U.S. Authorities May Soon Lay Charges in Insider-Trading Probe

Nov 22 2010 | 9:39am ET

U.S. authorities are planning a series of insider-trading cases that could eclipse the Galleon Group case as the largest in the country's history.

The result of a three-year-long investigation, the charges could ensnare some of the world's top hedge funds. Some hedge fund traders and executives may be among those facing criminal or civil charges.

The probe, led by the Federal Bureau of Investigation, Securities and Exchange Commission and U.S. Attorney's office in New York, is focused on several allegedly interlocking insider-trading rings. Among the focuses of the investigation are the use of expert networks by hedge funds and mutual funds, as well as whether hedge funds have enjoyed advanced knowledge of mergers, especially among technology and healthcare companies.

Dozens of hedge funds have been subpoenaed, including Jana Partners and TPG-Axon Capital Management. In addition, the FBI sought one research firm's help in setting up a sting operation to ensnare some hedge funds, that firm, Broadband Research, said.

"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.)," Broadband's John Kinnucan told about 20 clients, among them hedge funds SAC Capital Advisors and Citadel Investment Group, late last month. "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."

"It felt like a street mugging. They were hammering me from either side," Kinnucan told the Journal. "They said they were going to arrest me, but said, 'We think you can help us. There is this guy in particular we are after.'"

Kinnucan said that the FBI agents warned that "there will be trouble" if he didn't cooperate.

The investigators are also looking into Primary Global Research and bankers at Goldman Sachs as possible sources of confidential information. The probe was first reported by The Wall Street Journal.

Also known to be in the regulators' sights is proprietary trading firm First New York Securities, which plans to launch its first hedge fund next year. The probe has looked at whether First New York and other firms received advance tips on mergers last year.

"We are one of more than three dozen firms that have been asked to provide general information in a widespread inquiry; we have cooperated fully," First New York told the Journal. "We stand behind our traders and our systems and policies in place that ensure full regulatory compliance."

The first charges and lawsuits could come within a few weeks or early next year. A federal grand jury in New York has already heard some evidence, although it is still unclear what the charges might be or how extensive the allegations will be. But among those facing charges are people implicated but not yet accused in the Galleon case, Reuters reports.

Another possible case involves a former UBS investment banker, and former SAC Capital analyst Jonathan Hollander. Hollander, who left SAC two years ago, has given at least two statements to prosecutors over the past year-and-a-half. Those "proffer statements" emerged as part of the insider-trading case against former Jefferies Group hedge fund manager Joseph Contorinis, who was convicted last month.

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