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Online Insider Trading Bust

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CBS
Nineteen people have been charged with illegally pocketing more than $8 million from secrets traded in online chat rooms, an insider trading case prosecutors say was an Internet first.

Two suspects have already pled guilty to federal charges of conspiracy, and over a dozen additional suspects have been arrested, authorities said.

Richard Walker, director of enforcement for the Securities and Exchange Commission, called the case "one of the most elaborate insider trading schemes in history."

The Internet figured so prominently in the scheme that U.S. Attorney Mary Jo White and the SEC noted that the case was the first ever alleging that the Internet was used to pass inside information.

FBI Assistant Director Lewis Schiliro said the defendants made the mistake of thinking they were anonymous in cyberspace.

"Those who rely on the myth of anonymity in using the Internet to pursue their criminal activity should understand that law enforcement has the ability to pierce the veil they hide behind," he said.

John Freeman, 34, of New York and James Cooper of Bowling Green, Ky., pleaded guilty to conspiracy in connection with insider trading charges.

"I met an individual over the Internet who ... had access to information. I took the information over a period of about 2@1/2 years and traded on that information for profit," Cooper said Tuesday.

At the core of the scheme, authorities said, was Freeman, a part-time computer graphics worker who allegedly stole information from two investment banks, Goldman Sachs & Co. and Credit Suisse First Boston, for whom he was working.

The criminal complaint accused Freeman of starting the scheme in mid-1997 after he lost money investing in a helmet manufacturer.

Freeman went online and found other disgruntled investors of the company in America Online chat rooms, prosecutors said. Before long, he was speaking with Cooper, an insurance agent, and Benton Erskine, a West Virginia day trader and computer supply store owner.

Freeman allegedly offered to pass inside information on clients of Goldman Sachs and Credit Suisse First Boston to Cooper and Erskine in exchange for a percentage of any profits they earned by acting on it.

During the next two-and-a-half years, Freeman passed inside information to Cooper and Erskine, communicating almost solely through online chats and instant messages, authorities said.

Prosecutors said Freeman earned between $70,000 and $100,000 in kickbacks while Cooper made $227,000 and Erskine $273,000.

Sentencing for Freeman and Cooper was set for Sept. 15, when the defendants could face up to 10 years in prison and $1 million in fines.

Authorities said 15 of the defendants had been arrested. Freeman declined to comment after entering his guilty plea.

By Larry Neumeister