The Apparel Insider Trading Ring

By Nathan Vardi

For more than five years, Eric Martin made a habit of feeding material, non-public information about Carter’s, the Atlanta manufacturer of babies and children’s apparel, to hedge funds and a consultant who tipped off hedge funds. As the director, and later, vice-president, of Carter’s investor relations department, Martin was in a good position to know about earnings results, a corporate merger and even a financial restatement, before the company publicly released the information. Even after Carter’s terminated Martin, he continued to get his hands on market-moving information about Carter’s and provided it to hedge fund investors.

Martin pleaded guilty last year to conspiracy to commit securities and wire fraud in connection with an insider-trading conspiracy primarily involving Carter’s stock. What is interesting about Martin’s case is that federal prosecutors in Atlanta claim he disclosed information to hedge funds and a hedge fund consultant “in exchange for friendship, reciprocal stock tips about other public companies and future business and networking opportunities.” The only time Martin made money was through some consulting fees and when he traded on the information himself, although even then he sometimes did not correctly anticipate the market’s reaction to certain facts and several times managed to lose money when trading based on material, non-public information, according to federal prosecutors. In other words, Martin did not make a lot of money directly by giving inside information about Carter’s to hedge funds.

The Martin case seems to indicate that the relatively small and clubby apparel industry has seen its fair share of insider trading, making it a prime target for the Department of Justice and the Securities & Exchange Commission, which have both been aggressively pursuing insider-trading cases involving hedge funds. There are links between hedge funds Level Global, now defunct, and Buckingham Capital Management, to the apparel insider trading ring being investigated by federal prosecutors in Atlanta. Federal prosecutors, led by Manhattan U.S. Attorney Preet Bharara, have secured dozens of insider-trading convictions in recent years, including high-profile trial wins against former hedge fund billionaire Raj Rajaratnam and former Goldman Sachs director Rajat Gupta. Last month the hedge fund firm of billionaire Steve Cohen, SAC Capital, pleaded guilty to insider-trading charges as part of a $1.8 billion settlement that will see one of the most successful hedge funds firms ever shut down operations as an investment adviser.

The amount of money involved in Martin’s case, which is being handled by Sally Quillian Yates, the U.S. Attorney in Atlanta, is not huge. Martin’s illegal trading and tipping resulted in $13 million of profits and avoided losses. Other related cases involve a few million more, but the fallout has started to get big. Federal prosecutors in Atlanta have secured guilty pleas from three individuals and court filings suggest that five hedge funds are connected to the apparel insider trading ring. The assertion made by federal prosecutors that Martin received tips in exchange for information about Carter’s also suggests that he potentially received insider tips about other companies.

In November, for the first time, federal prosecutors in Atlanta identified one of the hedge funds they have been investigating for trading Carter’s stock based on inside information. Mark Megalli pleaded guilty to participating in a multi-million dollar insider trading conspiracy involving Carter’s stock when he was a consumer industry portfolio manager at Level Global Investors, a formerly $4 billion New York hedge fund that collapsed in 2011 under the weight of an unrelated insider-trading investigation that saw its co-founder, Anthony Chaisson, convicted on insider-trading charges. In total, Megalli was responsible for illegal trading gains and avoided losses at Level Global of between $2.5 million and $7 million, federal prosecutors say.

Megalli continued working in the hedge fund business after Level Global failed. According to an SEC filing, Megalli in 2011 joined Buckingham Capital Management, a hedge fund that manages $1.1 billion. Based in New York, Buckingham Capital Management is run by David Keidan and is owned by Buckingham Research Group, a registered broker-dealer in which Keidan is the largest single shareholder, Buckingham’s SEC filings show. One of the two hedge fund strategies Buckingham Capital runs is focused on the retail, apparel and footwear industries. Laurence Leeds is the chairman of Buckingham Capital Management and for years has run the retail and apparel hedge fund strategy at Buckingham.

Megalli is not the only connection between the apparel insider trading ring being investigated in Atlanta and Buckingham Capital Management. In late October, the SEC broadened the Carter’s investigation and filed a civil action against Dennis Rosenberg, a 70-year-old retired hedge fund consultant living in Oceanside, New York, who used to work as a market analyst and covered Carter’s stock. According to Financial Industry Regulatory Authority records, Rosenberg worked at Buckingham Research Group from 1991 to 1995. The SEC claimed Rosenberg, who has settled the case, received information about Carter’s from Martin for years while Rosenberg was a Wall Street analyst and later as a hedge fund consultant. Rosenberg, the SEC claims, disclosed material, non-public information about Carter’s to two hedge funds, which resulted in those investment advisors reaping gains of $2 million from trading profits and avoided losses.

In its complaint against Rosenberg, the SEC describes “Adviser 2” that received tips from Rosenberg as a Delaware corporation based in New York that has been registered with the SEC since December 1985 and is a subsidiary of a broker-dealer. The SEC also says that Adviser 2’s affiliate company used to employ Rosenberg. Those facts are consistent with Rosenberg’s FINRA records and Buckingham Capital Management’s filings with the SEC. Buckingham Capital Management is a Delaware corporation with its principal place of business in New York and has been registered with the SEC as an investment adviser since December 1985, according to a court document filed by the SEC. None of the other five companies for which Rosenberg worked between 1969 and 2005 owned affiliate investment advisors that were registered with the SEC in 1985.

Buckingham Capital Management and Buckingham Research Group did not return several calls or detailed emails seeking comment about the insider-trading investigation involving Carter’s. A spokesman for the SEC’s regional office in Atlanta declined to comment. A spokesman for the U.S. Attorney in Atlanta declined to comment.

According to the SEC complaint filed in federal court in Atlanta against Rosenberg, he tipped off Adviser 2 several times. For example, the SEC claims that Martin and Rosenberg spoke for five minutes in October 2008 about a Carter’s “earnings beat,” which Rosenberg told Adviser 2 about during a six minute phone conversation. Adviser 2 bought 70,000 shares of Carter’s, according to the SEC complaint, and the stock increased by 13.71% after Carter’s announced it had beaten third-quarter earnings expectations by 14 cents. The SEC claims in its complaint that Rosenberg passed on tips to Adviser 2 about Carter’s until 2009.

In 2010, Buckingham Capital Management and its Buckingham Research parent paid a combined $125,000 in penalties and settled an administrative proceeding with the SEC related to an inquiry into its chief compliance officer and its record-keeping procedures and document production. As part of that regulatory action, the SEC said that Buckingham Research Group and Buckingham Capital Management “did not establish, maintain and enforce written policies and procedures reasonably designed to prevent misuse of material, nonpublic information” given the nature of the businesses and the relationships between the broker-dealer group and the investment advisor.

Court filings made by government lawyers suggest that other hedge funds were involved in trading Carter’s stock based on material, non-public information. In June, Richard Posey pleaded guilty to conspiracy to commit securities fraud for tipping off Martin, who was terminated from Carter’s in 2009, about earnings information while Posey was Carter’s vice president of operations for its wholesale sales business. Posey separated from Carter’s earlier this year. According to a court-document filed by the SEC, in late 2009 Martin became a consultant to hedge funds and tipped three different hedge funds, which traded Carter’s stock based on Martin’s tips in 2009 and 2010.