12:00 PM
Justin Grant
Justin Grant
Connect Directly

Feds Giving Hedge Funds The Mob Treatment to Fight Insider Trading

The FBI says it has enough informants to bring insider trading cases to trial for the next five years, a tactic that helped decimate the so-called mafia in the 1990s.

Today's American mafia bears little resemblance to the shadowy, fearsome organization that captured the nation's imagination throughout the 20th century.

During the 1980s and early 1990s, crime bosses like John Gotti, Vincent "The Chin" Gigante, and Paul Castellano routinely found their names in the headlines - and their wrists in handcuffs – with federal prosecutors looking to break their organizations after decades of apparently looking the other way.

For more than 10 years, Gigante amused New Yorkers - and avoided trial - by wandering around Greenwich Village in nothing more than a bathrobe and slippers while mumbling to himself. Meanwhile John Gotti was famously dubbed the "Teflon Don" after winning acquittals in three high-profile trials in the 1980s.

Check Out Advanced Trading's Gallery of the Most Notorious Insider Trading Cases of 2011

Both crime bosses were eventually done in by FBI informants, which is the main reason the so-called mafia now barely registers a blip in the public's consciousness beyond a reality show like VH1's "Mob Wives" or "Sopranos" reruns on A&E.

Yet the downfalls of men like Gatti and Gigante continue to be relevant, since the feds are now using tactics that helped them crush New York's most notorious crime families to root out insider trading on Wall Street. The use of undercover informants and wire taps helped the feds take down Galleon Group hedge fund founder Raj Rajaratnam, and have given prosecutors enough evidence to bring dozens of traders and other hedge fund employees to trial over the last three years.

And just as the number of mob rats soared following Sammy "The Bull" Gravano's infamous testimony against John Gotti in 1991, it appears the number of insider trading snitches is also poised for a surge.

According to a Reuters report, federal investigators have enough informants lined up to file charges against hedge fund employees of various stripes over the next five years. The parallels with how the feds infiltrated the mob and what they're doing to end criminality on Wall Street don't end there either. FBI agents likened the challenges they face in penetrating a hedge fund to trying to enter a secret society, Reuters said.

From Reuters:

"We have cooperators set up for years to come," said David Chaves, a supervisory special agent for securities and commodities fraud investigations.

He told reporters that the informants include cooperating witnesses -- people who have been identified as conducting illegal trading but who have agreed to assist authorities to catch others in the hopes of receiving a lighter sentence -- and sources within hedge funds.

"I don't want to say it's infinite, but clearly in five years we think we will be working it," Chaves said.

The Galleon prosecution and other recent insider-trading cases have used secretly-recorded telephone conversations to gather evidence, an investigatory tool traditionally used in organized crime or narcotics cases.

The use of wiretaps sent a chill through the hedge fund industry closed to outsiders and what the FBI calls "undercover resistant."

Investigators have tracked mobile phone calls, instant messaging and social media to collect evidence.

The FBI says it is alert to new ways in which people may try to exchange information on publicly traded companies to gain an illegal edge.

"We will go to whatever lengths we have to to keep up with changes in technology," said Richard Jacobs, another FBI supervisory special agent for white-collar crime cases.

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio
Comment  | 
Print  | 
More Insights
More Commentary
Predictions Come True as Regulators Swoop
While two out of the five capital markets predictions from July have already come true, let's hope that all five don't actually happen.
IBOR Before It Was "IBOR"
While its catchy new nomenclature and explosion in popularity has given the outside world an impression that it is novel, the same conversations about it were happening twenty years ago. So why then is IBOR the latest buzz word for firms today?
SEC Reforms: What Floating NAVs Mean for Money Market Funds & Accounting Software
Money market accounts are a $2.6 trillion industry that impacts nearly every investor who parks cash, so a new SEC rule has major ramifications for a large number of investors.
Flip Sides of the Same Coin: Compliance & Transparency
The upheaval caused by the 2008 financial crisis continues to ripple outward, creating an unsettled environment that has disrupted traditional measures of trust.
IT Budgets Struggle With Data Growth, Survey Finds
Data is growing exponentially and IT managers are worried about budgeting for future storage. More sustainable solutions must come from the business lines.
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - July 2014
In addition to regular audits, the SEC will start to scrutinize the cyber-security preparedness of market participants.
Stressed Out by Compliance, Reputational Damage & Fines?
Stressed Out by Compliance, Reputational Damage & Fines?
Financial services executives are living in a "regulatory pressure cooker." Here's how executives are preparing for the new compliance requirements.