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Authorities Prepare Charges in Massive Insider Trading Probe

| Nov 22, 2010 | White Collar Crimes |

A three-year investigation by federal prosecutors, the FBI and the Securities and Exchange Commission is beginning to make headlines across the nation. The investigation has been focused on possible insider trading by consultants, investment bankers, hedge fund managers, mutual fund managers, and analysts across the nation. The investigation is being characterized as one of the biggest insider-trading probes ever.

Broadly, insider trading is trading securities based on material, non-public information. The transactions bringing rise to this investigation involved trading in stock of companies targeted for acquisition by another company before the acquisition was publicly announced. The Securities Exchange act of 1934 and Rule 10b-5 make insider trading punishable by a civil lawsuit for damages or criminal charges.

The SEC has been investigating potential insider trading on takeover deals since 2007 when there was a sharp increase in acquisition deals. Last autumn, the SEC sent subpoenas to more than 30 hedge funds and other investment groups.

Part of the investigation is focusing on the use of consultants who had insider knowledge based on employment with the companies involved in acquisition deals. Investment groups allegedly paid managers and directors of the involved companies for advanced knowledge of takeover deals.

The investigation specifically focuses on several suspicious transactions. One such suspicious transaction involved trading in Schering-Plough Corporation while a takeover of the company by Merck was developing. In 2009, Schering-Plough stock rose 8 percent in value the day before the acquisition was publicly announced, and rose 14 percent on the day of the announcement.

The investigation promises to ensnare dozens of traders at investment groups and federal charges are likely coming soon. The investigation is an outgrowth of U.S Attorney Preet Bharara’s focus on insider trading. In an October speech in front of a group of white-collar attorneys, Bharara declared insider trading to be a “top criminal priority” and said, “Illegal insider trading is rampant and may even be on the rise.”

Source: Wall Street Journal: U.S. in Vast Insider Trading Probe; Susan Pulliam, Michael Rothfeld, Jenny Strasburg, and Gregory Zuckerman, 11/20/2010