(January 19, 2012) — Federal prosecutors have charged seven hedge fund insider-trading suspects in a $78 million record-setting probe.
The probe was part of a five-year investigation of insider trading at hedge funds by the Federal Bureau of Investigation (FBI) and the Justice Department. United States Attorney Preet Bharara told a news conference that the illegal trade was part of a $78 million scheme involving at least seven financial industry professionals, marking the biggest transaction ever prosecuted in Manhattan.
“Today’s charges illustrate something that should disturb all of us: They show that insider trading activity in recent times has, indeed, been rampant and routine and that this criminal behavior was known, encouraged and exploited by authority figures in several investment funds,” Bharara said, according to the Associated Press. According to prosecutors, the alleged scheme, which involved trades in Dell Inc., led to a total of $61.8 million in illegal profits.
Meanwhile, the Securities and Exchange Commission (SEC) issued a released stating:
“The SEC alleges that a network of closely associated hedge fund traders at Stamford, Conn.-based Diamondback Capital Management LLC and Greenwich, Conn.-based Level Global Investors LP illegally obtained the material nonpublic information about Dell and Nvidia. Investment analyst Sandeep ‘Sandy’ Goyal of Princeton, N.J., obtained Dell quarterly earnings information and other performance data from an insider at Dell in advance of earnings announcements in 2008. Goyal tipped Diamondback analyst Jesse Tortora of Pembroke Pines, Fla., with the inside information, and Tortora in turn tipped several others, leading to insider trades on behalf of Diamondback and Level Global hedge funds.”
SEC Enforcement Director Robert Khuzami continued to note that it was disturbing that the case involved senior executives at “some of the largest and most sophisticated hedge funds in the country”.
The result of the investigation: charges against at least 56 people, with more than 50 having pleaded guilty or been convicted since 2009, including Galleon Group LLC co-founder Raj Rajaratnam. Rajaratnam, the hedge-fund tycoon and co-founder of Galleon Group, was found guilty of all counts against him in early May. The counts against him included nine of securities fraud and five of conspiracy to commit securities fraud.
After hearing the evidence that Rajaratnam participated in a seven-year conspiracy to trade on illegal tips from corporate executives, bankers, consultants, traders and directors of public companies, the Manhattan jury issued the guilty verdict.
This and other cases of alleged insider-trading on Wall Street have pushed institutional investors around the world to keep a closer eye on their investments while rethinking risk controls. Many analysts believe the latest string of FBI-led probes over insider-trading draws attention to the risk controls that fund managers have integrated when dealing with third-party research providers, and the investigation may encourage them to heighten their standards.
“I think the most important control is for senior executives to clearly communicate to employees that 1) insider trading is not tolerated; and 2) employees have an affirmative duty to escalate their receipt of information that is even potentially material and non-public,” Joshua E. Broaded, principal consultant at ACA Compliance Group, told aiCIO in late 2010, after three hedge funds were raided the previous month as part of a probe by the FBI, the Manhattan US Attorney’s office, and the SEC.