turn allegedly passed the information to other people in Europe, including Zoran Sormaz and Ilija Borac, both of Croatia, who are also named in the SEC's complaint.

After the SEC filed its initial complaint in August, Plotkin and Pajcin destroyed laptop computers on which they had stored information relating to the schemes as well as cell phones they used for their insider trading, the complaint said.

Soon after, Pajcin fled to the Dominican Republic. He returned for a deposition and -- after initially giving false testimony and denying any involvement with insider trading -- began cooperating with the investigation, according to federal authorities.

Plotkin faces a maximum penalty of 70 years in prison, Shpigelman a maximum of 55 years, and Renteria, the printing plant worker, a maximum of 15 years.

Sam P. Israel, a lawyer for Siegel, said, ''My client didn't have any involvement. He just made a purchase based upon the advice of the principal defendant without having any knowledge of any wrongdoing whatsoever."

Attorneys for the other defendants could not be reached for comment. In a statement, Merrill Lynch said, ''These allegations, if true, represent a serious breach of trust and violation of Merrill Lynch's fundamental principles. We do not tolerate or condone insider trading." A spokesman for Goldman Sachs said: ''We have fully cooperated with the authorities and their investigation."

Mary Skafidas, a spokeswoman for Business Week, said the company has ''taken significant steps to ensure the integrity and privacy of our stories until the magazine is published and released to the public," including requiring its printers to maintain strict security practices, requiring annual written verification of adherence to those practices, and conducting site inspections at each of its printing locations.

This isn't the first time inside trades have been made with information from the ''Inside Wall Street" column, according to the SEC. In the late 1980s, for instance, a plant worker also made trades based on advance information from the magazine.

Jenn Abelson can be reached at abelson@globe.com; Sacha Pfeiffer at pfeiffer@globe.com.