Insider trading probe affects cross section of financial industry
The first shot in what could be the largest insider trading case in history may have been fired Monday. The FBI raided the offices of two hedge funds in Greenwhich, Conn., as part of a massive insider trading probe. Last fall the Securities and Exchange Commission issued subpoenas to more than 30 hedge funds and other investment firms in an investigation of deals that led up to the financial crisis, and charges could be filed by the end of the year.
Three-year SEC investigation bears fruit
Insider trading involves profiting from purchasing stock in companies that are about to be bought before the deals are known to the public. When the value of those shares rises after the deal is announced, the inside traders sell them. The SEC is putting the finishing touches on a three-year investigation that is expected to result in insider trading charges against independent consultants, Wall Street banks, hedge funds and mutual funds across the U.S. Authorities told the Wall Street Journal that criminal and civil probes are looking at multiple insider trading rings that made tens of millions in illegal profits.
Goldman Sachs one of many targets
In one of many aspects of the SEC insider trading investigation, prosecutors suspect that Goldman Sachs bankers leaked information about health care takeover deals to certain investors in a flurry of acquisitions leading up to the financial crisis. Another focus of the investigation is on “expert network” firms hiring former employees of companies targeted for acquisition that pass along advice to hedge fund investors. According to Integrity Research Associates, more than a third of hedge funds use expert networks. Independent analysts and research boutiques are also feeling the heat.
FBI involvement signals jail time ahead
Federal prosecutors are expected to start filing criminal and civil insider trading charges before the end of the year. Because the FBI and U.S. prosecutors are involved along with the SEC, analysts expect some hard jail time to be involved. This would be different than the civil suit brought by the SEC against Goldman Sachs for mortgage fraud last summer. Goldman Sachs wriggled off the hook on that case by paying the largest penalty ever by a Wall Street firm. The $550 million dollar fine amounted to about two weeks’ worth of Goldman Sachs profits.