Five More Years of Insider Trading Cases According to FBI

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FBI officials working on insider trading cases predict five more years of prosecutions.  The government is investigating 240 individuals for passing inside information, of which half are expected to become targets of prosecution.  Separately, the Wall Street Journal reported that a senior Goldman Sachs salesperson is under investigation for passing inside information to hedge funds.

At a press conference Monday, the FBI highlighted its role in the insider trading investigations, led by FBI Special Agents David Chaves and Richard Jacobs, who supervise the bureau’s two New York-based securities and commodities fraud squads.  In remarks after the press conference, Chaves indicated that there are approximately 240 individuals under investigation, of which half are “subjects,” meaning investigators believe they could have committed crimes and have approached them or could do so to build cases.  The remainder are “targets,” meaning the government believes they have violated insider-trading laws and is actively building cases against them.

When asked how long the investigations will last, Chaves responded, “I don’t want to say it’s infinite, but clearly, in five years we think we’ll be working it,” adding later, “We have cooperators set up for years to come.”  The next round of arrests are expected the end of April.

FBI involvement began in March 2007 as Chaves, Jacobs and their colleagues in New York teamed up with the Manhattan U.S. Attorney’s office under Preet Bharara and the U.S. Securities and Exchange Commission.  Over the last five years, the FBI cited 64 people arrested with 59 convicted at trial or pleaded guilty.  With a reported 120 targets in the pipeline, the FBI will need to double its previous efforts to complete 120 arrests in five years.

The FBI referred to three related insider trading initiatives: “Match Makers,” which investigated expert networks, centered on Primary Global Research and the latest initiative, “Perfect Hedge,” which focuses on hedge funds.  The third initiative is called “Market Integrity,” presumably focused on non-hedge fund related insider trading.

Separately, the Wall Street Journal reported that David Loeb, a Goldman managing director who acts as a middleman between the Wall Street firm and some of its most important hedge-fund clients, is the latest Goldman official to be investigated in the insider-trading probe.  The WSJ previously reported that Henry King, head of Taiwan Research for Goldman Sachs Asia, who frequently worked with Loeb, was also under investigation.

Despite the large backlog of cases reported this week by the FBI, we believe that rising concerns about expanding definitions of insider trading, negative impacts on market efficiency, and prosecutorial opportunity costs will increasingly weigh against the momentum established by investigators.  Ultimately, media fatigue will be the biggest obstacle for the FBI and its collaborators, a key factor for investigators as the recent press release demonstrates.  However, even if five more years proves to be optimistic on the FBI’s part, we clearly are nowhere near the end.

 

 

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