SEC Fraud

Insider trading has been a proverbial “bad word” that’s entered the popular lexicon through high profile indictments of many major public icons. Every so often the media reports on someone who’s been accused of using the system to their own benefit while millions of other consumers are left trying to muddle through the daily ups and downs of the stock market. Recently Senator Charles E. Grassley, R-Iowa, has announced that he will be examining the hedge fund SAC Capital Advisors for 20 different stocks trades the company has made recently. This is in the same vein of potential fraud that has lawmakers, as well as consumers, up in arms about the predatory and unfair practices of insider trading.

This is just another example and the inquiry was set in motion as a result of correspondence sent to the Senator this past April. On the 26th, the Financial Industry Regulator Authority sent a letter about, what they called the, “potential scope of suspicious trading activity.” This is a huge slam against the SAC hedge fund that’s currently run by billionaire investor Steven A. Cohen.

The firm, led by Mr. Cohen, is one of the largest hedge funds in the world. To date no official charges have been made against Mr. Cohen or the group that he heads but a spokesman for the group said that they were “outraged” by the conduct of their portfolio managers. Many officials believe that charges will be filed shortly. Similar allegations have been made against Raj Rajaratnam, the head of the Galleon Group, that did result in conviction and similar accusations have been made against Noah Freeman and Donald Longueuil. These hedge fund giants have been industry leaders and it begs the question how epidemic the issue of insider trading is inside the financial community.

Wile specific hedge funds, such as SAC Capital itself, aren’t being charged; similar allegations have raised serious questions about the corporate culture that seems to possess a huge current running through our financial system. The government has been playing catch-up for years in their attempts to create a fair and balanced playing field. Senator Grassley has taken an aggressive approach towards this issue and it’s the hope that the legal system will start taking a more vigilant approach in its pursuit of Wall Street perpetrators. Though insider trading remains a huge issue, it is still unclear as to the efficacy of government regulation and indictment on this pervasive issue.

Last Friday, Sonny Nguyen, a former Nvidia executive, pleaded guilty to insider trading and divulging company information (in this case, quarterly earnings in 2007 – 2009) to Winifred Jiau, a consulting with expert network firm Primary Global Research. Later that day, Sam Barai, who ran Barai Capital Management, pleaded guilty to receiving secret information from Winifred Jiau on several companies, including information on Nvidia. Barai also pleaded to obstruction of justice. Nguyen is facing up to 5 years while Barai is looking at up to 25 years in prison.

Jiau has pleaded not guilty to insider trading and is scheduled for trial on June 1st. As more “expert network firms” tumble, it’s becoming clearer and clearer that these insider trading networks are rampant. “The government has criminally charged 13 people connected to these firms, including Ms. Jiau, who is accused of knowingly facilitating the passing of inside information. Of the 13 charged, eight have pleaded guilty.”

A Tangle of Details Emerge in an Insider Trading Case [NY Dealbook]

The Securities and Exchange Commission is an agency of the U.S. federal government that was founded in the wake of the massive securities losses sustained during the stock market crash of 1929. After the election of Democratic president Franklin D. Roosevelt in the darkest days of the Great Depression, Congress passed measures in 1933 that regulated the previously unchecked securities sector of the financial market. These measures led to the Securities Exchange Act a year later, which created the SEC.

After the end of the First World War and the resulting optimism of the post-war U.S. economy, hundreds of thousands of investors were lured into questionable securities and unbelievable promises offered in margin financing. Nearly half of the securities created during the 1920′s – about 25 billion dollars worth – ended up becoming useless overnight after the market crashed. The truth was unavoidable: the government had to intervene on the behalf of future investors and ensure that a regulatory and investigative commission has to be created that oversaw the swaps of enormous funds and risky assets. Not only to prevent another financial collapse, but to safeguard individual investors against the sweeping destruction entities with bigger stakes in the stock market could lie upon them.

In the aftermath of our recent Great Recession, it might seem that the SEC has failed enormously in the duties it was given when it was created almost 80 years ago. This was in part due to elected officials in congress and the executive branch loosening the regulatory power that the SEC had possessed over securities and exchanges. It was not that the SEC was ignorant; it was that it became inhibited. But now that we’ve been given a double dose of proof as to why government should always be keeping a vigilant eye out for fraud and false hype on the stock exchange, the SEC is going to carry on the legacy of keeping the fairness of securities and exchange to a maximum and the ways for powerful investors to milk the system kept to a minimum.

The SEC as it exists today focuses most of its investigative and protective efforts into going after instances of insider trading, price manipulation, the selling of unregistered securities, and glaring omissions about the facets of securities being offered. These are services that are essential for a world class economic engine like the U.S. to run, and are services that can only be provided by the power of government. The SEC is who you trust to make sure your securities are secure.

What makes insider trading a crime can be a difficult thing to understand. On one hand it inherently makes sense to punish those working for corporations who make their otherwise legal trading decisions based on information not available to any shareholder outside the company. But on the other hand – how can anyone who has an involvement in the business dealings of a personal investment not use privileged information to make more accurate market decisions? Even if you were honestly excluding yourself from using non-public information – the defining article that separates criminal and non-criminal insider trading – you still may be committing investment practices that are unfair and could be brought to the attention of the U.S. Securities and Exchange Commission. Knowing when a figurehead is about to announce his retirement, or observing the IRS questioning the front office, can give you an unfair advantage on the stock market if your money is invested in your company.

The SEC makes it very clear that they take insider trading very seriously. Due to the nature of illegal insider trading, their investigative and regulatory arms tend to pursue any and all credible accusations of criminal conduct within the securities and exchanges of the United States. Establishing whether an instance of insider trading was lawful or unlawful requires quick action in case a crime has indeed occurred, or else damning evidence of non-public information use could be lost or altered. But it isn’t impossible for the SEC to investigate an insider trading event that was perfectly legal. This is all indicative of the expansive gray area that exists between lawful and unlawful insider trading.

The best way to avoid getting yourself into a situation wherein you commit illegal insider trading whether knowingly or unknowingly, is to visit the Securities and Exchange Commission’s webpage on insider trading. They outline a straightforward explanation of how insider trading can be avoided and which kinds of real-world instances are the most likely to be investigated for illegal insider trading. However, they do recommend that in the event you are suspicious of illegal insider trading or wish to know the legal fine print, visit a lawyer who knows a thing or two about securities law.

The worst way to get nailed by the SEC for illegal insider trading, other than doing it premeditatedly, is to go about your close association to an investment without any concern for the potential criminal conduct you may be committing. Whether it’s online research or getting in touch with an attorney, you need to know the ins and outs of insider trading as it applies to your investment situation.

In a New York Times story today, it was revealed that Fred Wilpon and Saul Katz, co-owners of the New York Mets, had shopped around for fraud insurance back in 2001 on a suggestion from a close adviser, whose company had bought similar insurance to protect its Madoff investments. This fraud insurance isn’t something anyone can buy, it’s a one of a kind policy.

This is important in so much that it shows that Wilpon and Katz may have been concerned about their investments with Madoff, which could have implications since they’ve long argued that they had no warning and weren’t sophisticated enough to figure out Madoff was a fraud.

I think you can’t read too much into this, though I suspect many people will. If they knew Madoff was a fraud, they would’ve bought the insurance. If they suspected he was, and the insurance was affordable, then they would’ve bought it. If they didn’t know, they were acting on the advice of a close adviser. Either way, it’s a business decision, not one made based on gut.

The more interesting story is the impact this will have on their ownership of the New York Mets.

A lot has happened since Andrew Fastow was sentenced to prison for his role in the Enron debacle. The former chief financial officer pleaded guilty, after facing a 98-count indictment, surrendered $23.8 million, and agreed to a ten year prison sentence back in 2004. For those calculating at home, it’s hasn’t been ten years because he only had to serve a six year sentence that ends on December 17th.

He was released to a halfway house as part of a program called Second Chance, formalized in 2008. It’s a way of reintegrating nonviolent offenders near the end of their sentences.

Zvi Goffer’s insider trading trail is set to begin today. Goffer was a former Galleon employee and has been accused of being the leader of a scheme that has produced in excess of $20 million in illegal profits. His co-defendants are Emanuel Goffer, his brother, and Michael A. Kimelman. As was the case in the Rajaratnam trial, wiretaps will play a pivotal role in this trial as the prosecutors intend to play 60 tapes of conversations.

Prosecutors accuse Mr. Goffer and his co-defendants of trading on illegal tips about pending mergers and acquisitions from three lawyers, who have already pleaded guilty to securities fraud. At least one of those lawyers, Brien Santarlas, formerly of Ropes & Gray, is expected to testify for the government.

It doesn’t look good for Goffer, his brother, or Kimelman.

Former Galleon Employee Is Next Target in Inquiry [Dealbook]

Just next door to the much larger and more publicized Raj Rajaratnam trial, Manosha Karunatilaka pleaded guilty to participating in an insider trading scheme associated with Primary Global Research, an “expert network firm.” Karunatilaka was a former account manager at Taiwan Semiconductor Manufacturing and is said to have leaked sensitive information to investors and is the 36th conviction in a recently government enforcement measure that has ensnared 47 individuals.

The government said that from 2008 to 2010, Mr. Karunatilaka shared his company’s product sales and shipping information with clients of Primary Global. He was paid more than $35,000 by the firm for the “consultation calls” where he shared the information.

“Manosha Karunatilaka thought he could moonlight for an expert networking firm and sell out his employer in the process,” Preet S. Bharara, the United States attorney in Manhattan, said in a statement. “With today’s guilty plea, it should now be abundantly clear that his short-term financial gain was hardly worth it.”

Another Insider Trading Defendant Pleads Guilty [Dealbook]

It probably comes as no surprise to you (or anyone else who has been following this story) but Raj Rajaratnam has been found guilty on all fourteen counts against him.

It’s a huge insider trading trial but I’m not sure what “ramifications” it truly has. It’s a near clear cut case of insider trading with a tremendous amount of wiretap evidence. So far, everyone else implicated has plead guilty, except for Rajaratnam.

The only ramification is that the SEC is capable of catching (some of) these criminals given it’s slim budget.

Of the fourteen counts, 9 were for insider trading and 5 were for conspiracy. All told, he could face as much as twenty five years in prison.

One of the most damning pieces of evidence in the Raj Rajaratnam insider trading case is the wealth of taped phone calls between Rajaratnam and others, many of which have plead guilty. As the jury deliberates, they have returned to those phone calls for more information. Dealbook reports that they’ve been focusing on phone calls between Rajaratnam and Danielle Chiesi, a hedge fund consultant who has herself pleaded guilty.

Chiesi didn’t testify against Rajaratnam, so the tapes are the only evidence that involve her, and the calls are quite colorful:

In the calls, Ms. Chiesi refers to Mr. Rajaratnam and another suspected source as “baby,” and signs off with “I love you.” She favors expletives and long-winded explanations and at times even seems to flirt with Mr. Rajaratnam and Kieran Taylor, a former Akamai executive who prosecutors have said passed her inside information about his company. During the trial, certain portions of Ms. Chiesi’s calls with Mr. Taylor were so potentially offensive that the judge had them edited.

Fun stuff!