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Ivy Schmerken
Ivy Schmerken
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How the Government Flips Insider Trading Witnesses

An F.B.I. agent has persuaded Wall Street suspects to collect evidence against their business colleagues or friends, playing a key role in the government's insider trader investigations.

Did you ever wonder how federal prosecutors have been so successful in tracking down insider trading cases on Wall Street?

This is no longer a mystery. Today's Wall Street Journal reports there’s an F.B.I. agent based in New York who specializes in persuading people to become a witness against their business associates or friends.

The agent, David Makol, who shows up at unexpected places -- such as when his subjects are in gym parking lots or having breakfast at Wendy's, reportedly played a role in the government's latest insider trading investigation to shake-up Wall Street. On Wednesday, the U.S. attorney's office charged 7 investment analysts/traders with using illegal tips to profit from trading in Dell's stock. Those charged included the co-founder of a prominent hedge fund, Level Global, and a former trader at Diamondback.

The WSJ reports that many of the government's cases over the past two years have relied on evidence gathered by witnesses that Makol "flipped" to the government's side.

Makol, a 41-year old forensic accountant and son of a forklift drive, declined to be interviewed by the Wall Street Journal, but was photographed on Wednesday, the day of the insider trading raids. According to the WSJ, Markol, an avid runner and Boston sport fan, is part of a Brooklyn-based FBI squad known as C-35. He also teamed up with a competing squad in Manhattan to help flip Galleon Group trader David Slain, which led to last May's conviction of hedge fund honcho Raj Rajaratnam.

One tactic used is to gather information about the suspect's regular routines and personal details, like his wife's name.

In one scenario, Makol approached Karl Motey, an independent stock researcher, who had just finished his workout, when he was in the gym parking lot. Wearing suits, the F.B.I. agents spoke with Motey in a coffee shop and within a few minutes, he admitted to insider trading in technology companies. The WSJ reports that within a week, Motey met with prosecutors in New York and agreed to gather evidence on investment fund employees leading to Wednesday's arrests.

Defense lawyers on Wall Street have criticized the use of these techniques, particularly the use of wiretaps, by F.B.I. agents in these insider-trading probes, since such tactics were previously deployed in organized crime more so than white-collar investigations. Such overbearing techniques are used more often than people realize, a defense lawyer, told the Wall Street Journal.

In the case of Motey, who taped dozens of phone calls for the F.B.I., he pleaded guilty to securities fraud and conspiracy in December and is awaiting sentencing.

Meanwhile, a F.B.I. spokesman defends their actions telling the WSJ, this is the way the government needs to gather evidence in complex cases.

Click here for the full Wall Street Journal article

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
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