New York, NY – According to the Wall Street Journal, Iowa Senator Charles Grassley, the top Republican on the Senate Judiciary Committee, has recently started an investigation into potential insider trading by Stamford CT based hedge fund SAC Capital Advisors LP. This marks the first time since billionaire hedge fund manager Raj Rajaratnam was convicted on 14 counts of conspiracy and securities fraud that insider trading inquiries have been taken up on Capitol Hill.
Grassley’s Investigation Heats Up
On April 26th, Senator Grassley R-Iowa sent a letter to the Financial Industry Regulatory Authority asking it to provide information on the “potential scope of suspicious trading activity” at SAC, the hedge fund run by the billionaire investor Steven A. Cohen.
On May 10th, SAC executives, met with Mr. Grassley’s staff in Washington DC to discuss this inquiry. “We welcomed the opportunity to meet with the staff to educate them about the firm and our compliance efforts, and had an entirely appropriate, professional and cordial meeting. We will continue to cooperate in any way we can,” SAC said in a statement provided by a firm spokesman.
Last week, in response to Grassley’s request, FINRA provided information on roughly 20 instances where it thought the timing of SAC’s trades in various stocks were suspicious enough to refer the matters to the SEC. These transactions were made over the past ten years and include trades made around the time of merger announcements or other market-moving events.
It is important to note that authorities have not alleged any wrongdoing by SAC Capital or their founder Steven A. Cohen.
SAC Scrutiny Grows
Last year, SAC received a subpoena as part of the broad government investigation into potential insider trading. The firm stressed at the time that the subpoena didn’t suggest anyone at SAC had done anything wrong.
Since then, two former SAC portfolio managers, Noah Freeman and Donald Longueuil have plead guilty to trading on insider information. An SAC spokesman said that the firm was “outraged” by the conduct of the two portfolio managers.
Earlier this month, federal prosecutors disclosed that they are investigating trades made in a $3.0 bln stock account directly overseen by Mr. Cohen. It has been suggested that trades originated by Freeman and Longueuil were included in this account.
Suspicious Trades on the Rise
In recent years, the number of “suspicious trades” that FINRA has referred to the SEC for further investigation has been on the rise. In 2008, FINRA referred 189 such trades, up in 2009 to 221 trades, and in 2010 259 suspicious-trading referrals were made to the SEC. A single such referral can include dozens of trades in multiple stocks executed on different days.
Some industry insiders explain that the rise in “suspicious trades” could be a reflection of the old adage “buy the rumor, sell the fact” as stocks move prior to a merger announcement or other market moving event as rumors about these developments become widespread.
Despite this fact, the regulators are paying an increasing amount of attention on potential insider trading cases. This is consistent with information provided by industry sources which have said that federal investigators are currently looking into between 300 and 400 cases of potential insider trading.
In the past, Senator Grassley has been widely critical of the government’s regulation of Wall Street, and as a result the SAC investigation isn’t out of character. However, it is surprising about the rather public nature of his probe into SAC’s trading activity.
Grassley wrote in his recent letter to FINRA, “The use of nonpublic information for insider trading purposes is sadly alive and well in our nation’s financial markets. More must be done to investigate and bring these criminals to justice.” Given the recent activity of both regulators and federal prosecutors, and the added pressure from Grassley’s current investigation, we expect that a growing number of insider trading cases will become public in the months to come.