Former Portfolio Manager for New York Hedge Fund Pleads Guilty to Multi-Million Dollar Insider Trading Conspiracy
ATLANTA – Mark Megalli pleaded guilty on Thursday to participating in a multi-million dollar insider trading conspiracy involving Carter’s, Inc. stock.
“This conviction marks a tragic fall for a defendant who worked at top investment, law, and consulting firms and rose to a prominent position at a multi-billion dollar New York hedge fund,” said United States Attorney Sally Quillian Yates. “But, there is one set of rules, and they apply to everyone. Rigging the system by trading on inside information undermines the public’s confidence in our financial system – and it’s a violation of the law.”
Mark F. Giuliano, Special Agent in Charge, FBI Atlanta Field Office, stated: “Laws are in place to regulate investment firms and individual investors and to ensure that a level playing field is maintained for those engaging our financial markets. This case illustrates clearly why those laws are in place and the hard consequences for those that choose to disregard them. Today’s guilty plea of Mr. Megalli will begin the process of holding him accountable from his criminal actions involving Carter’s, Inc. stock trades.”
According to United States Attorney Yates, the charges and other information presented in court: Megalli was employed as the portfolio manager for the consumer sector at Level Global Investors, LP (“Level Global”), a multi-billion dollar hedge fund headquartered in New York, NY, between August 2009 and its dissolution in February 2011. Megalli was responsible for managing and making trading decisions on behalf of a multi-million dollar portfolio of consumer industry stocks. Megalli had previously obtained undergraduate and JD/MBA degrees from one of the country’s top universities, passed the New York bar and the Chartered Financial Analyst (“CFA”) examinations, and worked at top investment, consulting, and law firms.
In September 2009, Megalli caused Level Global to hire Eric M. Martin as a paid consultant to Level Global to advise Megalli on consumer sector stocks for $25,000 per quarter. Until March 2009, Martin had been employed as the Vice President of Investor Relations for Atlanta-based Carter’s, Inc., the major children’s clothing company. Carter’s is a public company registered with the U.S. Securities & Exchange Commission (“SEC”) and its common stock is listed on the New York Stock Exchange.
Beginning in mid-September 2009 and continuing through the end of July 2010, Martin provided Megalli with inside information about Carter’s quarterly and annual financial results and other events in advance of the public announcement of the information. Megalli in turn caused Level Global to execute transactions in Carter’s securities between September 2009 and July 2010, based in whole or in part on the inside information received from Martin, earning illegal profits and illegally avoiding losses for Level Global. As part of his guilty plea, Megalli agreed that he is responsible for illegal insider trading gains and losses avoided for Level Global between $2.5 million and $7 million.
Martin obtained the inside information from a Carter’s executive, Richard T. Posey, who was employed as the company’s Vice President of Operations at that time. Martin also provided inside information to several other individuals and investment firms for which he had been hired as an outside consultant, directly and through an expert networking firm.
By way of example, Posey tipped Martin, and Martin tipped Megalli and others, in advance of Carter’s October 27, 2009 announcement that it was conducting an internal investigation into accounting irregularities and would be delaying its earnings release for the third quarter of 2009. After business hours on October 22, 2009, Posey and Martin had an in-person meeting during which Posey disclosed inside information about the investigation and earnings delay to Martin. As soon as the meeting ended, Martin placed a telephone call to a former Wall Street equity research analyst previously identified as “Cooperator Number 1,” during which Martin passed on the information that he had received from Posey. Martin asked Cooperator Number 1 to wait to trade on the information until Martin could warn his clients. The next morning, at 9:42 a.m. on Friday, October 23, 2009, Martin sold his entire position in Carter’s stock, over 35,000 shares valued at approximately $1 million. Later that morning, at 11:23 a.m., Martin placed a 7-minute call to Megalli, during which Martin disclosed inside information about the investigation to Megalli. Less than two minutes into the call, Megalli sent an instant message to Level Global’s head of trading in which Megalli ordered the liquidation of Level Global’s entire position in Carter’s stock, 300,000 shares valued at nearly $9 million.
The next trading day, Monday, October 26th, Cooperator Number 1 placed a 12-minute call to Martin. Immediately after the call ended, Cooperator Number 1 sold his entire position in Carter’s stock -- 15,000 shares valued at over $400,000 -- and bought November 30th put options, thereby betting on Carter’s stock price to decline significantly. The next morning, Tuesday, October 27th, Carter’s shocked the market with the news of its internal investigation and earnings delay, and its stock price fell over 20% in one day. The internal investigation ultimately resulted in a multi-year financial restatement by Carter’s, criminal indictments of two of its former top executives for securities fraud and related offenses, and three SEC enforcement actions.
Megalli, 41, of New York, NY, pleaded guilty to one count of conspiracy to commit securities fraud. The charge to which he pleaded guilty carries a maximum sentence of five years in prison and a fine of up to $250,000. In determining the actual sentence, the Court will consider the United States Sentencing Guidelines, which are not binding but provide appropriate sentencing ranges for most offenders.
Megalli is the third individual to be convicted in a criminal investigation into insider trading in Carter’s stock, and the fifth person overall to be criminally charged in connection with the accounting fraud and insider trading investigations arising out of Carter’s October 27, 2009 earnings delay and multi-year financial restatement.
Martin, 43, of Roswell, Georgia, was indicted on November 7, 2012, for conspiracy, securities fraud, and wire fraud in connection with his participation in an insider trading conspiracy and for his own insider trading in Carter’s stock between 2005 and 2009, while Martin was still employed as Carter’s head of investor relations. The conspiracy charge alleged that Martin repeatedly provided inside information about Carter’s to Cooperator Number 1 ahead of the company’s earnings releases and other events between 2005 and 2009. This included tipping Cooperator Number 1 about Carter’s May 2005 acquisition of competitor Oshkosh B’Gosh before the news became public. Martin pleaded guilty to the conspiracy charge on December 8, 2012.
Posey, 48, of Duluth, Ga., was charged by Criminal Information and pleaded guilty to conspiracy to commit securities fraud on June 19, 2012. The conspiracy charge against Posey related to his disclosure of insider information to Martin ahead of quarterly and annual earnings releases and other events between early 2009 and July 2010, after Martin’s separation from Carter’s.
Sentencing for Megalli, Martin, and Posey has not yet been scheduled.
The case is being investigated by the Federal Bureau of Investigation.
Assistant United States Attorneys David M. Chaiken and Stephen H. McClain are prosecuting the case.
The Atlanta Regional Office of the SEC has conducted a separate investigation into potential civil violations of the U.S. securities laws relating to insider trading in Carter’s stock. In connection with its investigation, the SEC has filed civil enforcement actions against multiple individuals.
Today’s announcement is part of efforts underway by President Obama’s Financial Fraud Enforcement Task Force (FFETF) which was created in November 2009 to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices and state and local partners, it’s the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets and conducting outreach to the public, victims, financial institutions and other organizations. Over the past three fiscal years, the Justice Department has filed more than 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,700 mortgage fraud defendants. For more information on the task force, visit www.stopfraud.gov.
For further information please contact the U.S. Attorney’s Public Affairs Office at USAGAN.PressEmails@usdoj.gov or (404) 581-6016. The Internet address for the home page for the U.S. Attorney’s Office for the Northern District of Georgia Atlanta Division is http://www.justice.gov/usao/gan/.