The Securities and Exchange Commission would not normally have any interest in CFDs over US stocks traded on international markets. However, the increased activity in the volume of stock traded in Virtex and Philco during the week they announced their results to the market was flagged as excessive.
Lord was initially puzzled by what he found, but the haze soon lifted. After he and his team had spent a week specifically looking at the larger stock orders, they discovered that they had emanated out of Switzerland. More damningly they had been placed by CFD providers in the forty-eight hours prior to the companies announcing to the market. It was obvious that the Swiss had hedged their CFD positions.
It appeared to Lord that someone had had inside information about the two companies’ results. Rather than drawing attention to themselves by buying and shorting the stocks on the NYSE, the insiders had taken the same positions via CFDs in Switzerland. If some of the Swiss CFD providers had not chosen to hedge their positions, the SEC would’ve been none the wiser.
By the time Lord’s preliminary investigation was completed he had discovered that five CFD providers based in Switzerland had bought stock in Virtex and short sold stock in Philco. Clearly someone with inside information had been behind the trading. He had called each of the CFD providers seeking further information. They had been polite but guarded about the information they provided, and he had learned very little. Lord knew that the only way he’d get the answers he was seeking was by direct interrogation. The Swiss CFD providers were reluctant to meet with him, but he had been very persuasive, suggesting that the U.S. government would be very disgruntled if they refused to cooperate.
SR 23 departed JFK at 7:25 P.M. on Sunday and landed in Geneva eight hours later at 9:25 A.M. on Monday. Lord and his assistant, Ben Drucker, took a taxi from the airport to the Hotel Warwick in the city. Lord knew the hotel well having stayed there many times before. They checked in and twenty minutes later were back in another cab heading for his first appointment at JHM Brokers on Rue du Simplon. They took an elevator to the eleventh floor of an old brick building where they entered a lobby and were greeted by a young lady. “Aaron Lord and Ben Drucker from the SEC. We have an 11:30 appointment.”
"Good morning, Mr. Lord,” she said. “Monsieur Paul Bossard is expecting you. Please follow me.”
She led them to a meeting room where they met a tall, slim man with a goatee. He was immaculately dressed in a three piece, navy blue, pinstriped stripe suit. He had a thin folder sitting in front of him. “I fear you might have had a long trip for nothing, gentlemen,” he said. “Would you like something to drink?”
“Nothing, thank you. We’re running short of time,” Lord replied, pulling out his diary. “You took a significant long position in Virtex Software on the 17th January. Who were you acting for?”
“It was a proprietary position, and we were hedging a CFD position,” Bossard replied, handing the file that had been in front of him to Lord. “You’ll find everything in here.”
Lord quickly thumbed through the file. It included a complete summary of the Virtex transactions and copies of all documents including emails from a firm of lawyers based in Geneva instructing JHM to open and close the position on behalf of their client, Citadel Investments. “How long has the account been open?”
“About three months,” Bossard replied.
“Can we have a history of transactions?” Lord asked.
“Not without a court order, Mr. Lord. With respect, many of the transactions have nothing to do with your jurisdiction. I can say there was nothing untoward or unusual about the position in Virtex.” Bossard paused then laughed. “Other than the profit that is.”
“Is the account still open?” Lord asked.
“Yes, but there are no active positions. As far as we’re concerned we were dealing with a Swiss-registered company. We were surprised to find that the SEC was interested in the transactions. The transactions, while profitable, were relatively small. What is your concern?”
Lord picked up his briefcase, put the file under his arm and stood up. He was sure that Bossard knew more than he was letting on but equally sure that he wasn’t going to find out more than what was in the folder. “It could be nothing. I need to check with the firm of lawyers who instructed you. Thank you.”
Their second appointment was on Rue du Rhone, and as they climbed into the taxi, Lord handed the file to Drucker. “Call the lawyers. Tell them we want to see them tomorrow. Don’t take any bullshit. Let them know they can deal with us or the Justice Department.”
It was 6 P.M. when Lord and Drucker got back to their hotel having had meetings with four other CFD providers that had each provided a file with details not dissimilar to that provided by JHM. The Swiss were incredibly polite but not very cooperative and quite secretive. They sat in the bar, Lord nursing a whiskey and the younger man sipping a mineral water. “Five companies, three firms of lawyers and two firms of accountants,” Drucker said. “Someone went to an awful lot of trouble to hide what they were doing. All for sixteen million.”
“Sixteen million we know about,” Lord replied. “What about the CFD providers who didn’t hedge or hedged with other CFD providers in the UK or Australia? I think the profit was a lot more than sixteen million.”
The offices of Marshall & Associates, International, Commercial, and Finance Lawyers, were in an older building above a cluster of retail shops on Rue des Alpes. It was just after 9 A.M. when Lord and Drucker were shown to a large conference room, the walls of which were surrounded by legal tomes. A portly man with rapidly receding hair got out of a large leather chair and said, “I am Jurg Aberle, and this is my partner, Lars Gonthier. Please be seated, gentlemen, and let us know how we might help you. Before we start, can I offer you anything to drink?”
“Thank you, no,” Lord responded taking the file that JHM Brokers had given him from his briefcase. “You act for a corporation, Citadel Investments. Can you tell me the capacity in which you act?”
Aberle pushed himself back into his chair, put his hands on his stomach and looked over the top of his spectacles. “I’m sorry,” he said, “Citadel Investments is not an American company and does not have American directors or shareholders. How does it fall under your jurisdiction?”
Lord had been expecting this. “We suspect that your client engaged in insider trading.”
“Our client has never bought or sold U.S. stocks.” Gonthier smiled. “There must be some mistake.”
The hawk-like Gonthier was smirking infuriatingly, and Lord chose his words carefully. “As you are well aware, your client took a sizable long CFD position with JHM over the stock of Virtex Software Inc. JHM subsequently bought stock in Virtex to hedge their position. I want to know who instructed you to buy CFDs on behalf of Citadel Investments. And before you answer, I know that you have many clients that operate in the U.S. that would find it very disruptive if we were to investigate their operations.”
“Are you threatening us?” Aberle asked.
“Not yet,” Lord replied, “and I hope that I don’t have to.”
Aberle leaned over and whispered something to Gonthier before asking, “What is it you want to know? We want to cooperate with you. If we can help without breaching client-attorney confidentiality, we will.”
“Who instructed you to acquire CFDs in Virtex?” Lord asked.
Without answering, Gonthier slid a copy of an email over to Lord. It was from a firm of lawyers in the Caymans instructing Marshall & Associates to acquire CFDs in Virtex on behalf of Citadel Investments. A second email contained instructions when to sell.
“Why did you comply with those instructions?” Lord asked.
“They were the instructing lawyers who asked us to form Citadel Investments and to act on their behalf,” Gonthier replied.
“And if we go to the Caymans we’ll find the instructing lawyers are acting under the instructions of another firm of lawyers operating out of a tax haven. What happened to the money?”
/> “After we made deductions for our expenses and income tax, we remitted the balance to the Royal Bank of Canada in the Caymans,” Gonthier said, sliding a copy of the transfer to Lord. “With respect, Mr. Lord, we don’t think the SEC has any jurisdiction in this matter. After all, CFDs over stocks are illegal in the U.S. so I’m not sure how you have the authority to police them.”
Lord had pondered this himself, but the hedge positions had been taken over U.S. stocks, and there was no doubt in his mind that these trades had impacted the integrity of the market. “Thank you,” he said, as he rose to leave.
As they stared at the watches in the jewelry retailer’s window, Drucker said, “Aaron, do you think the funds are still in the Caymans?”
Lord laughed. “No way. They could be in Ireland, Liechtenstein, Hong Kong or God knows where. They’ll have been through so many international banks that tracing them will be impossible. Smart bastards!”
“Maybe we’ll get lucky with the other appointments.”
“You’re an optimist, Ben. We’ve found all we’re going to find, but we might as well go through the motions.”
Chapter 24
SR 22 departed Geneva at 11:45 A.M. on Wednesday and Ben Drucker looked at Aaron Lord and said, “Well that was a waste of time. Fucking Swiss!”
“Not necessarily,” Lord responded. “We know that someone traded on inside information, we know they made at least sixteen million and probably a lot more, and we know they’re very smart. I’ve got a gut feeling it’s the same people who Chas Grinich is looking for. I wouldn’t call it a waste of time.”
“Are we going to go after the auditors when we get back?”
“We’ll talk to them, but don’t forget, company directors talk to each other. We need to look at both boards too. Then there are senior managers and their PAs. The leak could’ve come from anywhere.”
“My money is on the auditors, Aaron. It’s just too pat. Right now they’re the only common link we have between the two companies.”
When Todd answered his prepaid cell phone, he said, “We’re all square now. I’ve repaid the debt. I’m getting rid of this phone. I never want to hear from you again.”
“Todd, that’s not a nice way to talk to me. Don’t forget, if it hadn’t been for me, you might be pushing up daisies. I need to see you,” Elliot said.
“Why? Our business is over. I don’t ever want to see you again.”
“I thought you’d want to tear your note up. Who knows what might happen if it fell into the wrong hands. You might get called on to pay it again.” Elliot said.
“You can tear it up.”
“You trust me?” Elliot laughed.
Todd paused. “All right,” he said, “but I won’t be staying. Have the note ready. Where?”
“There’s a coffee shop in Chinatown. I’ll text you the address. Eight o’clock tomorrow night. I’ll order a latte for you.”
“Don’t bother,” Todd said, terminating the call.
Devlin Cooper missed the next two games with the Cougars while his ribs healed, and his body recovered. There was still a lot of conjecture about his game against the Pirates and for many fans he was no longer their golden boy. His replacement, Jeff Sweeny, had seized his opportunity, and the Cougars had had two good wins. However, there was no disputing Cooper’s place on the team. Once he’d recuperated he would again be an automatic selection.
Cooper was young and in great physical condition, so it was no surprise that he recovered quickly. His mental condition was something else, though. In all his life, he had never suffered a day’s depression, but now he was in constant conflict with his conscience. He found it almost impossible to sleep and when he did drift off, he would awaken after a few hours with a start and in a cold sweat. He had never been booed by fans before, shunned and questioned by teammates, or been taken to task by some in the media. Worse, for the first time in his life, he suspected that his father was no longer proud of him. The bourbon helped him get through the nights, but the mornings were hellish. Devlin Cooper’s life was unraveling, and there was nothing he could do about it.
Phillip Cromwell’s appointment book for Thursday was full but when the man from the SEC had called he had been insistent, almost demanding, about seeing him. Cromwell had reluctantly agreed to meet with him at 7:30 A.M. However, when he asked Aaron Lord what it was about, the SEC man had said that it was something he didn’t care to discuss over the phone.
Cromwell eyed the young man sitting opposite him and thought he looked more like a marine than an investigator. He had little time for public servants and said, “I can give you thirty minutes, Mr. Lord. I’m sorry it’s too early for my secretary. I can’t offer you coffee.”
“That’s fine. Your firm audits Virtex Software and Philco Laboratories. Your partner, Douglas Lechte, signed the audit reports on both companies. How long has Mr. Lechte been with the firm?”
Suddenly Cromwell was very interested. “What’s this about?”
“We have reason to believe that their results were leaked before being released to the market.”
“There was insider trading?”
“We believe so.”
“Why do you suspect us?”
“We don’t. It’s a process of elimination. Your firm audits the accounts of both companies. That piqued our interest. Now, how long has Mr. Lechte been a partner of the firm?”
“Doug has been with us for twenty years, the last twelve as a partner.”
“It’s unlikely that he would’ve leaked any information then,” Lord said.
Cromwell paused, put his hand under his chin and finally said, “Yes, I suppose you’re right.”
“That’s hardly a vote of confidence.”
“Mr. Lord, I don’t know Doug’s personal circumstances so I can hardly make a judgment about his actions or what might motivate him.”
“That’s a strange comment. Does Mr. Lechte have any financial problems that you’re aware of?”
Cromwell paused again. “No…none that I know of anyhow.”
“Did any other partners or employees have access to the results?”
“I don’t know. Doug assigns the audit teams. Would you like to talk to him?” Cromwell said. “I’ll get him down here.”
“I thought you had another appointment,” Lord said, looking at his watch.
“Mr. Lord, this matter is of grave importance. Like you, I’d like to get to the bottom of it,” Cromwell said, picking up the phone.
“Doug, please come down to my office now. Something urgent as arisen.”
There was a lengthy pause. “Yes, yes! It is important. I wouldn’t have asked otherwise.”
Doug Lechte barged through the door and was about to let loose on Cromwell when he saw Aaron Lord. “What’s this about, Phillip?”
Cromwell made the introduction and then told Lechte the reason for the SEC investigator’s visit.
Without looking at Lord, Lechte said, “Well, I hope you told him the leaks didn’t emanate from this firm.”
“Mr. Lechte, I didn’t make any accusations. I’m sure you’d appreciate this is a process of elimination,” Lord said.
“Good! You can start by eliminating this firm.”
“I’d be happy to. I do have a few questions, though. Besides you, do any of your employees work on the accounts of both companies?”
“Yes, Vanessa Hodge. She’s one of my senior audit managers,” Lechte replied. “Some of her team would’ve also worked on both audits.”
“Ah hah,” Cromwell exclaimed.
“What’s that supposed to mean? What are you inferring? Vanessa’s as honest as the day is long. She’s beyond reproach,” Lechte said through tightly gritted teeth.
“The leaks came from somewhere,” Cromwell said.
“They didn’t come from this firm! It could’ve been the directors, managers, suppliers or customers. Christ, it could’ve been anyone. Isn’t that right, Mr. Lord?” Lechte asked.
“Yes. That??
?s true. However, we may need to talk to Ms. Hodge.”
“She out on an assignment, but she’ll be happy to talk to you. Is that all?” Lechte said, standing and extending his hand.
It was 9 A.M. when Cromwell’s secretary showed Aaron Lord out. He could hear loud, angry voices behind him. He stepped into the elevator thinking what a contrast. Cromwell’s handshake had been limp. He hadn’t defended Lechte and almost appeared pleased when Vanessa Hodge’s name was raised. Lechte had a bone crushing grip and had vigorously defended the firm and his manager. What was blindingly obvious was the two men’s disdain for each other. The only opinion Lord had formed was that Phillip Cromwell would be very easy to dislike.
Chapter 25
It was midday when Vanessa Hodge knocked on Doug Lechte’s door. He looked up, grim-faced. “Take a seat. I’m sorry, I have some bad news.”
Five minutes later Vanessa said, “That’s ridiculous. I never discuss clients’ business with anyone. Why would Mr. Cromwell want to suspend me? Why does he hate me so much?”
“It’s not you that he hates,” Lechte replied. “It’s his way of attacking me. He spent the morning lobbying the other partners and as usual the Catholic bloc voted with him. I told them that suspending you was stupid, but Cromwell had the numbers. Are you sure you didn’t inadvertently discuss the results with anyone? A friend, someone from your family?”
“God, even you think it was me.”
“Vanessa, I trust and will defend you with all my being. I just wanted to cover the possibility of you making a slip. You know, you say something to someone you know, and they, not realizing the importance of the information, accidentally pass it onto someone else who acts on it. You know how it works.”
“Yes, I do. That’s why I’d never breathe a word to anyone.” A tear ran down Vanessa’s cheek. “It’s so unfair.”
“Yes, it is. I made sure you’re on full pay. You’ve been working long hours. Why don’t you try and get some rest? It won’t take long for the SEC to absolve you.”