FBI Raids Three Hedge Funds Amid Insider-Trading Case (WSJ)

The Wall Street Journal
By Susan Pulliam, Jenny Strasburg and
Michael Rothfeld
11/22/10

Federal Bureau of Investigation agents raided the offices of three hedge funds as part of a high-profile insider-trading investigation, and more could be on the way, according to people familiar with the matter.

The offices of Diamondback Capital Management LLC and Level Global Investors LP were raided. Both hedge funds are run by former managers of Steve Cohen's SAC Capital Advisors.

The third firm raided is Loch Capital Management LLC, based in Boston, people familiar with the matter say. Leonard Pierce, a lawyer for Loch Capital, declined to immediately comment.

"The FBI is executing court-authorized search warrants in an ongoing investigation," said Richard Kolko, an FBI spokesman, who declined to comment further.

Loch had $750 million in assets as of the start of this year, according to SEC filings. The firm, run by brothers Timothy and Todd McSweeney, didn't immediately return a message seeking comment. Leonard Pierce, a lawyer for Loch Capital, declined to immediately comment.

The McSweeney brothers are acquaintances with Steven Fortuna, a hedge-fund manager who pleaded guilty in the Galleon case and agreed to cooperate in that ongoing investigation.

Level Global Investors LP is a Greenwich, Conn., hedge-fund firm run by David Ganek, a former SAC Capital trader and art collector. He started Level Global in 2003 and earlier this year reported managing about $4 billion in assets.

Diamondback Capital Management LLC is based in Stamford, Conn., and was started in 2005. It oversees more than $5 billion in assets, according to SEC filings.

The moves by the FBI follow an article by The Wall Street Journal describing an insider-trading investigation that is expected to encompass consultants, investment bankers, hedge-fund and mutual-fund traders. The investigation is said by people close to the situation to eclipse in size and magnitude past insider-trading probes.

Messages left with Richard Schimel, Diamondback's co-chief investment officer, and Diamondback's general counsel, Joel Harary, on their office phones weren't immediately returned.

A spokesman for Level Global said, "We can confirm that agents from the Federal Bureau of Investigations visited our offices this morning as part of what we believe to be a broader investigation of the financial services industry discussed in media reports over the weekend. We are cooperating fully with the authorities and, at the same time, we are fully operational and continue to work diligently for the benefit of our investors."

Goldman In Insider Trading Probe? by Matt Taibbi

By Matt Taibbi
Taibblog
11/20/10

News leaked out today that the feds will soon be herding a whole pen full of Wall Street firms into court on insider trading charges, including, reportedly, our old friends Goldman, Sachs.

The basic charge here is that investment banks and other firms were leaking insider info about things like mergers to closely-allied hedge funds, who in turn placed the requisite bets on or against the companies in question.

The most interesting detail in the WSJ piece, to me, was a bit about an email sent by one John Kinnucan, a principal at an Oregon-based company called Broadband Research, to a number of his clients. The email reads, in part, as follows:

"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… (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."

Aside from the amusing detail here in which Kinnucan brags about turning down an offer to cooperate with the feds (I ain't no stinking rat!) the thing to note here is the list of clients he sent this email to. Those include hedge-fund firms SAC Capital Advisors LP and Citadel Asset Management, and mutual-fund firms Janus Capital Group, Wellington Management Co. and MFS Investment Management.

Those are some interesting MF-ing names.

Citadel and SAC, along with Goldman and David Einhorn's Greenlight Capital, were among the firms subpoenaed by Lehman Brothers lawyers after that latter firm exploded in 2008. The allegation then was that a number of hedge firms worked with banks and other companies to spread rumors about Lehman at the same time some of those funds were holding big short positions.

Similar allegations, involving many of the same players, were made after Bear Stearns was blown apart in March of that year. There were multiple storylines in the that business, including one set of allegations that some hedge funds with short positions in Bear leaked information about Bear having a liquidity problem during that fateful week in March of 2008. Another extremely interesting detail, which I and others have reported on, involves the fact that all the big banks on Wall Street (including Goldman) and many of hedge funds (including Citadel) had a meeting at the Fed with Ben Bernanke just three days before the Fed announced its plan to subsidize the sale of Bear to JP Morgan Chase. This was on March 11, 2008; the only big bank that was not invited to this meeting was Bear, Stearns. It strains all credulity to imagine that the rescue of Bear was not discussed at that meeting and that none of the players at that meeting made moves based on those conversations.

The other crimes on Wall Street have been so pervasive and so massive in scope in the past decade or so that good old-fashioned insider trading — hedge funds and other gamblers robbing the great mass of uninformed investors by acting on exclusive intelligence not available to the rest of us — seems almost quaint. Compared to a situation in which the entire economy was based on fraud schemes like the mass sales of mismarked AAA-rated mortgage-backed assets, worrying about hedge-fund gamblers skimming a few billion here and there off of insider info seems almost misguided.

However there is a mounting pile of evidence suggesting a sort of widespread culture of insider trading in which a few players (specifically the major banks and a few of the biggest and best-connected hedge funds) have milked a seemingly endless stream of exclusive information, not occasionally or opportunistically but as an ongoing commercial strategy. I get about two or three letters a week from people in the finance business complaining that this or that company is openly advance-trading on a) information from the Federal Reserve about things like interest rate changes, or b) info about big client orders in things like commodities, or c) mergers and the like. Certainly there is a great deal to be suspicious of with regard to the behavior of certain companies in advance of major events like the rescue of Bear Stearns, the collapse of Lehman Brothers, the AIG bailout, the acquisition of Merrill Lynch by Bank of America, the emergency conversions to bank holding company status of Goldman and Morgan Stanley, and the announcement of major bailout programs like the TALF and the P-PIP.

Anyone who knew in advance how or when these deals were going down could make billions almost without trying, and we know that the heads of many of the major banks were in contact with key federal officials during this entire period. So there's that.

That's why it'll be interesting to see how far this federal probe goes. Many of the people I talk to insist that the insider-trading problem is a pervasive, systemic issue, not something that is isolated and limited to a few bad apples. So it'll be interesting to see if the Justice Department has a less indulgent view of insider crime than, say, Ben Bernanke's Federal Reserve. Not that I'm holding my breath for a huge roundup, but boy, wouldn't it be something if they aimed as high as this thing probably goes?

Huge Insider Trading Probe-Some charges could be brought before year-end

Will Someone Finally Go To Jail In Lieu

of the Meaningless SEC Fine Payment?

(just how do Wall Street Investment Banks have no losing

trading days in an entire quarter...?)

The Wall Street Journal
By Susan Pulliam, Michael Rothfiels,
Jenny Strasburg and Gregory Zuckerman
11/20/10

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.

One focus of the criminal investigation is examining whether nonpublic information was passed along by independent analysts and consultants who work for companies that provide "expert network" services to hedge funds and mutual funds. These companies set up meetings and calls with current and former managers from hundreds of companies for traders seeking an investing edge.

Among the expert networks whose consultants are being examined, the people say, is Primary Global Research LLC, a Mountain View, Calif., firm that connects experts with investors seeking information in the technology, health-care and other industries. "I have no comment on that," said Phani Kumar Saripella, Primary Global's chief operating officer. Primary's chief executive and chief operating officers previously worked at Intel Corp., according to its website.

In another aspect of the probes, 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.

Independent analysts and research boutiques also are being examined. John Kinnucan, a principal at Broadband Research LLC in Portland, Ore., sent an email on Oct. 26 to roughly 20 hedge-fund and mutual-fund clients telling of a visit by the Federal Bureau of Investigation.

"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 email, which Mr. Kinnucan confirms writing, was addressed to traders at, among others: hedge-fund firms SAC Capital Advisors LP and Citadel Asset Management, and mutual-fund firms Janus Capital Group, Wellington Management Co. and MFS Investment Management. SAC, Wellington and MFS declined to comment; Janus and Citadel didn't immediately comment. It isn't known whether clients are under investigation for their business with Mr. Kinnucan.

The investigations have been conducted by federal prosecutors in New York, the FBI and the Securities and Exchange Commission. Representatives of the Manhattan U.S. Attorney's office, the FBI and the SEC declined to comment. The rest of the story

Illegal insider trading on Wall Street is rampant

Mr. Bharara previously spent five years

as an assistant U.S. attorney prosecuting

organized crime leaders of the Gambino

and Colombo crime families.

(Mr. Bharara will not be intimidated by the Wall Street gangsters...)

Crain's New York Business
By Hilary Potkewitz
10/21/10

Saying illegal dealing is on the rise, U.S. Attorney Preet Bharara says his office is readying a new round of prosecutions and will up its use of wiretaps to catch white-collar crooks.

U.S. Attorney Preet Bharara said Wednesday night that insider trading is “rampant” on Wall Street and that his office is expanding its use of wiretaps to pursue Wall Street crimes.

“From my vantage point, I can see that illegal insider trading is rampant and may be on the rise,” Mr. Bharara said to a meeting of white-collar criminal defense lawyers at the New York City Bar Association. “We have devoted significant resources to this and are adding more.”

Calling insider trading a top criminal priority for his office, Mr. Bharara hinted that a new wave of arrests was on the way, though he declined to give details. He also said that his office will bring charges against corporations where appropriate.

About a year ago, the Federal Bureau of Investigation nabbed billionaire Raj Rajaratnam in an insider trading conspiracy by using wire-taps to record transactions and conversations within the Galleon Group, Mr. Rajaratnam’s former hedge fund. The ongoing case led to indictments and the resignation of several high-profile traders and corporate insiders.

Mr. Bharara said he views the Gallon case as a model for the successful use of court-authorized wire-taps in Wall Street cases, and said he plans to expand their use in insider-trading investigations.

“If you think about it, using electronic devices to monitor trading, which is predominantly an electronic activity, makes the most sense,” he said. “It certainly makes more sense when you think of all the other non-electronic crimes where we’ve been using wiretaps for years.”

Mr. Bharara previously spent five years as an assistant U.S. attorney prosecuting organized crime leaders of the Gambino and Colombo crime families. He pointed out that organized crime and white-collar crime have started to overlap. Just last month, a criminal investigation into cocaine trafficking at the ports of New York and New Jersey uncovered a multimillion dollar “pump-and-dump” stock fraud scheme.

“As long as white-collar criminals are using the tactics of common criminals, we have no choice but to treat them as common criminals,” Mr. Bharara said.

Congress is immune from insider trading rules! Lawmaker Vows to Outlaw Insider Trading on Capitol Hill

Congress is immune from insider trading rules

Lawmakers said there was no followup hearing

on the issue planned for the near future

By Tom McGinty and Brody Mullins
The Wall Street Journal
10/12/10

A congressman vowed to renew his efforts to outlaw insider trading by Capitol Hill members and their staffs, following a Wall Street Journal investigation showing that congressional aides traded in companies overseen by their bosses.

Rep. Brian Baird (D., Wash.) and a handful of other lawmakers including Rep. Louise Slaughter (D., N.Y.) have for years supported legislation that would explicitly make it illegal for members and their aides to trade stocks and other securities based on non-public information gleaned from the legislative process. Mr. Baird, however, retires at the end of this year.

When the bill—the Stop Trading on Congressional Knowledge Act, or Stock Act—was introduced nearly five years ago, just 14 other lawmakers endorsed it.

A current version of the bill has fared worse, with support from just nine lawmakers. There is no companion legislation in the Senate.

"Members of Congress and their staffs have access to information worth millions of dollars if used for personal gain," Mr. Baird said in an interview on Monday. "The public expects us to adhere to at least as high a standard as we impose on other people, and we don't in this case."

In a page-one story Monday based on an examination of more than 3,000 financial disclosure forms of congressional aides, the Journal reported that hundreds of aides traded stocks during 2008 and 2009. At least 72 of them traded the shares of companies overseen by their bosses' committees.

The aides said they didn't profit by making trades based on any information gathered in the halls of Congress.

Congress is immune from insider-trading laws; federal regulators have never brought an insider-trading case against either congressional members of their staffs. Unlike many executive branch employees, lawmakers and aides don't have restrictions on their stock holdings and ownership interests in companies they oversee.

About 1,700 of the highest-paid congressional aides must disclose information once a year on their finances, such as their assets, debts, spouses' employment and other sources of income, including capital gains from trading securities.

Rather than passing legislation, Mr. Baird said he has come to believe in recent months Congress should simply amend its official ethics guidelines and rules. The next House majority, for example, could easily add the new rules as part of the process of convening the new Congress in 2011, he said.

Mr. Baird also said the new rules should require disclosures of all trades within 48 hours, as the Stock Act states, instead of a year afterward, as current rules require. He said any improper trading would then be more easily detected, because observers would be attuned to congressional activities at the time their trades were made.

Mr. Baird said he trained his staff members to avoid profiting from non-public information, but said the majority of the members of Congress and their aides don't receive similar training.

Some legislators remain undecided about supporting the legislation. That includes House Speaker Nancy Pelosi of California. The Journal reported Monday that a top aide to Ms. Pelosi profited by the trading of shares of Freddie Mac and Fannie Mae in a brokerage account with her husband two days before the government authorized emergency funding for the companies.

The aide said she had no knowledge of the trades when they were made, and the husband said he bought the stock after reading a news article.

The House Financial Services Committee has "already begun to examine ways of preventing any unfair trading by government officials in both the executive and legislative branches," said Drew Hammill, a spokesman for Ms. Pelosi. "This includes assessing the implications for the constitutional protections of speech or debate."

Mr. Hammill was referring to a July 2009 hearing at a House subcommittee. "Should government officials trade on information that they have access to that the general public does not?," asked Rep. Dennis Moore (D., Kan.), who chaired the hearing of the House Financial Services subcommittee on oversight and investigations. "If not, what additional rules, regulations or laws are required to address this concern?"

Lawmakers said there was no followup hearing on the issue planned for the near future.