Two New Jersey men pleaded guilty to their role in an insider-trading ring that prosecutors said generated $1.48 million in illicit profit using information from employees at pharmaceutical and medical-technology firms.
Lawrence Grum and Michael Castelli, both 49, admitted to fraud and conspiracy today in federal court in Newark, New Jersey, U.S. Attorney Paul Fishman said in a statement. Four other men pleaded guilty earlier to participating in the ring. It profited from tips passed by executives at Celgene Corp., Sanofi (SAN) and Stryker (SYK) Corp.
Grum and Castelli traded based on inside information from a friend, Mark Cupo, 52, an executive at Sanofi, Fishman said. Cupo got tips from John Lazorchak, 43, former director of financial reporting at Celgene, and Lazorchak also got tips from Mark Foldy, 43, a former Stryker executive, prosecutors said. Cupo, Foldy and Lazorchak pleaded guilty Oct. 7.
The inside information given to Grum and Castelli “enabled them to reap substantial profits by engaging in lucrative securities trading ahead of the public announcement of several corporate acquisitions, numerous quarterly earnings results, and regulatory news,” according to Fishman. They also shared some of their profit with Lazorchak and Cupo.
Grum, Castelli and others made illicit payments for inside information “as hand-to-hand cash transfers, frequently paid in installments, to avoid leaving a financial trail,” according to Grum’s charges in a document known as a criminal information.
The men ensured that Lazorchak, Cupo and Foldy “did not engage in stock transactions in the instances where they were the source of the inside information,” according to the information. Grum also compiled a binder of “market ‘research’ to provide a false justification for his trades.”
The ring operated from 2007 to 2012 and involved two sets of high school friends and at least one witness who secretly recorded Grum for the Federal Bureau of Investigation, authorities said.
Grum, of Livingston, New Jersey, pleaded guilty to two counts of conspiracy to commit securities fraud and four counts of securities fraud. He co-owned a company that distributed spa uniforms, slippers and robes.
Castelli, of Morris Plains, New Jersey, pleaded guilty to two counts of conspiracy to commit securities fraud and five counts of securities fraud. He owned a construction company called Mutual Builders.
They face as many as 20 years in prison on the fraud counts. U.S. District Judge Katharine Hayden set sentencing for Feb. 20.
Castelli was a longtime friend and neighbor of Cupo, according to the information. Castelli and Grum were “trading partners and close friends, having known each other for most of their lives.” Castelli introduced Grum to Cupo, and they socialized through their membership in a wine-making club.
Lazorchak, Cupo, Foldy and a fourth man who pleaded guilty on Oct. 7, Michael Penolino, 44, are set to be sentenced by Hayden on Jan. 20.
Grum reassured Cupo that government investigators were unlikely to discover their scheme, according to a lawsuit filed against the men by the Securities and Exchange Commission.
“At the end of the day, the SEC’s got to pick their battle because they have a limited number and huge numbers to go after,” Grum told an FBI cooperating witness, according to the arrest complaint.
The tips involved Celgene (CELG)’s announcement in November 2007 that it was buying Pharmion Corp. for $2.9 billion; Sanofi’s announcement in March 2010 that it was buying Chattem Inc. for $1.9 billion; Celgene’s news in June 2010 that it was buying Abraxis BioScience Inc. for $2.9 billion; and Stryker’s announcement in May 2011 of plans to buy Orthovita Inc. for $316 million, according to the SEC.
They also involved six quarterly earnings announcements by Celgene and the company’s announcement in June that it was withdrawing an application in Europe for expanded use of its blood cancer drug Revlimid, according to the government.
The cases are U.S. v. Grum, U.S. v. Castelli, U.S. v. Lazorchak, 13-cr-00656, and U.S. v. Pendolino, 13-cr-00657, U.S. District Court, District of New Jersey (Newark).
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