Morgan Stanley Wealth Management has recovered more than $3 million in bonuses it paid to Vladimir Eydelman, a former broker who was accused of taking part in an insider trading scheme that involved a tipster chewing up stock tips under the iconic clock in Grand Central Terminal.
An arbitration panel with the Financial Industry Regulatory Authority Inc. ordered Mr. Eydelman to repay the firm $2.9 million plus interest after Morgan Stanley filed a claim in April against him for breach of three promissory notes. Mr. Eydelman was fired in March after the Securities and Exchange Commission accused him of an insider trading scheme that allegedly netted more than $5.6 million in illicit profits over a four-year period.
Promissory notes are commonly used by Morgan Stanley and other larger brokerage firms as recruiting incentives, and usually are offered in the form of an upfront loan that averages 150% or more of the annual revenue for a top broker. Mr. Eydelman owed $2.3 million on one of the notes and more than $300,000 on two others, according to the award. The notes could also be tied to deferred compensation Mr. Eydelman received in exchange for performance at the firm.
The terms of the notes generally require that the broker remain at the firm and not leave or get fired for a certain number of years, while meeting performance requirements, in order for the loan to be forgiven.
Mr. Eydelman's allegedly illegal trades likely sweetened the bonus he was paid to move over to Morgan Stanley from Oppenheimer & Co. Inc. in 2012, three years after the alleged scheme began, according to Marc Dobin, a securities and arbitration lawyer with an eponymous practice.
The SEC said Mr. Eydelman received “substantial commissions” for the trades in about 50 accounts, in addition to his own accounts and those of his two alleged partners in the scheme.
“Fifty customer accounts were traded on this insider information, so he may have at least bumped up his production,” Mr. Dobin said. “The firm would have been within its rights to go after him, even for the commissions, if they wanted.”
Moreover, from trading in Brink's Home Security Holdings Inc., Mr. Eydelman allegedly made more than $773,000 for himself; his customers; the alleged tipster, Steven Metro; and a middleman, a Brooklyn mortgage broker, Frank Tamayo, who recently pleaded guilty for his role.
Mr. Tamayo said Mr. Metro stole data about mergers and acquisitions or tender offers from computers at Simpson Thacher & Bartlett in New York. Mr. Metro gave the data to Mr. Tamayo, who said he met Mr. Eydelman near the large clock in the main concourse at Grand Central Station. Mr. Tamayo said he wrote the relevant ticker symbols on pieces of paper or napkins and showed Mr. Eydelman.
He then folded up the note, “placed it into his mouth and chewed the paper or napkin to destroy it,” according to a charging document.
A Morgan Stanley spokeswoman, Christine Jockle, declined to comment on the case or whether any regulatory action or investigation was pending against the firm. Morgan Stanley was not named as a defendant in the SEC's initial complaint against Mr. Eydelman.
Wells Fargo Advisors last week was ordered to pay $5 million over allegations it failed to properly detect a former broker's insider trading in shares of Burger King in 2010.
Brokers have been known to move in some cases when they become concerned about being caught, according to Mr. Dobin.
“It's not unusual for a broker to change firms when he thinks the gravy train is about to come to an end,” he said. “He leaves and takes a big check and says, 'I'll deal with the consequences afterwards, but at least I'll get the $3 million.'”
John Leonard, an attorney who was representing Mr. Eydelman against the SEC, declined to comment on the matter. A criminal case from the U.S. Attorney's Office for the District of New Jersey is still pending in federal court.
Mr. Eydelman could not be reached directly. He represented himself in the arbitration and did not file a statement in response to Morgan Stanley's claims, according to the award, which was dated Sept. 22 and posted to Finra's website Monday.