FBI sees more hedge fund trading probe informants

NEW YORK Mon Feb 27, 2012 5:51pm EST

Galleon hedge fund founder Raj Rajaratnam arrives at Manhattan Federal Court in New York May 10, 2011.  REUTERS/Brendan McDermid

Galleon hedge fund founder Raj Rajaratnam arrives at Manhattan Federal Court in New York May 10, 2011.

Credit: Reuters/Brendan McDermid

Related Topics

NEW YORK (Reuters) - The FBI says it has enough informants lined up to keep its investigations of suspected illegal insider trading at hedge funds going for at least five more years.

In a briefing on Monday with reporters at the New York office of the Federal Bureau of Investigation just blocks away from Wall Street, agents who manage squads of investigators likened the probes to penetrating a secret society.

The investigations are building on a mission dubbed "Perfect Hedge" that have led to the prosecutions of multimillionaire Galleon Group hedge fund founder Raj Rajaratnam and dozens of traders, executives and research consultants since late 2009.

"We have cooperators set up for years to come," said David Chaves, a supervisory special agent for securities and commodities fraud investigations.

He told reporters that the informants include cooperating witnesses -- people who have been identified as conducting illegal trading but who have agreed to assist authorities to catch others in the hopes of receiving a lighter sentence -- and sources within hedge funds.

"I don't want to say it's infinite, but clearly in five years we think we will be working it," Chaves said.

The Galleon prosecution and other recent insider-trading cases have used secretly-recorded telephone conversations to gather evidence, an investigatory tool traditionally used in organized crime or narcotics cases.

The use of wiretaps sent a chill through the hedge fund industry closed to outsiders and what the FBI calls "undercover resistant."

Investigators have tracked mobile phone calls, instant messaging and social media to collect evidence.

The FBI says it is alert to new ways in which people may try to exchange information on publicly traded companies to gain an illegal edge.

"We will go to whatever lengths we have to keep up with changes in technology," said Richard Jacobs, another FBI supervisory special agent for white-collar crime cases.

Both officials emphasized that law enforcement believes that the overwhelming majority of hedge funds and their traders are law-abiding and run their firms responsibly.

A similar briefing was given to reporters in Washington on Monday, where officials discussed the agency's shift in focus of the past 10 years to financial fraud cases involving larger amounts of money than in the past.

For example, out of the 2,600 mortgage fraud investigations open nationally, 70 percent involve more than $1 million, compared with smaller bank frauds under $25,000 that were previously typical of the caseload.

In New York, the FBI said that to date, out of 64 arrests made in "Perfect Hedge," 59 people have been convicted or have pleaded guilty. These prosecutions, in partnership with the office of the Manhattan U.S. Attorney and the U.S. Securities and Exchange Commission, have been an important deterrent, the agents said.

Another tool for deterrence is the publicity the cases have generated in the United States and abroad.

To that end, Michael Douglas, the Academy Award-winning star of the 1987 movie "Wall Street," agreed to a request from the FBI to record a public service announcement.

"In the movie 'Wall Street' I played Gordon Gekko, who cheated to profit while innocent investors lost their savings," Douglas, 67, says in the video recording released on Monday.

"The movie was fiction but the problem is real," Douglas says in the video. "Our economy is increasingly dependent on the success and integrity of the financial markets. If a deal looks too good to be true, it probably is."

(Reporting By Grant McCool, additional reporting by Aruna Viswanatha in Washington; Editing by Martha Graybow)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (2)
greatnesslost wrote:
It wasn’t insider trading that caused the crash, it was naked short selling, ETF’s, Hedge Funds, Default Swaps, and Mark to Market. Lehman Brothers was destroyed in what only can be called a cyber stock attack led by Sovereign Wealth funds and people who want the US system destroyed. Bin Laden had a Business and Economics degree from the London School. The Obama administration is blocking access to computer records to al Qaeda plans to bring down the EU system though naked short, and short selling in general of Euro Bonds. Why? The records may show George Soros piggy backed on the attack and made $1.1 billion in the process. It wouldn’t be good politically if the largest factor behind the Obama campaign’s fund raising for the 2008 election was one of the architects of the Sept 11 – 15 2008 crash. Lehman Brothers, only leveraged 10.5:1, meaning it had one of the highest reserve ratio of any US financial institution at the time was destroyed by naked short selling though two small American trading firms. Billions were funneled though these conduits. Company A would “sell” shares in Lehman they didn’t own to Company B at below the trading at the moment,which in turn would sell them back at a greater reduced price, and so on. Billions from foreign Sovereign Wealth Funds, most in the Middle East was used to launch a bear run. This panicked the market and naked shorts accelerated. With ETF leverage at record ratio the thing started to collapse. This was accelerated on Sept 15th by Sovereign Wealth Funds, this time expanding into China and Russia pulling $275 billion an hour electronically out of US financial institutions and banks. At that pace all the money saved electronically in the US could have been gone on the 16th. Bush shut it down, announced a $108 billion immediate rescue fund followed by TARP, etc. The FBI is barking completely up the wrong tree – it should be seizing George Soros’s records, and his communications with the Sovereign Wealth Fund managers at issue. In addition his recorded, text message, and E-mail records with the DNC, and Obama campaign.

This was an orchestrated kind of cyber attack on the US started on the 7 year anniversary of 9-11. That is no coincidence, and the Obama Administration should be hauled up in front of Congress to explain its link to this, and all records related to it exposed. it was not beyond Mr. Soros’s capacity to t

Feb 27, 2012 3:25pm EST  --  Report as abuse
JamVee wrote:
I hope they put every one of them in prison. I personally wouldn’t mind it if they got a river cruise with a cement overcoat.

Feb 27, 2012 6:42pm EST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.