American prosecutors are joining forces with prosecutors from several European countries to investigate an international ring of sophisticated traders who rely on insider tips to reap huge profits.
As Bloomberg describes it, the cabal of more than a dozen traders sounds like something out of a movie: The shadowy illicit traders are scattered across Europe and the Middle East. The group has used sophisticated techniques, which we detail below, to trade ahead of media reports, reaping tens of millions of dollars in profits.
The first sign of American involvement surfaced in November, when authorities in Serbia arrested one of the suspects, a Geneva-based trader, on a US warrant that alleged he committed securities fraud. He was extradited in May.
The group has a very clear MO: They cultivate sources who might have access to insider information, then they feed that information to the media.
Investigators suspect them of cultivating advisers, executives, lawyers and government officials with cash and gifts, the people said. These potential sources of confidential information are also being examined, they said.
One of the most interesting factors from the story is how the unnamed suspects played the financial press to their own benefit. The traders, according to Bloomberg, would pass along a tip to reporters, who would then independently verify the information. Before the story broke, the traders would position accordingly.
Bloomberg added that Bloomberg News was among the news organizations that received these tips. But one obstacle for prosecutors is that they have been reluctant to compel the journalists who received these (ostensibly legitimate) tips to cooperate in the investigation because of first-amendment issues.
US prosecutors are scrutinizing the traders’ use of the media, a crucial part of their strategy, according to the people familiar with the probe. By passing on tips to financial news organizations, including Bloomberg News, the traders hoped to benefit from a pop in the stock price when reporters independently corroborated the tip and published the news, the people said.
The Justice Department probe is focusing on the traders’ conduct, including attempts to use the media for their purposes. The investigators have been reluctant to compel journalists to cooperate because of First Amendment protections, the people said.
Bloomberg followed this by clarifying its policy for publishing tops from both named and anonymous sources: the organization won't publish until the story has been confirmed by someone with direct knowledge of the matter. The policy also prohibits telling a source when a story will be published (though we imagine some vague details about timing probably dribbled out as reporters tried to build a rapport with their incredibly helpful sources).
Traders involved in the insider-trading syndicate used shell companies to cover their tracks. They also used encrypted chat apps like Whatsapp, Signal and Telegram to communicate, as well as burner phones without SIM cards over public wireless networks.
Some of the traders avoided using their own name by working through associates, wealth managers or brokers who traded without leaving a paper trail.
So far, the team doesn't have too many strong leads: Aside from a low-level associate who has agreed to cooperate, prosecutors have little to go on. But with the integrity of global markets at stake, we imagine the combined resources of three G-10 governments (the UK and France, along with the US) will manage to win the day.