Investment Fraud Lawyer Blog

Representative Spencer Bachus (Republican, Alabama), the Chairman of the House Financial Services Committee (which oversees the financial services industry), is under investigation by the Office of Congressional Ethics, for allegedly trading on non-public information he gleaned as a result of his elective office and leadership role in Congress. (“Rep. Bachus Faces Insider Trading Probe: Report,” CNBC.com). The article did not say whether the Securities and Exchange Commission or Department of Justice is also investigating.

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Federal prosecutors have been putting a full court press on insider trading by hedge funds over the past four years. They recently announced the filing of criminal charges against seven more individuals, including hedge fund executives and portfolio managers, as well as guilty pleas by three cooperating defendants of Level Global Investors LP and mutual fund company Neuberger Berman Group LLC. Prosecutors say the cases show the “culture of greed” that permeates the hedge fund industry. (“Hedge Funds Prove Fertile Hunting Ground For Prosecutors,” Ian Thomas, Law 360).

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Wiretaps of hundreds of conversations have led federal authorities to pursue charges against individuals at two well-known hedge funds and an established mutual fund that caters to ordinary retail investors. The targets are former traders at hedge funds Diamondback Capital management LLC and Level Global Investors LP, and an analyst at mutual fund company Neuberger Berman Group LLC. If charges are brought, they would represent a substantial expansion of the insider trading investigations underway. Word is that two former research analysts at Level Global and Diamondback are cooperating with authorities. (“More Charges Set for Insider Probe,” Wall Street Journal).

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A recent Bloomberg Markets Magazine article raises troubling questions about investment corruption at the highest levels of government. In July 2008, as market fears mounted, Treasury Secretary Henry Paulson reportedly met with a group of hedge fund managers (five of whom were former officers of Goldman Sachs, where Paulson was CEO), and described a scenario in which the government would put Fannie Mae and Freddie Mac into conservatorship, thereby wiping out the common stockholders of those institutions, according to a fund manager who attended the meeting (“How Paulson Gave Hedge Funds Advance Word,” Bloomberg Markets Magazine, By Richard Teitelbaum). But earlier that morning Paulson had provided a different message to New York Times reporters and editors (i.e., the public): that the Federal Reserve and the Office of the Comptroller of the Currency were inspecting Fannie and Freddie’s books, and he expected their report would boost market confidence in Fannie and Freddie, according to the article.

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The Securities and Exchange Commission has voted to allow whistleblower employees to go straight to the SEC with information about securities law violations without reporting it to their employer, and still collect the full amount of the monetary reward authorized by the Dodd Frank financial reform act, according to a May 25, 2011 article in InvestmentNews entitled “SEC lets whistle-blowers bypass internal programs.” The SEC approved the rule by a 3-2 vote on Wednesday, May 25, 2011.

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In the largest illegal stock-tipping case in a generation, and the first pure insider trading case in which the prosecution introduced wiretapped telephone conversations, Galleon hedge fund co-founder Raj Rajaratnam was found guilty on 5 counts of conspiracy and 9 counts of securities fraud. See “Rajaratnam guilty on all counts in insider trading case,” (InvestmentNews, May 11, 2011). The maximum prison sentence for securities fraud is 20 years, and for conspiracy is 5 years.

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