New Wave of Insider Trading Charges as Judge Approved Wiretaps for White Collar Crime Investigation

It’s all over the news, and I should not be caught by surprise. Yet here I am becoming very disturbed by the loopholes in our financial institutions, which gave rise to an unprecedented amount of white collar crime - from Bernard Madoff to Raj Rajaratnam. Wall Street this week has seen the biggest insider trading charges in its history, charges alleging the involvement of various ratings firms, consultancies and half a dozen US public companies including IBM, Intel and two top hedge fund managers of Galleon and New Castle. Complaints filed in the court of the Southern District of New York are posted here.

The $20M insider trading case is currently seen as “a potential watershed in aggressive law enforcement”. Why did it take the SEC so long? Transaction cost or the difficulty in assembling evidence for insider trading? So far the FBI has received a judge’s permission to tap Mr. Rajaratnam’s phone, an authorization not traditionally available for white collar crime.  In the meantime, the Financial Times reports:

Billionaire investor Raj Rajaratnam and present and former executives of Bear Stearns, IBM, Intel, and McKinsey were charged on Friday in an alleged insider trading scheme that US prosecutors called the biggest ever involving hedge funds.

Mr Bharara said the investigation, aided by an unnamed co-operating witness, was continuing. He said the charges “should be a wake up call for every hedge fund manager and every Wall Street trader and every corporate executive who is even thinking about engaging in insider trading”.

Prosecutors claimed Mr Rajaratnam, founder of the Galleon hedge fund, and others used insider information from sources inside hedge funds, public companies, Moody’s Investors Service and an investor relations firm to trade ahead of earnings announcements, acquisitions and joint venture deals. 

The alleged scheme, which ran from 2006 until earlier this year, involved trades in companies including Google, IBM, Sun Microsystems and Hilton and produced profits of more than $20m, most of which went to Mr Rajaratnam, according to federal prosecutors. The Securities and Exchange Commission, which brought civil charges, put the proceeds of the scheme at more than $25m.

Among those charged with trading on and providing tips were Mr Rajaratnam; Danielle Chiesi, an employee of New Castle, a hedge fund set up by Bear; and Mark Kurland, a New Castle executive who formerly served as Bear’s head of research and asset management. Some alleged offences occurred after Bear – and New Castle – were acquired by JPMorgan Chase in March last year. New Castle, which faces civil charges filed by the SEC, was separated from JPMorgan in late 2008.

The SEC investigation is far from complete since those who are at risk of prosecution may choose to cooperate with the authorities and pass on names of other people and other hedge funds that they have shared information with. The case against Galleon is predicted to be just the “tip of the iceberg,” said Jacob Frenkel, a former SEC enforcement lawyer. 

Comments

[Joe]

I'm really beginning to wonder if our entire economy isn't fixed by Wall Street somehow, and what it would look like if it ran as it was actually supposed to (without finance titans tweaking it).

[Christine Ngo]

Hi Joe,

As it appears, the Wall Street has been intensifying the crisis rather than helping it. We definitely need a better set of financial regulations and reform must be done right. At the moment, the Treasury's restriction on executive compensation for all TARP’s beneficiaries seems misdirected.

I hope you are well.

Christine