The FBI, federal prosecutors in New York and the Securities and Exchange Commission are going after a large ring of people and companies involved. The charges have yet to be filed but according to reports the case could result in dozens of arrests.
Agents searched the offices and seized documents at Diamondback Capital Management LLC, Level Global Investors LP, and Loch Capital Management LLC. The firms, based in Stamford and Greenwich, Connecticut and Boston, Massachusetts respectively, together manage almost $10 billion in assets. Both Diamondback Capital and Level Global Investors issued statements saying they were cooperating with officials.
The raids, first reported on The Wall Street Journal's website, are being conducted by the FBI, the Manhattan US Attorney's office and the Securities and Exchange Commission. More raids are likely in the next few days, according to people familiar with the matter.
The search warrants came only a couple of days after the Wall Street Journal published a story about the head of a technology research firm, John Kinnucan, sending an e-mail to various hedge funds, including SAC Capital, about being visited by “fresh faced eager beavers from the FBI” who wanted him to record conversations with his clients to help gather information about insider trading, a task he declined to accept.
The raids follow testimony from last year’s Galleon Group scandal — the largest hedge fund insider trading case in history — in which that New York hedge fund’s founder and 22 others were arrested on charges involving illegal trades in the stocks of several companies. Galleon’s cofounder, Raj Rajaratnam, is fighting the charges.
Insider trading entails trading stocks illegally on corporate information known only to people inside a company and not yet widely disclosed to the public. In the Galleon case, current and former employees of major companies were paid to provide insider information. Armed with such information, investors could profit unfairly.
The FBI usually asks someone to provide this type of assistance only when it already has information to show the person engaged in illegal conduct — the carrot of cooperation is offered to mitigate any future punishment.
The FBI remained close-lipped about the raids, “We are conducting court-authorized search warrants as part of an ongoing investigation,” said Richard Kolko, a supervisory special agent at the FBI’s New York office. “The matter is sealed. We have no further comment.” But their expansive investigation illustrates how law-enforcement agencies are using an increasingly wide range of tools to pursue alleged insider-trading rings.
Their search warrants suggest that prosecutors believe there was evidence in their offices that can show the flow of insider information that can help prove insider trading. Whether the firms themselves or any of their employees are targets of the investigation remains to be seen.
By using a search warrant rather than a grand jury subpoena, prosecutors have signaled there is a good chance that securities laws were violated, and they want evidence gathered quickly and in a way that avoids the possibility that some material might be destroyed.
While it is unlikely prosecutors expect to find the proverbial “smoking gun” in a firm’s files, getting the records that show what the firm knew about a company, and when it knew it, can be helpful to building a case showing that trades were made on the basis of inside information and not fundamental research.
The issue is blurry because insider trading isn't defined by statute. The dividing line between criminal and legitimate behavior has evolved in cases stretching back decades, as courts interpreted the antifraud provisions of securities laws enacted after the 1929 stock-market crash.
The raids helped push the Dow Jones Industrial Average down. Financial stocks were hit, with Goldman Sachs Group Inc. down several points following news that investigators also were examining whether Goldman bankers had leaked information about deals. Goldman declined to comment to reporters.
Several white-collar defense lawyers in New York said they were bombarded by calls from traders seeking representation.
