A phone call to the New York Stock Exchange from an investor worried that he'd just been duped helped spark a chain of events early last week that led U.S. authorities to file fraud charges against a Kuwaiti financier, who was later found dead in his home.
Early on July 20, an individual investor called to tell regulators at the exchange he had purchased shares of Harman International Industries Inc on news reports it was the target of a takeover -- reports on some smaller websites that the caller was starting to question.
NYSE Regulation, the oversight body that provided this account, said the tip reinforced suspicions about trading activity that in-house surveillance tools were picking up related to Harman shares, which jumped at least 33 percent before markets opened that Monday morning.
NYSE's market police then scoured news on the listed company, and called it when the source of the takeover report was not immediately clear. The company knew nothing about such reports, and, just before U.S. markets opened, issued a public statement saying so.
With financial markets digesting the statement -- and mainstream media starting to connect the dots to unusual faxes some outlets received on the weekend -- NYSE Regulation contacted the U.S. Securities and Exchange Commission to help it identify where the market-moving news came from.
In an interview, NYSE Regulation said it then checked the tape for recent trading in Harman shares, and quickly identified a short list of brokerages that made large purchases, and sold the shares at handsome profits on Monday.
This was a good old rumor manipulation case, said John Malitzis, executive vice president of market surveillance at the arms-length oversight body. Somebody issues an unsubstantiated rumor ... and does so in order to benefit from the impact that that rumor will have on the stock price.
Staff did some quick and dirty detective work, closely with the Commission's enforcement staff, to address the potential fraud here, he told Reuters.
Three days later, the SEC sued Kuwait-based Hazem Khalid Al-Braikan for reaping more than $5 million of suspicious profits from trading around the fraudulent takeover reports for Harman, as well as Textron Inc, which was the subject of phony bid offers in April.
Three days after that, Al-Braikan, 37, was found dead in an apparent suicide.
'HIGH PRIORITY' FOREIGN INVESTOR
Rumors are a hot button issue for both the SEC and self regulatory organizations, or SROs, such as NYSE Regulation, Malitzis said. Amplifying this particular case was the revelation that the investor in question was outside of the United States.
Whenever we see a foreign account, this is a high priority for us and the SEC, Malitzis said, adding the SEC is highly sensitive to possible foreign fraud. That's a risk ... that if we don't act quickly we can't freeze the assets, he said.
The SEC has the time between when the trade occurs and, generally, settlement. Once the trade settles the cash is in the account and 'poof' it's gone outside the United States.
Twenty-four hours after receiving the phone call, regulators -- the SEC, NYSE Regulation, and the Chicago Board Options Exchange, which now oversees U.S. options markets -- identified Al-Braikan as the holder of the brokerage accounts, some of which also bought call options.
Regulators worked with the brokerages to identify the investor, Malitzis said. The SEC later obtained a court order to freeze the assets in Al-Braikan's U.S. accounts, and three related foreign entities.
In its legal filing, the SEC named the brokerages connected to Al-Braikan as Bank of New York Mellon Corp's Pershing unit, Citigroup Inc's Citigroup Global Markets, JPMorgan Chase & Co, and custodian State Street Corp's State Street Bank.
It is unclear what role the brokerages, which have a general obligation to watch for manipulation, played in identifying the suspicious trading. A Pershing spokesman said this week it is responding to requests from regulators.
Aleksandra Radakovic, vice president of market surveillance, whose team led NYSE Regulation's Harman probe, said in an interview we didn't have the luxury of time where we would in the normal course of business send letters (to brokerages) requesting information on an automated basis.
It was basically old fashion phone work and detective work, she said.
(Editing by Steve Orlofsky)