Are Expert Networks About To Be Exposed As The Ringleader In The Biggest Insider Trading Bust In History?

Tyler Durden's picture

Over a year ago, Zero Hedge published an expose in three parts (two of them in the form of direct letters to Andrew Cuomo) discussing the possibility that so-called "expert networks" are nothing less than legalized insider trading rings for the uber-wealthy, operating largely unsupervised, and leaking selective information to preferred clients. For those who may be new to this topic, we suggest catching up on Part 1, Part 2 and Part 3. Subsequently, we also suggested that expert networks would be implicated in the bust of Galleon Partners, the Goldman "Huddle", the collapse of FrontPoint Partners and, most recently, that expert networks may have been directly or indirectly involved in facilitating the record historical P&L of such hedge fund "titans" as SAC Capital. Today, via the Wall Street Journal, we realize that not only have the good folks at the SEC been diligently reading us for the past 13 months, but that we may have been right all along (once again). To wit: "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." Good bye expert networks (and many, many hedge funds) - we hardly knew you. 

More from the WSJ:

 

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. (INTC), according to its website.

In another aspect of the probes, prosecutors and regulators are examining whether Goldman Sachs Group Inc. (GS) 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 (JNS), 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.

Some more on expert networks: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.

 

And it is not only the SEC who reads us:

 

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.

Some traders at First New York, a 250-person trading firm, profited by anticipating health-care and other mergers unveiled in 2009, people familiar with the firm say.

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."

When all is said and done, First New York will only be the beginning.

As for representative transactions, here are some of the initial ones that have been leaked:

 

Transactions being focused on include MedImmune Inc.'s takeover by AstraZeneca Plc (AZN, ANZ.LN) in 2007, the people say. MedImmune shares jumped 18% on Apr. 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 (ABT) 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.

 

It appears that if and when the hammer comes down (or specifically if the SEC finally has the guts to file formal charges) those who will have a lot of explaining to do are the who's who in the hedge fund world.

 

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 (PRU) Jennison Associates asset-management unit, UBS AG's (UBS) UBS Financial Services Inc. unit, and Deutsche Bank AG (DB, DBK.XE), 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.

 

Could the hedge fund industry be about to experience its biggest insider trading bust? As much as we would like to believe so, the day when justice finally prevails over legal fees may still be far away. In the meantime, Zero Hedge is proud to have assisted in the exposure of this latest massive legal insider trading scam which favors the preferred and the wealthy over everyone else, precisely the kind of thing that makes investors hate the capital markets...

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Verum's picture

+1, thanks for the link

Slash's picture

please....I'll believe it when I hear the guilty verdict given. Until then, nothing but hot air.

jules from aus's picture

ditto Slash

... and I love the idea that they are going after 'tens of millions' of dollars - it will only cost these goons that much to settle these claims before anyone has to lift a leg up the stairs to the court door

- just hulla bulloo to get the masses excited for a time, and for dusting off the illusion that the SEC and FBI actually deserve their perverse budgets

good luck

Eyes on the World's picture

So we should roll and play dead since it doesn't make a difference anyway, right.  I get really tired of people have nothing better to do than complain.  Rome wasn't built (nor destroyed) in a day.

Thanatos's picture

Rome wasn't destroyed in a day because thier enemies didn't have weapons systems capable of it.

Had NBC weapons been available to their enemies, I can assure that Rome would have fallen in Minutes not days.

The history is valid, but things have changed slightly in that last 1700 years.

MountainHawk's picture

The wealthy have way too much power and influence not to be able to make this little problem go away. I'm with you, when I see a guilty verdict I will believe it.

Thanatos's picture

Exactly.

This is all a smokescreen.

They will put out lots of dense smoke, use a LCD projector to display the movie of "Justice" served onto the smoke.

When the smoke clears, the illusion will disappear, and back to the business of Fraud Inc. we will go.

This isn't GS or JPM up for trial... This is small fish (relatively) that are being cleared off the field.

They are being cleared because they would scream butthurt murder when Phase 2 of Fraud Inc. kicks off and they were left in the cold.

Better to have them quietly off to the sidelines, where they can't cause trouble for the big boys when they start sodomizing us in earnest.

 

Miss Expectations's picture

When Martha Stewart was putting together her Martha Stewart Living TV Show and Magazine someone said to her, "Martha people don't live like this."  Martha responded, "No, but they want to."

carbonmutant's picture

The market for something to believe in is infinite...

deadhead's picture

I saw the article in the WSJ this a.m. and the first thing I thought was "...gee, ZH spoke out about this ages ago!".

 

Once again, ZH is correct and way, way ahead of the curve.

 

Thanks again ZH for being the best financial read on the planet.

 

 

Fish Gone Bad's picture

I am not going to jump up and down and scream hallelujah! at the top of my lungs just yet.  Waiting for anyone to do anything to the "favorite children" is really getting old.

NumberNone's picture

how long before cuomo is found in a hotel room with 3 whores, a goat, and fifteen pounds of crack coaine?

Duuude's picture

 

 

Yeah...Client #10

 

 

Thanatos's picture

That was last month, and it was Transvestite Rent Boys, an Alpaca, 3 whores, and 15 pounds of Meth/Crack mix.

Or was that the GS Halloween party?

 

Miss Expectations's picture

Thanks again ZH for being the best financial read on the planet and perhaps in the history of the world.

Cursive's picture

@deadhead

Where you been?  Good to read you again, bro.  ZH is the balls.  Thanks Tyler.

FunkyMonkeyBoy's picture

Yes, but what's the REAL agenda here for pursuing this?

Whatta's picture

What is always the agenda of government?

Higher taxes and more control.

Look for plea bargins and calls for higher taxes on financial transactions by the guilty, like WB is calling for higher taxes on the wealthy...

rubearish10's picture

TD, diluting the enthusiasm with  "As much as we would like to believe so, the day when justice finally prevails over legal fees may still be far away" is so appropriate because the release of this article is to test the waters of market reaction, just to then, impose a mere "slap of the wrist" yet one more time. This will amount to virtually a "non-event" and the SQUID will continue to rule! How sad.

Bob's picture

That would certainly appear to be the intention.  "Tens of millions" . . . is that a joke? 

Tens of trillions is the real story, going back to year 2000. 

rubearish10's picture

Yeah, you could say that again!

I once believed this thing would just unravel "that one more time" necessary to "shakeout" all  thugs perpetrating our once beloved "market based" system. How foolish was that?

Bananamerican's picture

"examining whether multiple insider-trading rings reaped illegal profits totaling tens of millions of dollars,"

"And for what? For a little bit of money... There's more to life than a little money, you know. Don'tcha know that? And here ya are, and it's a beautiful day. Well. I just don't understand it."

Rick Masters's picture

That was a great e'ffing movie and one of my favorite lines from it. Fargo.

Captain Benny's picture

Its actually hundreds of millions.  The SEC knows it, they're just willing to settle for a lot less since their lawyers want to stay out of court and just watch more porn.

 

drswhaley's picture

The recovery will be cents on the dollar and will be a slap on the wrist (no jail time) and a request that they change their practices to some mechanism we aren't currently operating under but the net result will be the same.  What about officers in companies who are using inside info all the time.?  What about investigating officers at CSCO who sold 60% of their holdings prior to announcing their most screwed up quarter in a long time - we are to expect Chambers walks into the office on earnings release day, and surprise, our numbers are off?  He later apologizes for the miss - however, him and his bank account are smiling and it is now time to offer him lower priced options after the miss.

unununium's picture

Oooooooh, TENS OF MILLIONS!  How Dr. Evil.

The material crimes go unrecognized, uncomprehended and needless to say, unprosecuted.

Perhaps the FBI should make itself useful and crack open Fannie Mae's books.  Christ, Henry Paulson handed 1000 times this amount to Goldman via AIG in a single transaction.

 

SWRichmond's picture

Agree, tens of millions is chickenfeed to these guys, a mere cost of doing business.  Obviously, they're not going after the big fish, but rather using the FBI to get rid of the competition.

SSDD

midtowng's picture

That's what I think to.

The SEC is a joke. Are we supposed to believe they will suddenly start doing their job?

Bill Lumbergh's picture

I had similar thoughts...tens of millions is nothing and frankly the way Wall Street operates I would be surprised if this is not hundreds of millions.

StychoKiller's picture

You're being too conservative, how about 100's of $BILLIONS?

godzila's picture

Not in our liffetime :(

Seymour Butt's picture

TD, excellent article. 

Urban Roman's picture

Paging Sergey Aleynikov... Sergey Aleynikov to the white courtesy phone.

High Plains Drifter's picture

Oh goody. Does that mean there will be crying in Cramerica as Jimbo and his trusty side kick Herb go down for the count this time around?

Cleanclog's picture

Lawyers will make some devaluing bucks and create some jobs!  That's the good news.

Very little if any jail time for the cheaters and crooks, and even less "recovery of goods" stolen.  Just a few fines.  Chump change already accounted for.

Oh regional Indian's picture

Bingo Clean.

I was one step removed from the "inside inside" group in the Silicon Valley through it's boom and bust.
This game is old, very old. I was "out" because I wasn't a qualified investor (read I did not like to play their games, which included a lot of Porn for some reason. All these grown men, Vulture Capitalists, captains of Industry were all hooked on cheap porn and prostitution, also a lot of white-poweder driven ego-maniacs).

Chump change indeed. So many settlements have happened that the ones who would really scream have long been silenced by the "settlement" teat.

Nope, this time, it's going to get ugly or stay face-painted, bo-toxic pretty for a little while longer.
But only a little while.

ORI

http://aadivaahan.wordpress.com

Jake3463's picture

Minor characters get thrown under the bus and the beat goes on.

carbon based unit's picture

all accused parties settled with the SEC for undisclosed amounts and admitted no wrong-doing.  they also agreed not to engage in fraudulent behavior again.

max2205's picture

500k fine at the most

plocequ1's picture

Are Expert Networks About To Be Exposed As The Ringleader In The Biggest Insider Trading Bust In History? No!!  Now that was easy. You dont need a Harvard suit to figure that one out.  Have a nice day

Jasper M's picture

While I must grant ZH props for being, as one poster says, "ahead of the curve", it is a little disingenuous to imply the result of a 3 year investigation is the result of a letter you wrote a year ago. I suspect that, between porn clips, the SEC gets their own ideas once and awhile. 

Speaking of which, this op must have been very well compartmentalized; with all those folks getting disciplined, any disaffected porn-suffer might have leaked the case. 

digalert's picture

Haven't been around long, have you?

ZH has dragged, kicking and screaming, the SEC to the fraud.

ImNotExposedToSpeakAnySuchInformation's picture

SEC investigative years are measured in dog years; divide the number by seven to get the real value.

papaswamp's picture

Guess there will be several overseas extended 'Thanksgiving Day' vacations for some.

Escapeclaws's picture

What a joke. When will they go after the rating agencies? As these fraudsters like to say, "Whenever two or three entities gather in my name (Fraud), there I am in the midst of them." And indeed the rating agencies were and are in midst of all the financial fraud that brought down this economy, and elevated our masters.