Four men accused of insider trading split profits of almost £1 million ($1.4 million) from a series of trades on Legal and General stock as the financial crisis took hold in 2009, prosecutors told a London court.
Mark Ellison, a lawyer for the prosecution, told a jury that the four defendants in the Tabernula case conspired to use information obtained by a former Deutsche Bank managing director on a client — Legal & General, an insurance company.
Ellison said Martyn Dodgson, who worked at Deutsche Bank in 2008 and 2009 and was in communication with L&G, also spoke several times to Andrew Hind, an accountant not employed at Deutsche.
Hind then allegedly communicated with Benjamin Anderson, a independent day trader, and Iraj Parvizi, a former director at Aria Capital. They made a profit short-selling Legal & General stock between February 9 and February 16, 2009, prosecutors claim.
Short-sellers make money when stocks fall. The practice involves borrowing a stock and selling it, with the aim of buying it back at a discount at a later date and pocketing the difference.
Anderson and Parvizi gave Hind £210,000 when the position was closed out, £105,000 of which was paid to Dodgson, Ellison claims.
The court heard how Legal & General bought a £1 billion stake in a collateralized debt obligation (CDO) in 2008 from Deutsche Bank. A CDO is a portfolio of loans that pays the owner a regular income. In the deal, L&G would receive a stream of payments based on the interest from the loans, while Deutsche would retain the principal asset of the underlying loans, and bear the risk of the value of those loans changing.
Deutsche Bank also “insisted on a side-agreement,” Ellision said, that required L&G to pay cash to the bank if the face value of the investment — being held at Deutsche — decreased in value.
As Lehman Brothers fell and the financial crisis got worse in the final months of 2008, the market value of L&G’s CDO collapsed, leaving the insurer owing £155 million to Deutsche Bank, based on the side agreement.
L&G attempted to renegotiate the terms in January 2009. Deutsche Bank initially agreed, but demanded an £18 million fee at the last minute.
Andrew Palmer, the former chief financial officer of L&G, had an “existing relationship” with Dodgson, according to Ellison, and complained to him about the deal.
“All your efforts to build bridges with L&G have been seriously damaged by the people looking after our CDOs” Palmer said in an email to Dodgson in January 2009. “We were livid,” Palmer said.
In the following weeks, Dodgson obtained more information regarding L&G’s predicament, writing in an email to a colleague that, were the market to hear about how badly L&G’s CDO investment was doing, “it could take 10% off the [share] price, perhaps more.” Then, in February, Dodgson was involved in another internal Deutsche email chain that said: “This looks like turning into a horror show.”
Ellison then described how Dodgson and Hind set up meetings by text message, and subsequent phone calls between Hind, Parvizi and Anderson.
Parvizi and Anderson began shorting L&G stock on February 9, when the stock was worth around 62 pence. By the time they closed out their position on February 16, the stock was worth less than 45 pence.
“Information relating to the CDO had not been made public prior to the sell position being built up on February 9th,” Ellison said. “It was price sensitive information that clearly Mr. Dodgson was informed of and led him to take a share of the trading done by Mr. Hinde through Mr. Anderson and Mr. Parvizi,” Ellison said.
L&G is just one stock at the heart of the UK’s biggest-ever insider trading case. Trades on five other stocks, including Scottish & Newcastle and Sky, were also under scrutiny in the investigation led by the Financial Conduct Authority.
The court case is set to last at least 12 weeks at Southwark Crown Court in London.
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