Backroom deals, smokescreen lunches and coded communications: all the makings of a late-night TV movie plot, but, this however can describe the real-life melodrama of insider trading.
Since the not-so-long ago days of Enron and ImClone (can you say, Martha Stewart), media frenzy and public backlash against corporate executives who blur the line between business ethics and personal gain continues to shine the spotlight on shady financial misdeeds.
The financial industry, in particular, continues to be marred by those who take the Gordon Gekko investment approach.
The FBI, along with the Securities and Exchange Commission, after launching a three-year massive probe into criminal and civil investment allegations, recently issued several subpoenas and made one arrest of top-notch financial experts in an alleged insider-trading ring.
On November 22, 2010, the FBI raided three large hedge fund firms. As accounted by the Wall Street Journal, “In coordinated raids in New York, Connecticut and Massachusetts, Federal Bureau of Investigation agents seized documents at the offices of Level Global Investors LP, Diamondback Capital Management LLC and Loch Capital Management LLC.”
The raids come just two days before the arrest of a New York-based research analyst, Don Ching Trang Chu, of the Primary Global Research firm. Chu was arrested after taped recordings of him giving confidential insider trade information to Richard “C.B” Lee, hedge fund manager of the Galleon Group. Lee, a former SAC Capital Advisors trader, who had pled guilty-along with 13 others- in a separate insider trading case against Galleon’s founder Raj Rajaratnam agreed to cooperate with investigators.
This probe is spear-headed by the newly appointed Manhattan U.S. Attorney Preet Bharara who led the Bernie Madoff investigation and other illegal stock trade cases.
Since the November 22nd raid, a fourth FBI raid was conducted against the Chicago hedge fund firm Balyasny Asset Management LP. This latest round of subpoenas is mounting up against various consultants, bankers, traders and analysts alike. Firms, including Janus Capital Group, Wellington Management, Citadel, SAC Capital Advisors and others, are also feeling the heat.
Interestingly, in a separate but slightly equal case, the founder of SAC Capital found himself in a David Letterman-esque scenario (minus the sexcapades). It was reported that a Brooklyn rabbi was sentenced with extortion in an attempt to bribe the founder Steven Cohen with insider trade information he allegedly received from an Otisville Correctional Facility inmate he was counseling. Furthermore, Cohen is apparently an avid art collector who has purchased over $700 million worth of artwork over the past five years. As of November 12, 2010, it was announced that he purchased the iconic Andy Warhol’s “Coca-Cola  [Large Coca-Cola]” for $35.4 million- which are good ways to ‘get rid of’ money (can you say, “Hummm”).
These cases of insider trading are the newest twists to illegally profiting from confidential information.
There are alarmingly growing numbers of industry insider experts that have allegedly benefited from non-public information. A new breed of investment companies are developing into so-called “expert network firms”. These networking firms help investment managers meet industry experts to research a specific industry. However, they are generating “[n]ew ways non-public information is passed to traders through experts tied to specific industries or companies,” suggests the Wall Street Journal.
In yet another case of insider information is the retail discount company Big Lots. In a lawsuit brought on by Big Lots, the company is accusing Retail Intelligence Group, a Florida market research firm, of “going too far to dig up trade secrets, and put together information that damaged the chain’s stock price,” as told by National Public Radio. The company claims that Retail Intelligence- in a separate report- sold the information to selected institutional investors in the form of a research report, which “correctly predicted decreased performance for the third quarter.” The outcome of this lawsuit will be closely watched because it can greatly affect how stock market research will be conducted in the future.
With all the thickening plots and colorful characters, these latest insider trade investigations could possibly command Oscar-winning performances.
For a viewing of the cast of characters,see this chart.
- The six degrees of Steve Cohen (finance.fortune.cnn.com)
- 1st arrest made in huge insider trading probe (msnbc.msn.com)
- John Kinnucan: SAC Capital’s Michael Steinberg Was NOT Who I Was Asked To Record (businessinsider.com)