Just after obtaining the information—and right before an earnings release—Oleksandr Dorozhko purchased 630 put options on IMS’ common stock, according to Reuters. The next day IMS’ stock dropped by 28 percent and Dorozhko earned $287,346 after selling the options.

The SEC filed a complaint against Dorozhko in late 2007, but on January 7, 2008, the District Court denied the SEC’s motion for a preliminary injunction, according to a statement by the SEC. The Court concluded that “Dorozhko’s alleged ’stealing and trading’ or ‘hacking and trading’ does not amount to a violation … because Dorozhko did not breach any fiduciary or similar duty ‘in connection with’ the purchase or sale of a security.”

Upon appeal, the U.S. Court of Appeals for the Second Circuit thought otherwise, saying “that nothing in the U.S. Supreme Court’s jurisprudence or prior decisions of our Court expressly imposes a fiduciary-duty requirement on the ordinary meaning of ‘deceptive’ where the alleged fraud is an affirmative misrepresentation rather than a nondisclosure.”

After the case was sent back to the District Court, the judge ordered the $580,000 penalty.

Odyssey Marine Exploration immediately passed out confidentiality agreements to its employees containing two simple stipulations: 1) Don’t tell anyone about the shipwreck, code named “Black Swan,” and 2) Don’t trade company stock until the discovery was announced. Well, Tapanes had his own idea: mutiny and take some of the profits for himself.

This story started out with a lot of promise, but what could have been a great tale of daring-do and high sea escapades ended up being really lame. He didn’t bury a large amount of the treasure to be found later, he didn’t try sneaking it out of the boat. Instead, he courageously logged into his E*Trade account and unloaded $150,000 of his savings to buy 42,000 shares of the company. That was just before Odyssey Marine Exploration, the otherwise obscure company, announced the find and enjoyed watching its stock value jump by 80%.

Blatant insider trading is a very easy criminal activity to discover. A computer program immediately flags any unusual stock movement and alerts the authorities. The SEC very quickly found out that Tapanes worked for the company and began an investigation. Tapanes settled the issue outside of court and agreed to pay a fine of just over $215,000. He could still possibly face lawsuits from other federal agencies, according to one report on the story, but no other charges have been brought.

The pleas come in a year when prosecutors have ramped up action against insider trading. In an unrelated case, a Morgan Stanley compliance officer and her husband pleaded guilty to insider trading last May as well.

Read the story as presented in the New York Times.

Commentary: Wow – $20,000. Better dig deep to pay that one after selling $3.4 million in securities. That would hardly cover the administrative costs of this investigation. Hardly a deterrent to others.

Now the FBI is involved, and so are allegations of violations of the Judicial Code of Conduct.

Without getting into the sordid details, recently filed court documents show Colorado’s top federal judge, Judge Edward Nottingham, was too drunk to remember how he spent more than $3,000 at a strip club in two consecutive days. He also reportedly perused some very inappropriate Internet sites at work.

Judge Nottingham, who is is going through a divorce currently after his wife found the credit card charges from the Diamond Cabaret, recently presided over the insider trading trial of ex-Qwest Communications CEO Joseph Nacchio.

When asked in divorce court how he could have spent so much money, Judge Nottingham testified he could not recall, explaining, “I had had a lot to drink … and I don’t remember.”

The FBI has now gotten involved, looking into possible improper use of his federal computer.

Some are pointing out that Judge Nottingham appears to have violated the Judicial Code of Conduct and thereby may have to step aside. According to the code…

“Public confidence in the judiciary is eroded by irresponsible or improper conduct by judges. A judge must avoid all impropriety and appearance of impropriety. A judge must expect to be the subject of constant public scrutiny. A judge must therefore accept restrictions that might be viewed as burdensome by the ordinary citizen and should do so freely and willingly. The prohibition against behaving with impropriety or the appearance of impropriety applies to both the professional and personal conduct of a judge.”

Just a few weeks ago, Nottingham was presiding over the sentencing of Nacchio, in which he pointed out at great length how no one was above the law: “If it is perceived that there is one law for the rich and one law for everyone else, the law ultimately falls into disrespect.”

This is an unfortunate turn of events for the judge, who had been profiled by the Rocky Mountain News just a few months earlier as a “no nonsense” straight shooter.

Commentary: For those inquiring minds that need to know more…. go check out one of our favorite blogs, www.loweringthebar.net, where they try and decipher exactly how the judge could have blown $3,000 in two days and decide that it must have been roughly 20 hours of non-stop lap dances.

Mr. Reyes had been accused of intentionally changing the grant dates for hundreds of stock option awards without disclosing the move to investors. Sentencing is scheduled for Nov. 21st and Reyes could face up to 20 years in prison and millions of dollars in fines.

The conviction is expected to embolden prosecutors to pursue similar cases.

Back in May, Brocade agreed to pay $7 million to settle civil fraud charges in connection with backdating. Reyes’ alleged accomplice and Brocade’s former head of HR, Stephanie Jensen, is still awaiting trial.

Commentary:The conviction was not surprising to us. You can read the original SEC compliant here. A review of the document will show that the SEC had a very strong case and that Mr. Reyes was pretty much a one-man compensation committee. Now the only question left is how much prison time he will get (unlike Take-Two’s CEO, who got off with probation, we are predicting actual prison time in this case). We are sure that prosecutors are reinvigorated.

Mr. Aguirre had been leading the SEC investigation into possible illegal insider trading by large hedge fund Pequot Capital that is run by Arthur J. Samberg.

Aguirre was fired after complaining that his superiors were interfering by improperly narrowing the scope of the investigation and preventing him from interviewing Morgan Stanley’s CEO John Mack (who allegedly could have been the source for some of the “inside information”).

Now, two years later, the congressional report agrees that the SEC bungled the investigation in a major way and that this resulted in a lost opportunity to broadly crack down on hedge fund insider trading. Here is an excerpt of the report:

“The investigation of Pequot Capital Management could have been an ideal opportunity for the S.E.C. to develop expertise and visibility into the operations of a major hedge fund while deterring institutional insider trading and market manipulation through vigorous enforcement…”

Pequot Capital originally came under SEC scrutiny in 2004 after stock exchange officials found up to 25 sets of highly suspicious trades made by the hedge fund prior to major announcements. The SEC closed the Pequot inquiry last fall without taking action against the fund or its management.

Commentary: To us, it has seemed that there has been something fishy in this case since the get-go. That being said, Morgan Stanley CEO John Mack is surely far too smart to be passing along privileged information to a hedge for insider trading purposes. Yet, it’s rare that an experienced and fairly senior government official risk everything like this in “whistleblowing” unless there is real merit to the case. The Congressional investigation report appears to agree.

Records show that Pequot MUST have been improperly trading on inside information and that the SEC lost a tremendous opportunity to prove and prosecute. Unfortunately, nothing will likely come out it at this point in time – which makes our regulatory system (in this case) look about as fair and just as something designed by Putin.

On a lighter note, wondering what the picture is? That’s an illustration of a Pequot village from the mid-1600s (remember: Pequot is an Native American tribe). Know what the Pequot tribe does today? They are the wealthiest tribe in the nation and their holdings include the popular Foxwoods Hotel and Casino in Mystic CT. Perhaps Samberg had ‘gambling’ on his mind when decide what to name his hedge fund. So far his gaming seems to be working.

Judge Edward Nottingham also ordered the ex-CEO, Joseph Nacchio, to pay a $19 million fine and forfeit $52 million in assets he gained from illegal stock sales.

In administering his sentence the judge summed it all up by saying, “The crimes the defendant has been found guilty of are crimes of overarching greed.”

Commentary: Chalk up another win to the Feds for this sentence. This is definitely a longer sentence than many expected (as the maximum that he could have received, seven years and three months, was only slightly more than he actually got).

According to media reports and court filings

Lenowitz was among 13 people charged March 1st in separate insider trading indictments against employees at UBS, Morgan Stanley and Bear Stearns. As part of the

Lenowitz traded on information such as when he was tipped that UBS would lower its stock rating on Tenet Healthcare in Oct. 2002.

Commentary: According to the SEC, which sued 14 defendants in March, the alleged scheme stretched over five years, included hundreds of tips and produced more than $15 million in illegal profits.

Bringing reference to shades of the 80’s, Linda Thomsen, the SEC’s enforcement chief, described the trading scandal as “one of the most pervasive Wall Street insider trading cases since the days of Ivan Boesky and Dennis Levine.”

According to the Ontario Securities Commission, Shane Bashir Shuman, who worked in the IT department of MDS Sciex, improperly used knowledge of a pending takeover offer for Molecular Devices Corporation (based in California).

Susman learned about the takeover when he was asked by Sciex’s communications officer to help retrieve some documents after her computer crashed on January 23. This executive asked Shuman to search for any documents which included the code name of the transaction (”Monument”), but told him that the information in the emails was so sensitive that he should not view the document once it was recovered.

Six days later, the deal was announced and the stock of MDCC soared by 50%. This netted Shuman nearly $1 million on the 12,000 shares and 900 option contracts he had just purchased through an E-Trade account.

Commentary: Curiosity killed the cat… or at least is likely to put him in jail. Perhaps a simple training program in illegal insider trading could have prevented all of this.

The Commodity Futures Trading Commision filed a civil complaint against Brian Hunter, the former chief energy trader of the company, as well as Amaranth. Hunter earned over $100 million in 2005.

Read the full story.

Commentary: There is no planned jail time if Hunter is convicted. A monetary punishment may not be sufficient for him after his reported earnings of over $100 million.

Donlan pleaded guilty to one count of wire fraud and one count of tax evasion (he evaded paying some $2.2 million in taxes from the scam). Donlan and his wife, whose social security number was also used to set up the brokerage account, are also the subject of a pending civil suit that was filed in May by Wireless Facilities and the SEC.

At issue was that Mr. Pinera, a Board of Director member of the company, bought the airline’s stock just a few days before a strong earnings report in July of last year. Mr Pinera had advance knowledge of the report – and took advantage of this inside knowledge to profit from his sudden 3 million share purchase.

Two other stockholders in the airline also were fined. Pinera indicated he would not appeal the fine, which he called ‘politically motivated’.

Commentary: Another example of the “globalization” of insider trading.

According to the analysts, the warning they received from the Office Depot Investor Relations Department re-emphasized earlier alerts about the current business environment and soft spending by businesses. They also mentioned that the calls did not provide specific outlooks for sales and profits.

While lawyers say that the disclosure may go against the SEC’s Regulation FD, which is aimed at preventing selective disclosure of material information to analysts, Office Depot insiders insist that nothing material was disclosed. Even so, the hint was enough for most of the company’s analysts to cut their earnings estimates and for options traders to take positions that would pay off if Office Depot’s stock fell.

Commentary: This is nearly unbelievable that a company would do this in today’s environment. It has garnered surprisingly little press. The SEC appears to be sleeping through it too. And Office Depot is claiming that their calls with the analysts were routine? Then how do you explain that the stock dropped over 8% from $34.46 at close of business on June 21st (the day before they first started ‘tipping’ analysts) down to $31.81 on June 28th on stock trading volume that was nearly 4 TIMES AS HIGH AS NORMAL? This wiped more than $700 million off the market capitalization of the company.

Then the company finally announced in a June 29th filing with the SEC that it expected soft earnings. The stock dropped another couple percentage points after the announcement (when the rest of the world got the news), but that was only a fraction of the overall loss that had already occurred in the prior week.

As Dow Jones reported:

Traders booked massive profits in positions on Hilton Hotels Corp. as the stock surged 26% after the company said Blackstone Group will buy it for $47.50 a share.

The fact that many traders were taking profits in positions added as recently as Tuesday, hours before the deal was announced, had some crying foul. “This one stinks of insider trading,” said Steve Sosnick, equity-risk manager at the Timber Hill LLC market-making unit of Interactive Brokers Group.

Before the deal was announced, there was heavy trading in call options and a run-up in Hilton’s stock price, and many traders say that makes it another example of a private-equity buyout that was preceded by suspect trading in the options market. These traders are frustrated by their perception that this spree is going largely ignored by regulators.

It’s like a rash of burglaries in your neighborhood and you can’t get any information and the cops aren’t doing anything,” said Matt Calder, senior trader at Toro Trading LLC, an option market maker.

You don’t have a huge amount of parties who should’ve known about this deal,” Mr. Sosnick said of the Hilton buyout. “Perhaps this is one where enforcement can arise.”

Commentary: Okay, the booking photo of Paris is totally gratuitous but we figured it was one more way to get the SEC’s attention on this “no-brainer” (now we have two reasons to reference the Paris’ photo). Insider trading is running amok – and this is a perfect example. If the SEC snoozes through this one it will be a real shame.

This settlement comes after a $30 million payout by the company to the SEC to settle allegations that it had overstated revenues from a deal with AOL’s Time Warner, in addition to using accounting maneuvers to make earnings seem more consistent from 2000 to 2003. With the previous settlement, the company had neither admitted nor denied wrongdoing.

Commentary: Seems like a long jail sentence if Gordon is only emerging now. Looking back at Gordon in the original, Michael Douglas looks so incredibly young – yet still evil. Makes us feel old. All the same we look forward to the sequel in the hedge fund era.

The company finds itself paving the way for a slew of others, as it is the first to pay a fine in the stock options backdating scandal that prompted the SEC’s investigation of over 100 companies. Brocade allegedly failed to disclose hundreds of millions of dollars in compensation expenses to investors and falsified income reports from 1999 to 2004.

And while this settlement appeared to mark the end of the SEC’s investigation and sanctions for Brocade, former executives for the company are far from being out of the woods. Gregory Reyes and Stephanie Jensen, former CEO and president of Human Resources for the company, are being tried separately in criminal trials for their involvements with the scandal.

Commentary:This is the first instance of a company paying a fine to settle the stock options scandal and will certainly set the precedence for others.

The SEC also alleges that during this period Mercury also made fraudulent disclosures concerning Mercury’s “backlog” of sales revenues to manage its reported earnings, and structured fraudulent loans for option exercises by overseas employees to avoid recording expenses.

Linda Chatman Thomsen, Director of the Commission’s Division of Enforcement, said, “The array of fraudulent conduct at Mercury Interactive over an eight year period, including backdating dozens of stock option grants, backdating senior executive stock option exercises, structuring of overseas option exercises to conceal expenses and concealing the true nature of its earnings, deprived Mercury Interactive’s shareholders and the market of accurate information regarding executive compensation and the company’s accounting for stock options. The widespread and pernicious misconduct – including lying to shareholders, intentionally false accounting, and fraudulent stock options backdating – in this case warrants the significant sanctions imposed on the company and sought from the former executives.”

Commentary: Despite settling the corporate case, the SEC continues to pursue its case against the individual executives who orchestrated the fraudulent backdating, including former Chairman and CEO Amnon Landan, former CFOs Sharlene Abrams and Douglas Smith, and former GC Susan Skaer. These former execs can’t be feeling too great right now considering how strong a case the SEC has here, the length of time over which the fraudulent behavior occurred, and the fact that last month the first prison term was handed out to an executive over stock option backdating. In that case, the former GC of Comverse Technology was sentenced to just over 1 year in prison and ordered to pay $52 million in restitution.

Underscoring the severity of the misconduct, this was the largest fine that AMF could have levied.

At issue is that GLG allegedly illegally used sensitive information to trade shares in Vivendi, ahead of a bond issue by the French media group. Three other hedge funds – UBS O’Connor, Meditor Capital Management and Ferox Capital Management – were also fined for the same offenses.

The bookrunner for the bond issue, Deutsche Bank, was also fined €750,000 for failing to keep adequate records of phone conversations and destroying potential evidence around the illegal trading (which occurred back in November of 2002).

News of a convertible bond sale often sends a company’s shares lower – and when the news of Vivendi’s impending bond sale broke, its stock dropped 14%. Investment banks typically phone investment funds prior to this official announcement to gauge their interest in the offering in a process known as “book building”. Hedge and other investment funds are forbidden from trading on this inside information- but GLG and the other three funds apparently freely traded on the information.

Deutsche Bank was also fined $11 million earlier this year by regulators in Britain for “market misconduct” connected to two stock offerings it managed in 2004.

Commentary: This is just bad business all around. And you can be sure that for each time that fund is unlucky enough to get caught – there are 50 more instances where they weren’t. Hedge funds are rife with insider trading… and increasingly good at covering their tracks (the cases are hard to prove to begin with).

Mr. Heron was the former General Counsel, Corporate Secretary and Chief Insider Trading Compliance Officer of Amkor Technology, Inc. The SEC alleges that during 2003 and 2004, Mr. Heron routinely traded Amkor securities in the days prior to Amkor’s announcements on financial results and business transactions in spite of the fact that he and other employees were subject to blackout periods when they were prohibited from trading. It was Heron’s job to enforce this policy.

The SEC identified more than 50 such illegal trades which netted Heron about $290,000.

Commentary: The 110 degree heat in Arizona must have fried this fellow’s brain for him to execute such a brilliant foolhardy plan. Normally, when you hear about cases where the GC and Compliance Officer do something stupid, it involves a smaller company with inexperienced leadership. Not this case. Amkor has 22,000 employees and $3 billion in sales.

Sorin was also ordered to pay $52 million in damages, as compensations to stock holders who suffered losses by the securities backdating, which took place in 1998-2002. Payment of the damages is pending results of two other trials held against other suspects by the US Securities and Exchange commission.

Sorin, along with two other senior executives in Comverse Technology, CEO Kobi Alexander and former CFO (Chief Financial Officer) David Kreinberg, have been charged with earning millions of dollars illegal compensation through fraudulent back dating of stock options. Kreinberg previously pleaded guilty back in October 2006.

Alexander fled abroad during the investigation and was arrested last October in Namibia. The U.S. government is still seeking his extradition.

Commentary: Sorin earns the dubious distinction of being the first executive involved in the stock-option backdating scandal to be sentenced to prison. The restitution amount will likely be cut once the cases with the other defendants are resolved.

Humor is abound in the courts these days. In rejecting defense attorneys’ requests that Sorin be spared prison time U.S. District Judge Nicholas Garaufis asserted that Sorin wasn’t “the grand Wizard of Oz,” but said that “he facilitated a portion of it with his actions.” Perhaps he is the scarecrow?

As PC World reported, the popular technology blog, Engadget, posted a story claiming the expected June launch of the iPhone would be delayed until October – and the Leopard October debut would be postponed until January. Engadget’s credited its source as coming from an internal Apple e-mail.

The e-mail tip turned out to be false. But before anyone figured this out Apple’s stock tumbled 3 percent losing US$4 billion in value by the end of the trading day. Apple reacted quickly and issued a statement saying that the iPhone and Leopard are both still on track – the iPhone will ship at the end of June, and Leopard will ship in October. Engadget quickly posted a correction.

Commentary: What PC World did not report, and which makes the case even stranger, is that the email that Engadget got sent, was reportedly indeed an internal Apple email that went out to thousands of Apple employees. What supposedly really confuses Apple is how someone might have spoofed their internal system in order to send out such a mass email.

It could have been a mistake. Perhaps not though. It could have been a concerted effort by a stockholder (or “put” holder more likely) to disseminate false information to move the stock. Penny stock promoters do it all the time. Many hedge fund managers do as well. This case will only bring further intrigue and interest to the practice as volatility and leverage together can produce great gains with the right bet. And a blog, regardless of its popularity, cannot independently verify the facts of a submission. That was traditionally the role of big media – and with the slimmer staffing of a blog, and the pressure to produce “scoops” in the age of Internet before someone else beats you to it, don’t except ‘fact checkers’ to be showing up at blogs anytime soon.

The former energy banker allegedly forwarded top secret details of Credit Suisse-advised acquisitions and mergers to contacts in Pakistan. This information then prompted those contacts to make large wagers on stock options and credit default swaps. Mr. Naseen is charged with making upwards of $7 million as a result of the insider trading and information sharing.

SEC followed suit with a related civil complaint that alleges that one of Naseem’s contacts was a Pakistani banker who filtered the information up to high-ranking financial executives in the country.

Commentary: The is just one example of how insider trading has become more global than ever before – so not only are there more greedy people to contend with, but many of them also feel that they are beyond the reach of the U.S. SEC and other global market authorities. As Tariq Assiss, the Chairman of the Pakistan Securities and Exchange Commission, was quoted June 20th in the NY Times, “There is a culture of noncompliance in Pakistan. If you can’t get caught, then you have the incentive to make a quick buck.” This, along with the explosive growth of derivative products offered, simply makes it more difficult to police insider trading.

The Justice Department saw its five-year investigation of former corporate executives end on a high note with the conviction of one-time Qwest Chief Executive Joe Nacchio. Nacchio joined the likes of Enron’s Jeffrey Skilling and Worldcom’s Bernard Ebbers as he was found guilty on 19 of 42 counts of illegal insider trading.

Collecting over $250 million in stock sales, salary and bonuses throughout his tenure at Qwest, Nacchio was accused of dumping upwards of $100 million in company stock within the first half of 2001 – a time when he was well aware of the company’s ailing financial status. Following Nacchio’s departure from the company, Qwest nearly faced bankruptcy as stock prices hit a record low of $1.11.

Commentary: We spoke with former senior compliance executives at Qwest and asked them what they thought of Nacchio. Their response? “It could not have happened to a nicer guy.” NOT – supposedly he was incredibly arrogant as well as disrespectful to employees.

On a side note, most US Attorneys should be happy that they went to law school as they do not have a future as stand-up comedians. Our favorite example for today was the US Attorney for Colorado, Troy Eid, quipping about the conviction: “For anybody who has ever made a call from Qwest’s 14-state service area, ‘convicted felon Joe Nacchio’ has a nice ring to it.” We bet he laid awake at night thinking that one up!