Insider Trading Charges Likely to Grow

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New York, NY – One year ago, U.S. federal authorities announced that its insider trading investigation, which had previously bagged Galleon Group co-founder Raj Rajaratnam, had expanded to buy-side analysts, company employees, independent consultants, and expert network firms.  Last week, a number of reports indicate that authorities are expected to announce new criminal charges against individuals at three prominent asset management firms – including the first ever charges brought against an analyst at a mutual fund. 


Recent Developments in the Investigation

Sources say that federal investigators have currently focused their attention on analysts and traders at mutual fund Neuberger Berman Group LLC, and hedge funds Diamondback Capital Management LLC and Level Global Investors LP.  Charges are expected to be filed against various individuals in the next few weeks.  According to people familiar with the matter, some of those charged are expected to plead guilty to insider trading.

Two of these firms were among the four hedge funds that the FBI raided last year, including Barai Capital, Diamondback, Level Global, and Loch Capital Management. Diamondback is the only one of the four firms that has survived the blow to their credibility brought on by the investigation.

As has been the case with many of the past insider trading charges, the breakthrough in this case is expected to result from the government’s strategy of “flipping” witnesses to cooperate with the investigation.  People familiar with the matter indicate that two research analysts —Spyridon “Sam” Adondakis formerly employed by Level Global Investors, and Jesse Tortora formerly of Diamondback Capital, have been helping federal investigators.

Adondakis and Totora previously worked together as technology analysts for Prudential Equity Group.  Another one of their friends from Prudential, Fayad Abbasi, is currently an analyst at Neuberger Berman.  He is purportedly someone who investigators are considering bringing charges against say sources familiar with the matter.  A spokeswoman for Neuberger said the company wasn’t aware of an investigation involving Abbasi.

Adondakis and Totora had actively used expert networking firm Primary Global Research in the past to speak with company employees and industry consultants.  In fact, according to court documents, four of the “experts” that Adondakis and Tortora had spoken with have already pleaded guilty to leaking inside information about their companies to hedge-fund clients.

Some note that Anthony Chiasson, one of the co-founders of Level Global, is also under investigation, and could be charged in the coming weeks.  When the FBI raided Level Global’s office in November of last year, they requested data contained on the computers used by the Chiasson and his co-founder, David Ganek, among others.  Both Chiasson and Ganek, along with the co-founders Diamondback Capital, Lawrence Sapanski and Richard Schimel, previously worked at SAC Capital Advisors.

Another person who sources say could potentially be charged by federal investigators is Todd Newman, who once headed technology trading for Diamondback Capital from their Boston office.  He was placed on a leave of absence last year after the FBI raided the firm.  He was subsequently let go.

Since the start of the broad insider trading investigation, the office of Manhattan U.S. Attorney Preet Bharara has charged 56 people with insider-trading – 52 of whom have either pleaded guilty or have been convicted at trial.


Impact of these Potential Charges

These new charges are likely to mark the start of a new phase in the government’s battle against insider trading.  These charges are based on the more than 300 hours of wiretapped conversations between company insiders or industry consultants and analysts or traders at over 50 hedge funds that has previously been collected in this federal investigation.

Despite this, it is unclear whether mutual and hedge funds will respond to these new charges by putting the brakes on the use of external research providers.  This is due in large part to the fact that most buy-side firms have spent a considerable amount of time and resources over the past twelve months to enhance their internal controls when their analysts use expert networks or other alternative research providers.

Certainly, this is what the alternative research industry hopes, as the past year has proven extremely difficult for most firms due to the response from many buy-side investors who restricted their use of IRPs while they became comfortable with their pool of providers.

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