Federal authorities have launched one of the biggest crackdowns on insider trading in years. On Saturday, November 20, the Wall Street Journal reported that a huge insider trading investigation was under way. According to the paper's sources, a veritable hurricane of financial scandal was in the making:
Federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders, and analysts across the nation, according to people familiar with the matter.
The criminal and civil probes, which authorities say could eclipse the impact on the financial industry of any previous such investigation, are examining whether multiple insider-trading rings reaped illegal profits totaling tens of millions of dollars, the people say. Some charges could be brought before year-end, they say.
The investigations, if they bear fruit, have the potential to expose a culture of pervasive insider trading in U.S. financial markets, including new ways non-public information is passed to traders through experts tied to specific industries or companies, federal authorities say.
Reading the article, it appeared as though it would be some time before the Feds took any concrete action. Yet perhaps fearing the destruction of evidence after the WSJ's story, investigators swung into action on Monday, with the FBI mounting raids of three hedge funds. The firms were Diamondback Capital Management and Level Global Investors in Connecticut and Loch Capital Management, based in Boston.
While none of these firms are well known, the WSJ story suggests that the insider trading firm could implicate some of the biggest players on Wall Street. The reporters write that "prosecutors and regulators are examining whether Goldman Sachs Group Inc. bankers leaked information about transactions, including health-care mergers, in ways that benefited certain investors, the people say. Goldman declined to comment."
Also mentioned are SAC Capital Advisors LP and Citadel Asset Management, as well as as Janus Capital Group, Wellington Management Co. and MFS Investment Management. Collectively, these firms have tens of billions of dollars under management.
The most intriguing aspect of the emerging scandal is that insider information appears to have been systematically trafficked by "independent analysts and consultants who work for companies that provide "expert network" services to hedge funds and mutual funds." According to the story:
"Expert-network firms hire current or former company employees, as well as doctors and other specialists, to be consultants to funds making investment decisions. More than a third of institutional investment-management firms use expert networks, according to a late 2009 survey by Integrity Research Associates in New York. The consultants typically earn several hundred dollars an hour for their services, which can include meetings or phone calls with traders to discuss developments in their company or industry.
But the investigations also involve more familiar tip-offs of impending mergers and other deals:
"The SEC has been investigating potential leaks on takeover deals going back to at least 2007 amid an explosion of deals leading up to the financial crisis. The SEC sent subpoenas last autumn to more than 30 hedge funds and other investors.Some subpoenas were related to trading in Schering-Plough Corp. stock before its takeover by Merck & Co. in 2009, say people familiar with the matter. Schering-Plough stock rose 8% the trading day before the deal plan was announced and 14% the day of the announcement."
Not surprisingly, some of the investigations under way loop back to the Galleon Group case involving that firm's founder Raj Rajaratnam and 22 other defendants. Some 14 people have already pleaded guilty in that investigation and presumably some of them are providing insights about illegal doings elsewhere.
Among hedge-fund managers whose trading in takeovers is a focus of the criminal probe is Todd Deutsch, a top Wall Street trader who left Galleon Group in 2008 to go out on his own, the people close to the situation say. A spokesman for Mr. Deutsch, who has specialized in health-care and technology stocks, declined to comment.