In October of 2009, the founder of Galleon Group, billionaire Raj Rajaratnam and five associates were arrested on charges of insider trading. The subsequent investigation has led to 23 arrests and 14 people pleading guilty to various charges. While Rajaratnam faces decades in prison if convicted, he has denied any wrongdoing. His trial is set to begin in January 2011.
Prosecutors Using Unconventional Methods to Investigate Insider Trading
According to the Associated Press, the Galleon case was the first time that wiretaps were used on an insider trading case. Prosecutors argued that because the scheme was largely conducted over the phone, there was little value in investigating by conventional means.
Rajaratnam’s attorneys asked the court to suppress the wiretaps because, they allege, prosecutors mislead the judge issuing the wiretaps about their scope and purpose. According to a Reuters report, U.S. District Judge Richard Holwell allowed prosecutors to use the more than 2,000 recorded conversations as part of their case, despite finding that prosecutors intentionally withheld information on the depth of an SEC civil investigation into Galleon. Specifically, Judge Holwell in agreeing with prosecutors noted that disclosure "of all the details of the SEC's investigation that the government recklessly omitted would ultimately have shown that a wiretap was necessary and appropriate."
While the Galleon case was billed as the biggest insider trading case in the United States involving hedge funds, it may only be the beginning. Recently, the Galleon wiretaps led to the arrest of Don Ching Trang Chu, of the California-based Primary Global Research, on charges of providing insider information to a number of different hedge funds. The firm cut its ties with Chu after his arrest, but the investigation into Chu’s activities continues and, according to a CNBC report, more arrests are expected in January.
Government Continuing to Crackdown on Insider Trading
Recently, a former partner of Deloitte Tax, LLP, and his wife were arrested on charges of insider trading. According to a Reuters report, Arnold McClellan and his wife Annabel are accused of providing inside information to members of their family. The Securities and Exchange Commission notes that this deal netted over $23 million in profits for the couple and their family and friends.
Prosecutors allege that Arnold McClellan told his wife about pending mergers. Annabel McClellan then told her sister, Miranda Sanders, about the deals. Sanders and her husband, James, lived in Great Britain during the time they received the information, where James ran Blue Index, Ltd, a London brokerage firm. The SEC believes that James Sanders used this information to his clients’ benefit, netting them over $20 million in profits. The McClellans are said to have made over three million for providing this information.
According to The New York Times, federal prosecutors are warning that insider trading is becoming the common way of doing business. Many in the securities field suspect that the multi-billion dollar scandal involving Bernie Madoff spawned the crackdown on insider trading and note that more and more resources are being devoted to stopping this practice.
The focus of the government is now on restoring confidence in the market. If you suspect you are under investigation for any sort of insider trading or white collar crime, it is important to discuss your case with an experienced attorney.