Insider Trading

Prosecutors Seek to Prove Incentive in Gupta Insider Trading Trial

Rajat Gupta’s attorneys have argued throughout his trial that he and Raj Rajaratnam were at odds over Rupta’s investment in Rajartnam’s fund, the Galleon Group, which collapsed during the financial crisis, resulting in Gupta’s $16.4 million investment in the fund being completely wiped out. According to his attorneys, as a result of this falling out, Gupta had no motivation to provide Rajaratnam with corporate secrets. However, this week prosecutors offered testimony and evidence attempting to prove Gupta’s investment in the Voyager Capital Partners fund did indeed provide Gupta with the financial incentive to leak inside information to Rajaratnam. The Voyager fund was a “fund of funds” that invested in multiple Galleon funds. The government presented evidence indicating that several of those funds were invested in Goldman Sachs. Gupta invested $5 million when the fund was founded in 2005 and then increased his investment to $10 million according to testimony from Isvari Mahadeva, a former Galleon employee. Gupta is charged with providing Rajaratnam with inside information from Goldman and Proctor & Gamble. Before it collapsed during the financial crisis, the Voyager fund performed extremely well, returning approximately 41% during its first few years. A good portion of the testimony was related to a dispute between Gupta and Rajaratnam over the value of Gupta’s investment in the fund. Testimony indicated Rajaratnam eventually relented and Gupta ended up with a higher stake in the fund. The government is expected to wrap up its case this week.

New York Times: Prosecutors Try to Prove Incentive for Insider Tips (6 June 2012)
(Source: New York Times)

Witness: Gupta Helped Promote Rajaratnam Funds

A pair of government witnesses testified last Friday at the ongoing insider trading trial of Rajat Gupta. The first witness was Bill George, the former chief executive at Medtronic, and director at both Goldman Sachs and Exxon Mobil. George’s testimony mostly consisted of walking through the minutes from Goldman board meetings and other presentations made to the board in 2008. According to prosecutors, after these meetings Gupta, who was also a member of Goldman’s board, would call Raj Rajaratnam and illegal tip him off to information about Goldman before it went public. Prosecutors also introduced an email and power point presentation sent to George from Gupta regarding the private equity fund Gupta and Rajaratnam created. By introducing this evidence prosecutors were trying to demonstrate the close business ties that existed between Gupta and Rajaratnam. The second piece of testimony came from Michael Cardillo, a former employee of Rajaratnam’s hedge fund the Galleon Group. Cardillo testified that Rajaratnam’s brother, also an employee at Galleon, told him in 2008 that Proctor & Gamble was going to announce a drop in organic sales growth. He also indicated to Cardillo that the information came from his brother. They all shorted the Proctor & Gamble stock and when the company announced the decline the next day, they all made a significant amount of money. Gupta was also a board member at Proctor & Gamble.

New York Times: Prosecutors Present E-Mail Evidence in Insider Trading Case (25 May 2012)
(Source: New York Times)

Three Plead Guilty to Insider Trading in UK Regulator’s Prosecution
Europe, Middle East and Africa

The United Kindgom (UK) Financial Services Authority (FSA) has announced that three people have pleaded guilty to insider trading in the course of its prosecution. Blue Index director James Sanders, his wife Miranda Sanders and Blue Index co-director James Swallow have pleaded to insider trading and will be sentenced on 19 June 2012. The FSA had alleged that Miranda Sanders’ sister Annabel McClellan and brother in law Arnold McClelland leaked inside information to James and Miranda Sanders, “who used the information to commit insider dealing in those US securities between October 2006 and February 2008″. James Sanders was alleged to have passed on that information to others, including James Swallow. According to the FSA, as a result of the insider trading, “[t]he total profits generated by the defendants were approximately £1.9 million, while the total profits generated by the clients of Blue Index were approximately £10.2 million”. FSA acting director of enforcement and financial crime division Tracey McDermott said that “[Mr] Sanders and [Mr] Swallow abused their position as approved persons” by using Blue Index “as a vehicle for their criminal conduct and cynically exploit[ing] the inside information they had illegally obtained to try and improve its reputation and profitability for their own benefit”.

FSA’s media release (28 May 2012)
(Source: FSA)

SEC’s Evolving Tools and Techniques Continue to Uncover Financial Schemes

Matthew Kluger, Garrett Bauer and Kenneth Robinson successfully engaged in an insider trading scheme for nearly 20 years before finally being identified by the Securities and Exchange Commission (SEC) once the agency began adopting new techniques and tools to thwart financial crimes. After missing the warning signs of the 2008 financial crisis and the Bernie Madoff Ponzi scheme, the SEC began using several new and unconventional techniques to regain its credibility. One of the first efforts the SEC undertook was to consolidate more than 70 tip lines into one database. All tips are now entered into a single database, and SEC employees must enter a tip into the system within three days of receiving it. The SEC also created the Office of Market Intelligence to manage and analyze all of the tips they receive. The agency is also now working more closely with the Department of Justice (DOJ), and there is an FBI agent assigned to the Office of Market Intelligence to help sort through bogus tips. In addition to working more closely with the DOJ, the SEC has also adopted several of its methods. For example, the SEC has adopted the practice of offering leniency to cooperating witnesses who agree to provide evidence against their co-conspirators. These new strategies appear to have paid dividends: last year, the SEC filed a record 735 enforcement actions. While some critics have questioned the agency’s focus on insider trading, the SEC defends its emphasis on the crime, citing the damage to public confidence in the markets and Wall Street’s unfair advantage over the average investor. The unit that oversees insider trading investigations is also taking a new approach to its investigations. Rather than looking at questionable trades in specific stocks, the unit now looks for suspicious traders and their connections on Wall Street. These new methods eventually led the SEC to Kluger, Bauer and Robinson and influenced their eventual confessions.

New York Times: With New Firepower, S.E.C. Tracks Bigger Game (21 May 2012)
(Source: New York Times)

Hollywood Producer Charged in Insider Trading Sting

A Hollywood producer and members of his family have been accused of insider trading by the Securities and Exchange Commission (SEC). Mohammed Mark Amin allegedly traded on information he obtained from participating in confidential board meetings at DuPont Fabros Technology. Amin’s brother, cousin, and three friends also traded on the information. Amin received the information in late 2008 and the group began to buy shares in the company before a new business expansion was publicly announced in February of 2009. The group profited more than $600,000 on the trades. The six men charged have agreed to pay nearly $2 million to settle the case. The SEC has brought charges of insider trading against groups of family members four times within the last month.

New York Times: Insider Trading Crackdown Ensnares Hollywood Producer
(8 May 2012)
(Source: New York Times)