Tuesday, December 20, 2011

The Only Perfect Hedge is In a Japanese Garden (or an FBI Insider Trading Sting)

The first half of the headline is an old trader's aphorism, the second half is a Bloomberg story:

FBI Runs ‘Perfect Hedge’ to Nab Inside Traders
The New York field office of the FBI sits a block west of Foley Square, where Roman and Greek- inspired courthouses with four-story colonnades loom over a small town of judicial institutions in which the biggest of America’s financial crimes are prosecuted. 

Almost five years ago, in a conference room 23 stories above the plaza, FBI agents David Chaves and Patrick Carroll surveyed the midtown skyline to the north, home to much of the world’s financial industry. They had received some disturbing intelligence: a surge in profits at hedge funds might be the result of an epidemic of insider trading.

The two men, head of securities and commodities fraud units at the New York office, faced a dilemma. Informants had told them the hedge fund industry was similar to organized crime: insular and distrusting of outsiders. Without people on the inside, the government would have a tough time gathering enough evidence to prosecute. They needed more tools to gather more information on traders who move faster, and more secretly, than your typical Mafia soldier.

“It was reminiscent of that scene in ‘Jaws’ where they get their first look at the shark,” Chaves said. He told Carroll, “We’re going to need a bigger boat.”

That bigger boat came in the form of a landmark change in the way white-collar crime is investigated in the U.S., agents said. The only way to uncover insider trading was to apply the same techniques agents used to dismantle the Mafia: court- authorized wiretaps of phones, informants and cooperating witnesses.

‘Perfect Hedge’
At that moment, “Perfect Hedge” was born. This is the behind-the-scenes story of that historic, sprawling, nationwide insider-trading initiative by those who ran it.

Over the next five years, the operation by the New York offices of the Federal Bureau of Investigation and Manhattan U.S. Attorney led to prosecutions that disrupted multiple rings of illegal trading by portfolio managers, bankers and consultants. It is the biggest insider trading investigation since the days of Ivan Boesky and Michael Milken, and the largest ever in the world of hedge funds....MORE