What To Do When The FBI Raids Your Hedge Fund
From Bloomberg's Jonathan Weil
What to Do When the FBI Raids Your Hedge Fund
As if the global capital markets
hadn’t suffered enough shocks lately -- artillery fire in Korea,
meltdown in Ireland, Eva Longoria Parker’s divorce filing --
life just threw America’s hedge-fund masters a beanball. It
appears the government wants to toss many of them in jail.
This week the Federal Bureau of Investigation executed
search warrants at three large hedge funds’ offices as part of a
widening insider-trading investigation. Several other funds,
including SAC Capital Advisors, got subpoenas for documents.
What does this crisis mean for the industry? We already can
guess the first question that must have leaped to the mind of
every self-respecting wealth maximizer: “How can I use this
information to make enough money to buy myself a jet?” The
answer, of course, is that it pays to be on the inside.
This raises an even more intriguing existential question.
Is it possible for a hedge fund to profit off its own imminent
collapse? A little role-playing exercise shows it’s not only
possible -- it’s preordained.
Imagine you are a skilled trader at a hedge fund with a few
billion dollars under management. You learn that FBI agents have
just arrived to raid your firm. Lesser beings might cower under
the pressure. You, though, realize that you now possess the
ultimate edge: The knowledge of what is happening to you at this
very moment. You scan the latest news for headlines about your
firm and, seeing none, set about on an action plan.
Soon the unsuspecting public will be told that financial
stocks are plunging on the news that your firm is being raided.
You have the benefit of knowing this in advance. The only
remaining questions: Do you short Goldman Sachs? Do you short
other large banks, too? More importantly, do you short them for
your personal account, or for your fund’s? Sensing nothing but
upside in the downside, you settle on all of the above.
“The masterminds leave the fewest footprints, and they are
often planning their defense at the same time they are
committing the fraud,” he said. “To take a simple example,
those who trade on insider information may well accumulate at
the same time a stack of research reports on a company whose
stock they just illegally purchased, and point to that file when
law enforcement comes knocking.”
As you consider whether to send Khuzami a thank-you note,
you hit the print button. Piles of bearish research reports
churn out, ready to be placed on your desk as if they had been
there for weeks. You’re probably just being paranoid, though.
For all you know, the trades you executed were legal.
Make a Call
Right about now, your attention starts to shift. There’s
the question of whom to call first about the FBI raid. Personal
lawyer? Spouse? Lover? No, you resolve instead to call your
fund’s top so-called expert-network service. They helped get you
in this mess. Surely they can get you out, right?
Past experience tells you the experts’ information always
falls into one of two categories: Worthless or way, way too
good. You hope for the latter. Even if the network can’t lure
away Khuzami from the SEC to represent you, maybe the experts
could dig up some dirt on the pimply FBI agents downloading your
firm’s e-mails? Suddenly it occurs to you that all your phones
probably are tapped. Better hold off on making that call.