Hedgefundgate Begins: Numerous Insider Trading Charges Forthcoming

Rajmahal was just the beginning. The Sri Lankan, who just made the record books for spending a generous $100 million on bail and has even bigger digs in New York's Sutton Place complex (although not quite Richard Perry big), is just the proverbial appetizer. And if regulators have truly decided to start treating the hedge fund industry like the 21st century equivalent of organized crime (which they have as previously disclosed by the US attorney), tonight many other wannabe billionaires are not sleeping too well (and even considering checking out Expedia for some sweet one-way trip deals). Because if they are not, they will be after reading the most recent take on their upcoming plight. From Bloomberg: "Federal investigators are gearing up to file charges against a wider array of insider-trading networks, some linked to the criminal case against billionaire hedge-fund manager Raj Rajaratnam that shook Wall Street last week, people familiar with the matter said." If nothing else, this will hopefully force many of them to reevaluate the nomenclature of what funds to allocate the hundreds of billions of dollars that have emerged from the "sidelines" recently: it would appear The Insider Trading Rapid Value Appreciation Offshore Fund, most recently developed at Shady Pickins Asset Management (SPAM L.P.), may not be the best appellation after all.

And, in the most delicious sense of Kafkaesque irony, nobody is safe anymore: if you have talked on the phone, exchanged text messages, or even communicated in smoke signals to get that $100k "sure thing" - you are on the hook.

The pending crackdown, based on at least two years of investigation, targets securities professionals including hedge- fund managers, lawyers and other Wall Street players, the people said, declining to be identified because the cases aren’t public. Some probes, like the one that focused on Rajaratnam, rely on wiretaps. Others stem from a secret Securities and Exchange Commission data-mining project set up to pinpoint clusters of people who make similar well-timed stock investments.

And the following advice demonstrates just why the SEC is so terrified of going after not just the medium fry, but the really big fish (pardon, we may have some interspecies confusion as we realize cephalopods are a different phylum than fish):

“If you’re going to shoot the king, you better shoot to kill,” said Bradley Bennett, a partner at Baker Botts in Washington who formerly focused on insider-trading cases as an SEC investigator. “If they’re going to take on a billionaire, they need to have the strongest possible cases. The defendant’s own words are the strongest possible evidence.”

Surprisingly, the SEC is actually taking the right approach in cracking the not so complex web of information leaks:

The SEC began using computer software about two years ago to sift hundreds of millions of electronic trading records, known as blue sheets, attached to the stock exchange reports about suspicious incidents, according to people familiar with the project. By looking for patterns in the library of data, they identified groups of traders who repeatedly made similar well-timed bets.


Once investigators find a cluster of correlated trades, they tap other sources of information to unravel how its members obtain and share tips, the people said. For example, if a group profits on trades before a series of corporate takeovers, the SEC may check so-called league tables listing which investment banks or law firms advised the deals. If one firm was involved in all of them, an employee there may be the source of the leak.


The data-mining strategy yielded one of its first cases in February, when the SEC and U.S. prosecutors charged takeover advisers at UBS AG and Blackstone Group LP with taking part in an $8 million insider-trading case, people familiar with the inquiry said. Authorities used a “novel” technique to detect the scheme, the SEC’s lead investigator on the case, Daniel Hawke, said at the time, without elaborating.

And here is why anonymous and numerous sources within the buyside community advise us that a whole plethora of hedge fund bosses simply picked up and left as soon as the Rajmahal news broke on Friday...

Surveillance during the probe of Rajaratnam, 52, led investigators to other suspects and more charges are likely, people familiar with the matter said. U.S. Attorney Preet Bharara said Oct. 16 the Justice Department will continue using wiretaps to root out insider-trading.

Luckily, Raj had a big rolodex, big enough in fact to provide quite a few promising leads to any aspiring regulator. So big in fact, that quite a few of the speed-dial names have already leaked and are making the rounds. Keep an eye out on some of the major $1 billion + HFs tomorrow to see who decides to not show up for work, or at least looks behind their backs every 5 minutes for the guys in the trench coats...

This one is about to get exciting.

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