Security: News

Author: Stuart Fieldhouse

A hedge fund manager has pleaded guilty in a US federal court to five counts of insider trading for having aggressively purchased Citizens Bank common stock and options based on a tip he received from a Citizens employee about the bank's then-impending merger with Cleveland-based Charter One Financial.

United States Attorney Michael J. Sullivan and Kenneth W. Kaiser, Special Agent in Charge of the Federal Bureau of Investigation in New England, said that Michael K.C. Tom, age 36, of Waltham, Massachusetts, had been charged in an Information filed in December 2005.

Tom managed and partly owned a hedge fund based in Burlington, Massachusetts called Global Time Capital Growth Fund.  The fund invested principally in equities, including in the banking industry.  Before he started the fund, Tom was a senior analyst in the Credit Portfolio Management Group at the Boston offices of Citizens Financial Group.  Among other things, the CPMG was responsible for due diligence investigations of banks that Citizens sought to acquire.

On April 28, 2004, Tom received a phone call from Shengnan Wang, a portfolio analyst in the CPMG at Citizens whom Tom had helped to hire.  Wang told Tom that other colleagues in the CPMG were performing a due diligence in Cleveland at a bank that Citizens was about to acquire.  This information was highly confidential, as its public release, among other things, would tend to drive up the price of the acquisition target's stock, thereby making the acquisition more expensive.

Armed with this inside information, and with his knowledge of the banking industry, Tom was able quickly to narrow the possible targets to the eventual target, Charter One Financial.  Over the next few business days, he traded aggressively in Charter One securities, making 52 purchases of either common stock or call options contracts.  He made these trades in his own name, as well as on behalf of GTC Growth Fund and some of his relatives.

On May 4, 2004, Citizens announced that it intended to acquire Charter One.  On May 5, 2004, the first day of trading after the public announcement, Tom sold most of the securities, reaping a profit of approximately $750,000.

Tom faces a maximum sentence of 10 years in prison, to be followed by three years of supervised release and a $1 million fine. On November 4, 2005, Wang and her husband Hai Liu, pleaded guilty to insider trading charges for their roles in the same scheme.

The case is being investigated by the Federal Bureau of Investigation in New England.  It is being prosecuted by Assistant US Attorney Jonathan Mitchell in Sullivan's Economic Crimes Unit and Special Assistant US Attorney Brad Ali.

Email the Author