Insider Trading Charges

Insider Trading Charges

14 People Charged in Hedge Fund-Related Insider Trading

The hedge fund industry's image took a blow when fourteen individuals were accused of insider trading by federal prosecutors.   Stacy-Marie Ishmae has been following the case for the Financial Times and gave a good overview in a recent interview.  Here is the transcript from the audio interview discussing the insider trading charges, if you would like to download the audio visit this website.
JUDY WOODRUFF: The world of hedge funds was rocked again today with new charges of insider trading. Fourteen people, including money managers, lawyers and investors, were singled out by federal prosecutors. Seven of the defendants allegedly offered tips on impending takeovers. Those tips, in turn, were passed on with pre-paid cell phones, fake names and secret meetings.

The latest charges are connected with the criminal case against billionaire and hedge fund manager Raj Rajaratnam, the founder of the Galleon Group fund, which is now being liquidated. He was among six hedge fund managers and corporate executives arrested on insider trading last month, allegedly reaping more than $20 million in illegal profits.

The U.S. attorney in Manhattan said today that the latest charges were a wakeup call to Wall Street.

PREET BHARARA, U.S. attorney, Southern District of New York: This investigation goes to the very heart of fair play in the business world. We are not just talking about aggressive hedge fund traders who are trying to get an edge. Someone had to give them that illegal edge. And it takes two to tango. As we allege in these complaints and the previous ones, those someones were unscrupulous insiders with connections to some of the best-known companies in the world. The casual betrayal of corporate secrets by insiders threatens the integrity of our markets and victimizes the companies they owed a duty to honestly represent.

JUDY WOODRUFF: And for more about these insider trading cases, we turn to Stacy-Marie Ishmael, a reporter and markets blogger for "The Financial Times." Thank you for joining us.

So, briefly, what is it that prosecutors did today?

STACY-MARIE ISHMAEL, "The Financial Times": Thanks for having me. Well, what happened this morning is that there were a series of new charges filed by the FBI and the Department of Justice against some characters that hadn't previously been named in this case. There were also eight arrests. Seven of those were in New York, and one of them was on the West Coast.

'A motley crew'

JUDY WOODRUFF: And who exactly are these people who were charged and what were they -- precisely were they charged with?

STACY-MARIE ISHMAEL: Well, it's a bit of a motley crew, actually. It's not just guys at hedge funds, although, you know, they were certainly represented. You also had two attorneys, individuals from other firms on Wall Street. You know, so, the focus has really moved away from just being concentrated on hedge funds. And the charges are slightly different person to person. But what is consistent is that prosecutors are saying, each of these individuals either provided by information that allowed people to make trades based on information that wasn't available to anybody else, or they acted on that information and executed trades and profited from that.

JUDY WOODRUFF: Are you getting a bigger-picture sense of what the investigators think was going on here?

STACY-MARIE ISHMAEL: Well, I mean, it's interesting. At this stage, what we know, you know, looking back to the initial allegations against Mr. Rajaratnam, is that they have been concerned about the activities of hedge funds and, you know, their dealings with Wall Street insiders. They have said, we think this sector, there's a lot going on that, you know, is against what the regulations prescribe, essentially. And what we have seen now is that they have moved away from just targeting the people who were just making money on those trades, and to the people who were providing the information that allowed them to make money on that trade. So, they have really shifted the focus away from what -- you know, what you would consider the center, and more on kind of the infrastructure that allowed this type of activity to take place.

JUDY WOODRUFF: Remind us of the difference of what -- clearly, all these firms do a lot of research.


JUDY WOODRUFF: When does research cross the line and become insider trading?

STACY-MARIE ISHMAEL: That's really quite a gray area. What the SEC has tried to establish and the Department of Justice as well is that -- is to draw that line between what's acceptable, what's research, and what's insider trading. And where they have come down on that line is, if these people weren't given these particular facts or particular documents by other individuals who had a duty not to release that information, so, say, a lawyer who was working on a deal or who knew a deal might happen, but who was in breach of client privilege by giving that information out, then you're coming down on the side of insider trading.

Who is Raj Rajaratnam?

JUDY WOODRUFF: So, tell us a little more -- or remind us a little bit more about who Mr. Raj Rajaratnam is, a native of Sri Lanka...


JUDY WOODRUFF: ... billionaire...


JUDY WOODRUFF: ... before all this broke.

STACY-MARIE ISHMAEL: Well, I mean, before it broke, he wasn't exactly a household name, you know, much like other recent major frauds, like, you know, say, Madoff or Sir Allen Stanford. How he's been described has actually been really interesting. We have been told that his personality -- that he had a very big personality, that he could come across as quite arrogant, that, you know, he was a hard-driving boss and that he demanded very much from his traders. But then you're getting the picture that his friends and family say he was very loyal, he was a family man, he was actively involved in the community, and that he did quite a lot of charity work. So, you know, it's really a competing picture.

JUDY WOODRUFF: And remind us what he was charged with. And, by the way, he's on bail now. Is that right?

STACY-MARIE ISHMAEL: He is. He is out on bail. His bail was set at $100 million, which sounds high, but he was allowed to be free on a $20 million bond. So, they didn't actually have to put up the whole of the sum. And what he's been charged with, you know, sort of a range of things, from conspiracy to fraud, all of which center around having access to information that he really shouldn't have had access to, and then using that information to trade in stocks and shares, and profit on those trades.

Integrity issues for Wall Street

JUDY WOODRUFF: We just heard the U.S. attorney in New York make some pretty -- use some pretty strong language.


JUDY WOODRUFF: I mean, he talked about this -- this is an investigation that threatens the integrity of the broader business community. What -- what is he getting at there? This is more than just a narrow thing, it sounds like.

STACY-MARIE ISHMAEL: That's exactly what he's saying. I mean, the analogy here is to a cancer, in a sense. The -- there has been a lot of discussion, particularly among regulators, about the fact that, increasingly, smaller investors -- so, investors who aren't at the big banks, investors who may never have set a foot on Wall Street -- are disadvantaged, you know, by having just a lack of access to this kind of infrastructure. Now, some of that infrastructure is perfectly legitimate. But what -- you know, what the SEC and others are saying is that they worry that these kinds of activities, whether they be done by hedge funds or, you know, facilitated by lawyers, are really undermining the way that markets are supposed to work. They're making markets unfair, essentially.

JUDY WOODRUFF: And, I mean, he used the term, this is a wakeup call for Wall Street.

STACY-MARIE ISHMAEL: Yes. And I think what he's getting at there is, you know, some people on Wall Street may have gotten complacent and they may have felt like, well, nobody's going to come after me; what I'm doing isn't really wrong; I can get away with this. And the message that prosecutors and regulators are sending out is that, no, this is wrong, and you can't get away with it.

JUDY WOODRUFF: And, just quickly, do you have a sense of what happens next in this investigation?

STACY-MARIE ISHMAEL: That is an excellent question. There's a very, very strong sense that, you know, this second wave of arrests and charges today isn't necessarily the end of the story, that, you know, there may be more to come. You know, for instance, you know, going back to a couple weeks ago, when the first set of charges were announced against Mr. Rajaratnam, very shortly after, you saw high-profile people resigning from jobs. You know, it toppled an executive and there was the partner at McKinsey who fainted on his doorstep after having these allegations thrust against him. And we expect that simply because of how big some of these firms were and just the complexity of what was involved, that we're going to see more of the same in the coming weeks.

JUDY WOODRUFF: Stacy-Marie Ishmael with The Financial Times, thank you very much.


JUDY WOODRUFF: We appreciate it.   Source

Related to: Hedge Fund Insider Trading

Tags: hedge fund insider trading, fourteen, Raj Rajaratnam, Galleon Group, insider trading, SEC, securities and exchange commission, hedge funds, fraud, corruption

Hedge Fund Videos | 30+ Free Videos on Hedge Funds