Bank Leu - U.S. Insider Trading Scandal

U.S. Insider Trading Scandal

Bank Leu's Bahamian subsidiary, Bank Leu International, was used by Dennis Levine to handle most of his insider trades. From 1981 to 1986, Levine built up his account to over $10 million USD, trading on information he acquired based on his work as an investment banker.

Levine took advantage of the Bahamas' strict bank secrecy laws (which forbid the disclosure of any information about a customer's banking relationship) to cloak his activities. Bank Leu itself had a long tradition of secrecy, and its Bahamian branch had a reputation for accepting deposits from anyone, no questions asked.

However, unknown to Levine, his account manager in Nassau and several bank employees (including the bank's manager) copied several of his trades in order to make their own profits off Levine's information. This practice, called "piggybacking," was not illegal in and of itself unless the piggybacker knows or has reason to know that the trader he is copying is acting on illegally obtained information. However, Bank Leu officials knew soon after Levine opened his account that he was trading almost entirely on inside information. Even without this to consider, the practice was contrary to Bank Leu policy. As a result of their piggybacking, Bank Leu employees made a tidy profit of their own off Levine's trades.

More seriously, Bank Leu steered a large number of trades through a broker at Merrill Lynch's office in Caracas. He himself piggybacked the trades for his own benefit, and the volume led one of his colleagues to get suspicious. The colleague wrote a letter to Merrill Lynch's compliance unit, whose internal investigation led to Bank Leu. Unfortunately, the broker had by this time moved onto another company, and there was no way for Merrill Lynch to pierce the offshore veil. The matter was thus passed on to the Securities and Exchange Commission.

Bank officials suggested that Levine come up with reasons to justify the trades. However, they also forged or destroyed many documents related to Levine's activity--thus opening them to charges of obstruction of justice. Their story fell apart when noted attorney Harvey Pitt, whom the bank had retained, noticed a huge gap between the actual statements of the bank's managed accounts and the omnibus records. At that point, the bank decided to cooperate with the SEC.

Bahamian Attorney General Paul Adderly issued an opinion that stock trading was separate from normal banking transactions, and thus was not subject to the bank secrecy laws. The bank was thus free to reveal Levine's name, and he was arrested soon afterward.

Despite the bank's cooperation, Bahamian regulators forced corporate headquarters in Zurich to fire the entire board of the Bahamian branch as a condition of being allowed to stay in business in the Bahamas.