Proactive Enforcement Paying Off
Last week, an executive with a global pharmaceuticals giant headquartered in the U.S. was arrested for insider trading. He allegedly earned “substantial profits” by trading stock options using inside information about three companies his firm was looking to acquire before they were sold.
Insider trading is just that: the trading of securities or stocks by “insiders” with material, non-public information pertaining to significant, often market-moving developments to benefit themselves or others financially. These developments can include pending mergers and acquisitions, anticipated earnings releases, and product line developments.
The universe of people with access to this non-public information is growing. It includes:
■Securities professionals (traders and brokers);
■Corporate executives and employees, along with employees of banking and brokerage firms and even contractors;
■Lawyers working with companies on mergers and acquisitions;
■Government employees who misuse their legitimate need-to-know position; and
■Even friends, family members, and business associates who are tipped off about the information.
In addition to this insider knowledge, all of these individuals have another thing in common: the obligation to keep this information in the strictest confidence.
Historically, insider trading cases were usually handled as isolated incidents where trading was based on a specific instance of material, non-public information being provided.
And these cases have been challenging: investigators relied on financial documents, phone records, and—more recently—e-mails to determine when and how traders received the non-public details. These criminal insiders work hard to thwart law enforcement—including trading through multiple accounts, trading in others’ names, and using disposable cell phones and prepaid calling cards.
But we’ve become much more proactive these days…using intelligence as well as sophisticated techniques like undercover operations to identify the most egregious offenders. We’ve been able to link seemingly unrelated cases and uncover large criminal rings of insider trading. And our new national Fair Markets Initiative will further focus our insider trading efforts by prioritizing cases, enhancing collaboration with the Securities and Exchange Commission (SEC), and increasing our emphasis on intelligence to identify and dismantle insider trading schemes.
Our growing caseload reflects the wisdom of our approach—we’ve had a 40 percent increase in insider trading cases over the past year (see sidebar for recent case examples).
Coordination with our partners is vital to this success. We work very closely with the SEC in a parallel law enforcement and regulatory effort to ensure fairly operated financial markets. In fact, we recently embedded an FBI agent with the SEC in New York.
The FBI also maintains a relationship with the North American Securities Administrators Association—comprised of state and provincial securities regulators in the U.S. and Canada—making presentations, offering training, exchanging best practices, etc.
Increasing globalization has led some of our insider trading investigations overseas, where our legal attachés use existing relationships with their partners to follow up on leads. Individuals engaged in illicit insider trading often funnel money through offshore accounts, and overseas employees of American companies with operations abroad could be just as susceptible to the lure of insider trading.
Insider trading has been a continuous threat to U.S. financial markets and has robbed the investing public of some degree of trust that markets operate fairly. Through our investigations, the FBI is working hard to curb that corruption and help ensure fairness in the marketplace.
Investigations Paying Off
- New York hedge fund billionaire Raj Rajaratnam was sentenced to 11 years in prison for his role in the largest hedge fund insider trading scheme in history.
- Also convicted in that case was Rajaratnam’s business partner and friend, Rajat Gutpa.
- Attorney Matthew Kluger was convicted of stealing inside information from various law firms he worked for and providing it to a professional stock trader in a 17-year scheme that netted them millions.
- IBM executive Robert Moffat was convicted of providing non-public information to a hedge fund employee in a major insider trading scheme.
- A Philadelphia stockbroker who received inside information from an executive with a public insurance company—a fellow Alcoholics Anonymous member—was charged with insider trading.