Federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders, and analysts across the nation, according to people familiar with the matter.
The criminal and civil probes, which authorities say could eclipse the impact on the financial industry of any previous such investigation, are examining whether multiple insider-trading rings reaped illegal profits totaling tens of millions of dollars, the people say. Some charges could be brought before year-end, they say.
The investigations, if they bear fruit, have the potential to expose a culture of pervasive insider trading in U.S. financial markets, including new ways non-public information is passed to traders through experts tied to specific industries or companies, federal authorities say.
One focus of the criminal investigation is examining whether nonpublic information was passed along by independent analysts and consultants who work for companies that provide “expert network” services to hedge funds and mutual funds. These companies set up meetings and calls with current and former managers from hundreds of companies for traders seeking an investing edge.
Among the expert networks whose consultants are being examined, the people say, is Primary Global Research LLC, a Mountain View, Calif., firm that connects experts with investors seeking information in the technology, health-care and other industries.
“I have no comment on that,” said Phani Kumar Saripella, Primary Global’s chief operating officer.
Primary’s chief executive and chief operating officers previously worked at Intel Corp., according to its website.
In another aspect of the probes, prosecutors and regulators are examining whether Goldman Sachs Group Inc. bankers leaked information about transactions, including health-care mergers, in ways that benefited certain investors, the people say. Goldman declined to comment.
Independent analysts and research boutiques also are being examined. John Kinnucan, a principal at Broadband Research LLC in Portland, Ore., sent an email on Oct. 26 to roughly 20 hedge-fund and mutual-fund clients telling of a visit by the Federal Bureau of Investigation.
“Today two fresh faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information,” the email said. “(They obviously have been recording my cell phone conversations for quite some time, with what motivation I have no idea.) We obviously beg to differ, so have therefore declined the young gentleman’s gracious offer to wear a wire and therefore ensnare you in their devious web.”
The email, which Mr. Kinnucan confirms writing, was addressed to traders at, among others: hedge-fund firms SAC Capital Advisors LP and Citadel Asset Management, and mutual-fund firms Janus Capital Group, Wellington Management Co. and MFS Investment Management.
SAC, Wellington and MFS declined to comment; Janus and Citadel didn’t immediately comment. It isn’t known whether clients are under investigation for their business with Mr. Kinnucan.
The investigations have been conducted by federal prosecutors in New York, the FBI and the Securities and Exchange Commission. Representatives of the Manhattan U.S. Attorney’s office, the FBI and the SEC declined to comment.
Another aspect of the probe is an examination of whether traders at a number of hedge funds and trading firms, including First New York Securities LLC, improperly gained nonpublic information about pending health-care, technology and other merger deals, according to the people familiar with the matter.
A First New York spokesman said: “We are one of more than three dozen firms that have been asked by regulators to provide general information in a widespread inquiry; we have cooperated fully.” He added: “We stand behind our traders and our systems and policies in place that ensure full regulatory compliance.”
Key parts of the probes are at a late stage. A federal grand jury in New York has heard evidence, say people familiar with the matter. But as with all investigations that aren’t completed, it is unclear what specific charges, if any, might be brought.
The action is an outgrowth of a focus on insider trading by Preet Bharara, the Manhattan U.S. Attorney. In an October speech, Mr. Bharara said the area is a “top criminal priority” for his office, adding: “Illegal insider trading is rampant and may even be on the rise.” Mr. Bharara declined to comment.
Expert-network firms hire current or former company employees, as well as doctors and other specialists, to be consultants to funds making investment decisions. More than a third of institutional investment-management firms use expert networks, according to a late 2009 survey by Integrity Research Associates in New York.
The consultants typically earn several hundred dollars an hour for their services, which can include meetings or phone calls with traders to discuss developments in their company or industry. The expert-network companies say internal policies bar their consultants from disclosing confidential information.
Generally, inside traders profit by buying stocks of acquisition targets before deals are announced and selling after the targets’ shares rise in value.
The SEC has been investigating potential leaks on takeover deals going back to at least 2007 amid an explosion of deals leading up to the financial crisis. The SEC sent subpoenas last autumn to more than 30 hedge funds and other investors.
Today two fresh faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information…. We obviously beg to differ, so have therefore declined the young gentleman’s gracious offer to wear a wire and therefore ensnare you in their devious web.
Transactions being focused on include MedImmune Inc.’s takeover by AstraZeneca PLC in 2007, the people say. MedImmune shares jumped 18% on April 23, 2007, the day the deal was announced. A spokesman for AstraZeneca and its MedImmune unit declined to comment.
Investigators are also examining the role of Goldman bankers in trading in shares of Advanced Medical Optics Inc., which was taken over by Abbott Laboratories in 2009, according to the people familiar with the matter. Advanced Medical Optics’s shares jumped 143% on Jan. 12, 2009, the day the deal was announced. Goldman advised MedImmune and Advanced Medical Optics on the deals.
A spokesman for AstraZeneca and its MedImmune unit declined to comment.
In subpoenas, the SEC has sought information about communications—related to Schering-Plough and other deals—with Ziff Brothers, Jana Partners LLC, TPG-Axon Capital Management, Prudential Financial Inc.’s Jennison Associates asset-management unit, UBS AG’s UBS Financial Services Inc. unit, and Deutsche Bank AG, according to subpoenas and the people familiar with the matter.
Representatives of Ziff Brothers, Jana, TPG-Axon, Jennison, UBS and Deutsche Bank declined to comment.
Among hedge-fund managers whose trading in takeovers is a focus of the criminal probe is Todd Deutsch, a top Wall Street trader who left Galleon Group in 2008 to go out on his own, the people close to the situation say. A spokesman for Mr. Deutsch, who has specialized in health-care and technology stocks, declined to comment.
Prosecutors also are investigating whether some hedge-fund traders received inside information about Advanced Micro Devices Inc., which figured prominently in the government’s insider-trading case last year against Galleon Group hedge fund founder Raj Rajaratnam and 22 other defendants.
Fourteen defendants have pleaded guilty in the Galleon case; Mr. Rajaratnam has pleaded not guilty and is expected to go to trial in early 2011.
Among those whose AMD transactions have been scrutinized is hedge-fund manager Richard Grodin. Mr. Grodin, who received a subpoena last autumn, didn’t return calls. An AMD spokesman declined to comment.
Is Charles Rangel corrupt?
Rep. Charles Rangel sits in his ethics hearing before the House Adjudicatory subcommittee Thursday on Capitol Hill.
By Peter Grier, Staff writer / November 18, 2010
Yes, Rep. Charles Rangel has been found guilty of ethics violations by a House ethics panel. But does that mean he was corrupt?
It’s a question that appears to matter quite a bit to Rep. Rangel (D) of New York himself. And well it might – if the public at large begins to think of him as corrupt and sleazy, as opposed to sloppy and careless, his legacy will be even more diminished after decades of public service.
And it perhaps he would find it harder to look at himself in the mirror in the morning.
That is why at his punishment hearing on Tuesday Rangel admitted that he had done wrong in such matters as failing to pay taxes on rental income earned from his Dominican Republic beach villa, and soliciting donations for the Charles Rangel Center for Public Service – but that his actions had been inadvertent.
“I had no intent to evade or avoid the law,” Rangel told a hearing of the full House Ethics Committee.
He hadn’t known the details of his own tax returns, he said. Officials from the City College of New York, site of the Rangel Center, had come to him and suggested that he would be the best person to raise needed cash for the institution, according to Rangel.
In brief remarks to the committee he reminded them that the panel’s own chief counsel, Blake Chisam, under questioning early in the week, had said he saw no evidence of corruption per se in Rangel’s actions.
And he also brought along a character witness – Rep. John Lewis (D) of Georgia, himself a respected veteran of the civil rights movement. Rep. Lewis reminded committee members that Rangel is a decorated Korean War veteran, and that he had walked with Lewis and Dr. Martin Luther King Jr. from Selma to Montgomery, Alabama, to try and help win the right to vote for African-Americans.
“My colleagues, I must tell you that Charlie Rangel is a good and decent man. I know this man. I think I know his heart,” said Lewis.
However, ethics panel chief counsel Chisam still recommended that the full committee, and then the full House of Representatives, vote to censure Rangel. That is the most serious punishment short of expulsion the House can mete out.
And some panel members questioned Rangel’s assertion that he is not corrupt. They noted that he had failed to pay taxes on his beach villa for 17 years, and that he indeed reaped personal gain from that, in the form of a lower tax bill.
After all, Rep. James Traficant, the Ohio Democrat expelled from the House in 2002 after felony convictions on bribery and other charges, only failed to pay taxes for two years.
“Failure to pay taxes for 17 years. What is that?” said Rep. Michael McCaul (R) of Texas.
Rangel targeted donors for the Rangel Center who had legislative business before the House Ways and Means Committee, which he chaired at the time, according to Mr. McCaul.
“Is that not corruption?” said McCaul. “I guess it is how you define corruption here. I think reasonable people may disagree on that interpretation.”
House ethics committee delays Waters trial
By Paul Kane
The panel’s leaders did not characterize the evidence except to say in a statement that it “may have had an effect” on the charges Waters faces. The lawmaker, however, said the evidence is an e-mail from her chief of staff about the 2008 bank bailout legislation.
The committee effectively returned the case to an investigative subcommittee to consider the new evidence rather than proceed with a trial that had been slated to begin Nov. 29.
“The Committee’s decision to cancel the hearing and put it off indefinitely demonstrates that the Committee does not have a strong case and would not be able to prove any violation has occurred,” Waters said in a statement, adding later, “I am puzzled at the committee’s insistence on moving backwards instead of forwards.”
Waters has said she did nothing wrong in helping to arrange a 2008 meeting in which officers from the nation’s largest minority-owned bank, Boston-based OneUnited Bank, asked Treasury officials for tens of millions of dollars in assistance. The bank later received a separate $12 million grant from the Troubled Assets Relief Program.
Waters suggested Friday that the e-mail supports her contention that she was interested in helping a broad group of minority-owned banks, not just the one her husband invested in.
Unlike Rep. Charles B. Rangel (D-N.Y.), who fought with multiple legal teams and ultimately had no counsel when the committee found him guilty this week of 11 ethics charges , Waters has consistently been represented by veteran ethics lawyer Stanley Brand. Waters is expected to mount a vigorous defense.
The e-mail was sent by Mikael Moore, the lawmaker’s top aide and grandson, on Sept. 28, 2008, just two hours before House Speaker Nancy Pelosi (D-Calif.) unveiled TARP. Moore complained to staff on the House Financial Services Committee that he wanted to know “the status of the provisions that we have been working on” related to minority-owned banks.
“It would not be acceptable to receive a copy [of the legislation] after it is final,” Moore wrote, making a couple of suggestions in changing a few words from an earlier bill.
The ethics panel said in August that the investigative subcommittee had concluded Waters probably violated the chamber’s conflict-of-interest rules by pressing for aid to keep OneUnited afloat.
Waters’s husband, Sidney Williams, had served on the bank’s board. He owned stock in OneUnited that had declined in value from $350,000 in June 2008 to $175,000 two months later.
At the meeting in early September 2008, the bank’s officers requested $50 million in federal money. The Treasury officials balked, saying they had no legal authority to give the bank the money.
The Treasury Department has said that the TARP grant it gave OneUnited in December of that year was based on sound, normal criteria.
Throughout the investigation Waters – the most senior black lawmaker on the Financial Services Committee – has maintained that she arranged the meeting as part of an effort to help minority-owned banks in general, and not OneUnited specifically. She told the ethics investigators that after the meeting, she removed herself from the effort to help the bank, citing the conflict.
But the four-member investigative subcommittee found that Moore remained “actively involved in assisting OneUnited representatives with their request for capital from Treasury.”
Staff writer R. Jeffrey Smith contributed to this report.