Federal prosecutors and the SEC are reportedly poised to file huge criminal and civil insider-trading cases against an array of consultants, investment bankers, hedge-fund and mutual-fund traders, and analysts across the nation, according to The Wall Street Journal (“U.S. in Vast Insider Trading Probe,” by Susan Pulliam, Michael Rothfeld, Jenny Strasburg and Gregory Zuckerman), and The New York Times (“U.S. Is Said to Pursue Broad Insider Trading Inquiry” by Peter Lattman).
Moreover, things really seem to be heating up on these cases. Yesterday, Strassburg, Rothfeld and Steve Eder further reported the “Trading Inquiry Widens to Big Firms” noting that he Manhattan U.S. Attorney’s office has subpoenaed SAC Capital Advisors and Citadel LLC, which are large hedge funds, Janus Capital Group Inc., the big mutual fund company, and Wellington Management Co., one of the nation’s largest institutional-investment firms. The U.S. Attorney is reportedly seeking trading records, communications and other data as part of a broad criminal investigation.
Authorities say this is huge, and could eclipse previous investigations in terms of its impact on the financial industry. The FBI, federal prosecutors and the SEC are reportedly examining multiple insider-trading rings that may have reaped tens of millions of dollars in illegal profits. The FBI reportedly used wiretaps traditionally used for organized crime and drug trafficking cases. Charges could be brought before year-end, according to the articles.
Authorities are interested in providers of so-called “expert network” services to hedge funds and mutual funds seeking an investing edge. One of those is Primary Global Research LLC, whose account manager was questioned by the FBI recently.
Experts are required to keep proprietary information they have acquired confidential, and must not privately disclose any material non-public information. According to the article, however, expert-network firms themselves admit that such rules do not prevent experts from sharing such information on private phone calls, either purposely or accidentally, when a client pressures them. Recording phone calls would likely put a stop to that, but “[c]lients have generally said they didn’t want that,” Stuart Lewtan, who runs Zintro Inc, a small Waltham, Mass., expert-network firm, was quoted as saying, adding: “These are people who generally operate in a pretty secretive way. Even if they’re complying with SEC regulations, they generally just don’t like to be recorded.”
Another aspect of the probe involves Goldman Sachs, and whether its bankers leaked non-public information about transactions, including health-care mergers to certain investors, according to the articles. Independent analysts and research boutiques are also targeted.
SAC, Wellington, Janus and Citadel were among the clients of John Kinnucan, a principal at Broadband Research LLC who recently was questioned by two FBI agents. The WSJ article printed the text of an October 26 email (apparently) from Kinnucan to 20 hedge-fund and mutual-fund clients, which states:
“Today two fresh faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information,” the email said. “(They obviously have been recording my cell phone conversations for quite some time, with what motivation I have no idea.) We obviously beg to differ, so have therefore declined the young gentleman’s gracious offer to wear a wire and therefore ensnare you in their devious web.”
The SEC, which has identified insider trading as a top priority, sent subpoenas last autumn to more than 30 hedge funds and other investors.
“Illegal insider trading is rampant and may even be on the rise,” Preet Bharara, the United States attorney in Manhattan, was quoted by the NYT as saying, adding: “Disturbingly, many of the people who are going to such lengths to obtain inside information for a trading advantage are already among the most advantaged, privileged and wealthy insiders in modern finance. But for them, material nonpublic information is akin to a performance-enhancing drug that provides the illegal ‘edge’ to outpace their rivals and make even more money.”
Any new charges would be in addition to “the largest hedge fund insider trading case in history” filed by Mr. Bharara against a number of money managers and company executives, including Galleon Group co-founder Raj Rajaratnam, and 22 others, 14 of whom have pled guilty to criminal charges so far.
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