A Credit Suisse Securities USA LLC investment banker from Pakistan has been charged with conspiracy and securities fraud in connection with leaks of pending merger details, including TXU Corp.'s proposed buyout by a private-equity group, according to newly released court documents.
According to a criminal complaint, Hafiz Muhammad Zubair Naseem, a member of Credit Suisse's Global Energy Group in New York, has been charged with conspiracy and 25 counts of securities fraud. The scheme allegedly netted profits of more than $7.5 million.
Credit Suisse Securities is a unit of Credit Suisse Group.
Naseem, 37, was arrested by federal authorities late Thursday and will be presented before a magistrate judge on Friday, said Yusill Scribner, a spokeswoman for the U.S. attorney's office in Manhattan. He faces up to 20 years in prison on each securities fraud count.
A lawyer for Naseem declined to comment late Thursday because he had not yet been officially retained.
Prosecutors allege that Naseem, a Pakistani citizen, and others engaged in a scheme to make trades in nine public companies based on inside information from Credit Suisse about pending mergers and acquisitions between April 2006 and February 2007.
The transactions included Express Scripts Inc.'s failed bid for Caremark RX Inc. and the proposed buyout of TXU by a group led by Kohlberg Kravis Roberts & Co. and TPG Inc. Caremark was eventually sold to CVS Corp.
The U.S. Securities and Exchange Commission separately charged Naseem in a civil action Thursday.
Prosecutors claim Naseem regularly called an unnamed co-conspirator at home or on his cell phone with material nonpublic information about the proposed transactions. The co-conspirator would then execute dozens of transactions, including trades in an offshore account, based on that information.
The SEC has said in its court papers that Naseem shared details about the pending mergers and acquisitions with an unnamed Pakistani banker.
"This investigation isn't over," said Stephen Korotash, chief trial counsel in the SEC's Fort Worth, Texas, office. "We know there are others out there who think they've escaped detection. They're wrong. We're coming after them." The SEC charges were filed in federal court in Chicago.
Other companies in which Naseem's co-conspirator allegedly made improper trades include Northwestern Corp., Energy Partners Ltd., Veritas DGC Inc., Jacuzzi Brands Inc., Trammell Crow Co., Hydril and John H. Harland Co.
Credit Suisse was either engaged to advise the target company or its acquirer in each deal, according to court documents.
"We are shocked and extremely disappointed that an employee would violate not only our trust, but the trust of our clients," Credit Suisse said in a statement. "We immediately brought the activities of this employee to the attention of the relevant authorities and as the SEC has publicly stated, it 'is especially appreciative of the tremendous assistance provided by Credit Suisse' in identifying this individual.
"We continue to work closely with the authorities. The violation of our policies and procedures is not tolerated by Credit Suisse."
The most recent round of phone calls occurred in February, regulators allege, when Naseem placed several calls to the Pakistani banker in the weeks ahead of the Feb. 26 announcement that TXU had agreed to be purchased by a group led by Kohlberg Kravis Roberts & Co. and TPG Inc. The banker generated profits of about $5 million by trading on the inside information, the SEC alleged.
The Pakistani banker also provided information about some of the deals to high-profile financial executives in Pakistan, who in turn traded ahead of merger announcements, the SEC said. The SEC did not identify those executives.
The scope of the alleged insider trading came into focus as the SEC teamed up with Chicago Board Options Exchange and New York Stock Exchange regulators. Regulators originally started their investigation following reports of suspicious trading in TXU securities.
On Feb. 23, the Friday before the deal was announced, some 18,000 TXU call options, which give investors the right to buy the stock, changed hands. That was more than seven times the average daily volume for the rest of February and prompted regulators to investigate. The SEC found that some 6,700 of those TXU call options were purchased by the Pakistani banker after receiving a series of phone calls from Naseem.
Authorities in Guernsey, in the English Channel off the coast of France, have frozen the Pakistani banker's profits, Korotash said. To ensure that he would benefit personally, Naseem opened a brokerage account in Pakistan and granted trading authority over the account to the Pakistani banker, the SEC charged.
The SEC on Thursday also charged Francisco Javier Garcia with making profits of about $150,500 from trades in at least 260 TXU call options based on inside information about the buyout. The SEC has already charged two U.K. residents, Sunil and Seema Sehgal, with making a combined $272,000 in profits after trading on inside information about the TXU deal.