Alleged insider trading involves Santa Ana firm

Federal investigators in California are looking into a Goldman Sachs banker who allegedly passed along privileged information regarding the buyout of a Santa Ana company.

The new investigation ties directly into a much larger case involving Galleon Group, a multibillion-dollar hedge fund. Raj Rajaratnam, the fund manager, received 11 years in federal prison for insider trading, the harshest penalty to date for that kind of crime. The day he was arrested, there was a massive sell-off of the hedge fund, and the firm folded within a month.

Recently, the investigation implicates that a senior Goldman Sachs banker leaked information on a merger between Advanced Medical Optics (AMO) in Santa Ana and Abbott Laboratories, an international medical equipment and drug company.

As a standalone company, AMO held a majority of the market share for LASIK eye surgery technology.

When Abbott bought AMO in early 2009, it changed its name to Abbott Medical Optics and became a subsidiary division of Abbott.

Last month, Abbott announced that it was approved by the Food and Drug Administration for a laser eye procedure to treat cataracts. The new technology was developed Abbott’s division in Santa Ana.

Although the Goldman inquiry stems from only one banker within the firm, the information that was swapped could have been directly acquired by access to Goldman and their clients.

Goldman, who advises many large companies on mergers, had a top member from their San Francisco office advising Advanced Medical Optics in its Santa Ana office in regards to their merger with Abbott, according to a recent Wall Street Journal report.

In January 2009, according to the report, The Galleon Bankers allegedly using Goldman’s leaked information, bought 226,000 shares of Advanced Medical Optics three days ahead of the merger, then sold those shares for 143 percent profit the day it was announced.

Advanced Medical Optics ceased public trading later in the month after all the shares became Abbott’s.

According to data from TheStreet.com, AMO’s final posted 52-week price range was between $2.88 and $24.90, and their stock had jumped over 230 percent in its final month of existence.

The investigation has far-reaching implications for Goldman Sachs, one of the world’s largest investment banks. AMO is the latest company mentioned in the insider trading ring in which several convictions have already been dealt.

A spokesman for Goldman Sachs declined to comment on the matter.

Investigators are looking into whether forward information on the AMO deal reached Rajaratnam. Rajaratnam pleaded guilty after prosecutors presented tapes of wiretaps showing him yielding tips from insiders at Google, Intel, Hilton and Goldman Sachs, among others.

Rajat Gupta, a former board member at Goldman Sachs, is scheduled to start a criminal trial next month for his alleged involvement in the case. He faces federal charges of securities fraud and conspiracy.

In a publicized report, the Securities and Exchange Commission postulates “more than $25 million in illicit profits and/or loss avoidance” in regards to this case. This does not take into account, however, new names of bankers or companies that have emerged in the investigation.

Kevin Callahan, an SEC spokesman, said the Galleon case is not over. He said the SEC pursued a civil fraud case and won, and the U.S. attorney’s office tackled the criminal case for Rajaratnam.

“It’s still ongoing — we still have cases open, the Gupta case is still in litigation,” he said.

Callahan said the SEC can’t confirm or deny the existence of any current investigation. He said that in the Rajaratnam case, the SEC worked with the U.S. Attorney in securing the conviction.

“We brought the civil case, and (Rajaratnam) had to pay $91 million in the end,” Callahan said. “The total amount of monetary sanctions for both the civil and criminal cases are more than $156.6 million.”

According to several publications, the name of the Goldman banker involved with the AMO deal is Michael Korenberg, a managing partner in the San Francisco office. According to the Wall Street Journal, he is the highest-ranking Goldman name to be mentioned in the case.

John Hueston is Korenberg’s personal lawyer from Irell and Manella LP in California. He said the allegations are baseless.

“There is no case against Michael Korenberg, and he has nothing to do with the case. It’s a red herring,” he said.

Hueston was a lead prosecutor for the Department of Justice in the Enron criminal trial, one of the biggest insider trading cases in history. He successfully won convictions against executives Ken Lay and Jeff Skilling.

According to  a report by Reuters, Korenberg’s name first came up in the investigation during a hearing in the Gupta case. Hueston says he thinks the Gupta defense team was leaking the names of other bankers in order to pass blame away from Gupta.

Hueston declined to comment on the Galleon AMO transaction.

Days after the buyout, the original AMO shareholders sued the company over the merger.

A lawsuit was filed against the AMO board by shareholders on behalf of all others, claiming that Abbott had bought off all the shares of the company at a “discount,” and that investors were played.

“As far as I know, it’s not resolved … It isn’t dismissed and it’s not settled, so it’s still an ongoing case against the board,” said Trevor Allen, general manager of the Shareholders Foundation. “They said, ‘Look, this is an unfair price and you should have never accepted it,’ so they still have to resolve the case against the (AMO) board.”

Allen said the case was filed in Orange County Superior Court.

O.C. Court filings show two open civil cases regarding stocks that were filed by two separate plaintiffs in January 2009 against Advanced Medical Optics. The court lists Abbott and Advanced Medical as defendants.

This is not the only large profile case involving Goldman Sachs executives. Jon Corzine, the former CEO of Goldman and former governor and senator of New Jersey, was called upon Congress to testify several months ago about the implosion of MF Global, a financial company he headed.

A few billion in customer funds simply went “missing” and the firm went bankrupt within a matter of days.

Corzine said at a hearing in December that he did not know where the money was.

Nomi Prins is a former managing director at Goldman Sachs. She is now authoring a book on the 1929 stock crash, and has been interviewed by PBS, Fox News and Democracy Now! about the 2008 financial crisis. She said in an email that she’s not fully aware of the current Galleon case, but that these things happen on Wall Street.

“It does not surprise me that these allegations have arisen. There’s such intense pressure in the banking world to both make money and ‘get ahead’ — individually and from a corporate standpoint — that people in positions of possessing pertinent information could succumb to the lure of providing it to their most important relationships,” she said.

“Goldman, meanwhile, has the highest ratio of notional derivatives to assets, by far, of any bank holding company. That kind of inherent systemic risk should not be tolerated in a sensible regulatory framework,” Prins added.

Lloyd Blankfein, CEO of Goldman, told a hearing in Washington regarding the 2008 financial crisis that the derivatives ended up working better than he expected.

Blankfein is expected to be a star witness in the Gupta trial next month.

About ehernandez

Liz is a chic art and communications major and super-courteous account executive. Working for the Daily Titan since summer of 2007, she pretty much knows her way around advertising.