A stock broker facing charges for carrying out an alleged insider trading scheme with an already disgraced trader is highlighting the risks firms run when they don't keep track of their employees' communications.
The Securities and Exchange Commission and the Department of Justice accused Christopher Matthaei of Brielle, New Jersey, on March 30 of carrying out a
The SEC alleges Matthaei and Wygovsky arranged their insider trades partly using a messenger service called Telegram. The service's end-to-end encrypted messages, according to the SEC, "leave no trace on Telegram's servers, support self-deleting chat messages, and do not allow message forwarding."
The two brokers also talked nearly every day using the chat function on their Bloomberg Terminals, a computer system that provides up-to-the-second market information. Those messages could be monitored by their employers.
The case underscores how brokers with questionable regulatory records can continue working in the industry for years. Although Matthaei's records show no customer complaints against him, he was previously employed by two firms that have been expelled from the brokerage industry.
Other recent cases suggest a run-in with regulators isn't enough to prevent a bad actor from
Don't trust, do verify
Hugh Berkson, the president of the Public Investors Advocate Bar Association, which represents investors' interests, said the case shows it's not enough for firms to believe what their employees are telling them about how they communicate. There also needs to be a review of the messages.
"There is an ever-growing need for firms to grow more sophisticated in their surveillance," he said. "The thing is bad actors are always going to tell you they are following the rules and regulations, which is why the firm has to take the next step and make sure they are."
Regulators have been cracking down on firms that fail to keep comprehensive records of electronic communications. Last September, the SEC and the Commodities Futures Trading Commission, which regulates the futures market,
Matthaei, who was arrested on Thursday in New Jersey, is accused by federal authorities of running a classic insider-trading system.
Neither Matthaei's lawyer, James Lundy of Foley & Lardner in Chicago, nor Wygovsky's lawyer, Arthur Middlemiss at Lewis Baach Kaufmann Middlemiss in New York, could be reached for comment.
The deals in question involved special purpose acquisition companies, known as SPACs for short. These so-called "blank check" firms raise money by selling stock through an initial public offering solely for the purpose of later buying up privately held businesses.
Matthaei and Wygovsky started working together after Wygovsky took a job in 2013 at a Canadian firm that isn't named by the SEC but is
One of Wygovsky's jobs at Polar Asset Management was to look for investing opportunities in the U.S. As part of that, he became aware of various private investments in public equity, or PIPE, offerings being made by SPAC companies.
PIPE arrangements allow companies to raise capital before an initial public offering by selling privately at a discounted price. When a wealth management firm learns of a PIPE offering from a SPAC or other firm, they are generally under an obligation to keep the information confidential.
Wygovsky is alleged to have used his insider track on several PIPE deals to benefit Matthaei. In May 2020, for instance, Wygovsky learned through his job that Tortoise Acquisition, a SPAC, was planning to acquire Hyliion, a maker of electric powertrains in Cedar Park, Texas.
Wygovsky was bound by company policy and U.S. and Canadian securities laws to keep the information to himself. Instead, the SEC alleges, he passed it to Matthaei, who began buying shares in Tortoise Acquisition on May 29, 2020.
Matthaei and Wygovsky took several lavish trips together during the time of their alleged scheme. In June 2020 — not long after the Tortoise Acquisition merger — the pair and their families decamped for Saint Barthélemy in the Caribbean. Matthaei paid $41,950 for them to travel by private jet and $76,050 for them to stay at a private villa. He later paid $38,500 to fly Wygovsky and his family to Nantucket by private jet and $52,443 for them to stay in a luxury rental home. On Aug. 15, 2020, Wygovsky and his family were flown back to Toronto on a private jet paid for by Matthaei at a cost of $10,329.
Matthaei, according to the SEC, only stopped taking part in the insider trading when Wygovsky was arrested in Austin, Texas, in July 2021 for his part
The SEC is seeking to have Matthaei and Wygovsky pay back any ill-gotten gains and civil penalties. It is also asking for Matthaei to join Wygovsky in being barred from the industry. Wygovsky, meanwhile, has already agreed to a settlement with SEC permanently enjoining him from violating U.S. securities laws.
In his separate criminal case, Matthaei stands accused of one count of securities fraud conspiracy and one count of securities fraud. The first count carries a maximum penalty of five years in prison and a $250,000 fine. The second has a maximum penalty of 20 years in prison and a $5 million fine.
Before joining, Matthaei worked for nine other firms. Of those, two have been permanently banned from the industry by FINRA, the broker-dealer industry's self-regulator.
One of them, Evolution Financial Technologies of Iselin, New Jersey,
Berkson said it's too much of a stretch to say Matthaei's association with those two failed firms could have in any way predicted the charges he's now accused of. He noted that before the SEC and DOJ's current insider-trading charges, Matthaei had no other mark on his disciplinary record.
"The fact that it was such a long time ago that he was at these other places, and there are no other complaints on his records suggest this was a relationship with one particular client that led him into these issues," Berkson said.
