News & Analysis

SEC settles insider trading suit on Blackstone deal

The buyout firm blew the whistle on a former Wall Street trader who has settled an SEC lawsuit alleging he spread false rumours about Blackstone’s Alliance Data deal.

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Paul Berliner, a former trader at Wall Street investment firm Schottenfeld Group, has settled a Securities and Exchange Commission lawsuit that accused him of spreading a false rumour about The Blackstone Group’s now defunct $7.8 billion (€5 billion) deal for Alliance Data Systems.

He agreed to disgorge $26,129 and pay a $130,000 civil fine but did not deny or admit guilt.

ADS getting pounded … Blackstone is negotiating a lower price.

Berliner's alleged message

Berliner allegedly circulated instant messages on 29 November 2007 to 31 people including traders at brokerage firms and hedge funds.

“ADS getting pounded – hearing the board is now meeting on a revised proposal from Blackstone to acquire the company at $70/share, down from $81.50,” he wrote, according to the SEC. “Blackstone is negotiating a lower price due to weakness in World Financial Network – part of ADS’ Credit Services Unit, as evidence [sic] by awful master trust data this month from the World Financial Network Holdings off-balance sheet credit vehicle.”

This resulted in the company’s stock hitting an intraday low of $63.65, down some 17 percent from where it had been trading, and at one point caused the New York Stock Exchange to temporarily halt trading of ADS stock, the SEC said. 

Berliner allegedly shorted the stock and then covered the positions as ADS’ share price dropped, making a profit of $25,509.

Paul Curnin, a partner at Simpson Thatcher & Bartlett, a law firm retained by Blackstone, received a flurry of calls from investors looking to validate the rumour, which prompted him to notify the SEC, the SEC told the Wall Street Journal.

Schottenfeld Group at the same time instigated an internal investigation, suspending Berliner in December.

“There is no place at our firm for individuals that violate the securities laws,” its chairman, Rick Schottenfeld, said in a statement.

Blackstone and ADS have been unable to agree on a revised deal that would meet regulatory approval. The credit card processing company is currently suing the buyout firm in pursuit of a $170 million break-up fee, a law suit Blackstone has called “spurious”.

A Blackstone spokesman declined comment.