Authorities may be close to filing insider trader cases

NEW YORK (Reuters) - Federal authorities may file a series of insider trading cases against hedge fund traders, consultants and Wall Street bankers within weeks, several lawyers familiar with the situation said.

Prosecutors and securities regulators are likely to file a number of cases targeting the $1.7 trillion hedge fund industry rather than a single spectacular case, said the lawyers, who have knowledge of the investigations but did not want to be identified since details have not been made public.

The new round of prosecutions could start in the next few weeks or early next year, the lawyers said, but it is too soon to say whether they will rival last year’s arrest of Galleon Group hedge fund manager Raj Rajaratnam and nearly two-dozen others, one of the largest insider trading cases ever.

The Wall Street Journal reported in its Saturday edition that federal authorities, after a three-year investigation, were preparing insider trading charges against a host of financial players including investment bankers and hedge fund managers that could surpass any previous investigations.

Legal sources told Reuters that some of the new charges may be lodged against a number of individuals who were implicated in the Galleon case as well as another major insider trading case, but were never formally charged.

While the full scope of the investigation by prosecutors and the Securities and Exchange Commission is unclear, the sources said one area of focus is the use of so-called expert network firms, which command big fees from hedge funds to match them with experts in particular industries.

Federal authorities also have been looking into whether investment bankers and others may have tipped off some traders to news concerning negotiations in buyouts of several pharmaceutical companies. An SEC official declined to comment.


Federal authorities are still deciding whether to pursue cases against several individuals who were implicated but never charged in the Galleon case and another case involving a former UBS investment banker, several people familiar with the situation said.

One individual sitting on the prosecutorial bubble is former SAC Capital Advisors analyst Jonathan Hollander, who last worked for Steven Cohen’s $12 billion hedge fund in November 2008.

Federal authorities have linked Hollander to several allegations of insider trading in both court filings and testimony at a recent criminal trial, but he has not been charged with any wrongdoing.

Reuters has learned that prosecutors disclosed for the first time in August that they had taken at least two confidential statements from Hollander at some point over the previous 18 months.

Prosecutors disclosed the Hollander “proffer statements” in an August 25 letter to lawyers for former Jefferies Group Inc hedge fund manager Joseph Contorinis, who was convicted by a federal jury of insider trading in October.

The letter was included as an exhibit to a court filing by attorneys for Contorinis before the start of his trial in Manhattan federal court.

Nicos Stephanou, one of the government’s star witnesses against Contorinis, testified that in addition to providing the former Jefferies fund manager with nonpublic information about corporate buyouts, he also provided similar confidential tips to Hollander while the analyst was still working for SAC.

Stephanou, a former UBS banker, pleaded guilty to passing tips to numerous people and agreed to cooperate with prosecutors. He is scheduled to be sentenced in late December.

The August letter to Contorinis’s lawyers did not divulge the substance of Hollander’s proffer statements, which a person familiar with the matter said were given some time ago.

Federal authorities and Hollander’s lawyer, Aitan Goelman, declined to comment.

Proffer statements are generally given by individuals in the hopes of either avoiding charges or negotiating a plea deal. Defense lawyers said it was not uncommon for individuals, in giving a proffer, to describe potential wrongdoing by others in the hopes of getting immunity from prosecution.

Lawyers familiar with the situation, who declined to be identified, said it may offer one explanation for why federal prosecutors and U.S. securities regulators dismissed criminal and civil insider trading charges against former Blackstone Group banker Ramesh Chakrapani, a friend of Hollander.


In January 2009, federal authorities charged Chakrapani with tipping off an unnamed analyst at a hedge fund with confidential information in 2006 about the status of buyout negotiations involving the Albertstons supermarket chain.

The analyst was not named or charged but Reuters reported in January that the “tippee” was Hollander.

Authorities said the Albertsons tip generated a profit of $3.5 million for Hollander’s firm at the time, CR Intrinsic, a subsidiary of SAC Capital. An SAC spokesman declined to comment on the Hollander proffer statements.

Federal authorities may need to move quickly if they are going to charge Hollander in connection with trading in Alberstons shares because the five-year statute of limitations for bringing an insider trading case expires early next year.

Indeed, lawyers said one reason authorities may be gearing up to file a new round of insider cases is because of the five-year statute of limitations. A number of the buyout deals under scrutiny involve deals from 2006 and 2007.

Editing by Ted Kerr