How Much Longer?


New York – The insider trading investigation entered a new phase in February as the focus shifted from suppliers of inside information, mainly centered on expert network Primary Global Research (PGR), to users of inside information.  The natural question is how much longer will the investigation last?  If investigators have their way, the investigation could last well into the fourth quarter or carry on until next year.  However, media fatigue with the topic will become an increasing challenge for prosecutors, who have managed the media masterfully so far.

The investigation of PGR began around April 2009, after Galleon defendant Richard Choo-Beng Lee started cooperating with prosecutors.  Lee was a client of PGR, having signed up in late 2008 or early 2009, and began wiretapping his main contact at PGR, Don Chu, in June 2009.  Meanwhile, the FBI directed another cooperating witness, Karl Motey, an ex-sell side analyst who had his own research boutique, Coda Group Inc., to sign up as a client of PGR.  Motey’s conversations with PGR salesman James Fleishman began in May, 2009.  So it took about six months for investigators from the time they first began collecting evidence to the time they began bringing charges in November 2010.

We are now nine or ten months into the PGR phase of the investigation. Do we have another nine or ten months ahead of us?  That depends on how long it take to achieve the prosecutors’ objectives.  We believe the goal for Preet Bharara, the United States Attorney for the Southern District of New York, is to bring charges against hedge funds, not just individuals within hedge funds.   In a speech last October to the New York Bar, Bharara stressed his emphasis on bring down firms rather than individuals: “I am in the habit of asking AUSAs [assistant US attorneys] in appropriate cases whether they have considered charging the corporation when we are contemplating charges against individuals.”

The NY Post noted Bharara’s repeated use of the phrase “criminal enterprise” during last week’s press conference announcing the arrest of two former SAC portfolio managers.  Criminal enterprise is a key concept in RICO (Racketeer Influenced and Corrupt Organizations) charges.  Bharara’s statement during the press conference, “If you have converted a legitimate enterprise into an illegal racket, then you have done something wrong and you will not get a pass,” further underlined the threat.

SAC ‘cub’ Level Global Investors LP, a $4 billion hedge fund founded by former SAC portfolio managers, recently announced it is closing.  It was raided by the FBI in November but has not been charged with any wrong-doing.  The repeated focus by investigators on current and former SAC employees suggests that SAC Capital is a target of the investigation.

Investigators are signaling their intention of continuing the probe for an extended time.  The press release announcing the arrest of two former SAC portfolio managers addressed the question of timing.  Bharara stated, “To date, 12 people have been charged by this office in connection with our investigation of expert networking firms and four have pled guilty, but we are far from finished.”  FBI Assistant Director Janice Fedarcyk was even more explicit: “The charges and pleas announced today mark neither the beginning nor the end of a long-term FBI investigation we expect will continue for some time.”

Investigators are trying to manage expectations.  So far they have been masterful in their media management, passing out tidbits every two or three weeks to ensure there are no protracted gaps in media coverage.  But as time goes on, they know they will have to contend with waning media interest.  For prosecutors, media reliance is a two-edged sword.  It has helped them with “deterrence”, creating widespread concern among investors about insider trading specifically and research practices generally.  But as time goes on, the media will be less willing to amplify the investigation.  For this reason, prosecutors will be trying to generate results expeditiously, and in their ideal scenario, bring charges against hedge funds as ‘criminal enterprises’.


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