An insider trading case last year that federal authorities said was the biggest ever is providing a recipe for another case that may be even bigger.
The current case is largely an extension of work that led to the arrest of Galleon Group founder Raj Rajaratnam in October 2009. The Galleon investigation marked the first time that federal authorities used wiretaps in an insider trading probe.
Similarly, wiretaps led to the first arrest in the latest case. Don Ching Trang Chu, a consulting firm executive, was arrested Wednesday for allegedly providing private information about a company's corporate earnings to a hedge fund.
The FBI this week searched the offices of three hedge funds and subpoenaed some of Wall Street's most influential firms, including Janus Capital Group and SAC Capital.
The Galleon case has resulted in 23 arrests and 14 guilty pleas. Many of those arrested are cooperating in the latest investigation.
The cases represent an offensive by U.S. Attorney Preet Bharara against white collar crime in the securities industry. One aim of the current case: unearthing those who helped match employees at public companies with large-scale traders hoping to profit from information that wasn't available to the public.
Authorities have said little about the current investigation. But a study of Bharara's comments over the past year show how it has progressed.
Bharara said when he announced the arrests in the Galleon case last year that the use of wiretaps marked a turning point in investigations of insider trading. Wall Street insiders, he said, will be forced to wonder if every conversation is recorded.
"When sophisticated business people begin to adopt the methods of common criminals, we have no choice but to treat them as such," he said.
A month later, as he announced more arrests, he said "the alarm bells have only grown louder."
"How pervasive is insider trading?" he asked. "Is this just the tip of the iceberg? We don't have an answer yet. But we aim to find out."
Two weeks later, in November 2009, he said white-collar fraud had caused a "lack of faith in the economic system; a lack of belief in the markets; and a lack of trust that the playing field is level."
By last month, Preet was holding nothing back, saying that insider trading is "rampant and may even be on the rise."
Now, at least two defendants in the initial probe seem headed for trial. Rajaratnam, a former billionaire and the richest Sri Lankan-born person in the world, and Danielle Chiesi, a former consultant at New Castle Funds, have pleaded not guilty to charges of securities fraud.
Rajaratnam is a Wall Street analyst who built Galleon into a high-flying hedge fund that specialized in trading stock of technology companies such as IBM Corp., Advanced Micro Devices Inc. and Google Inc. Authorities say he built a web of contacts throughout the technology industry who provided him with inside information that allowed Galleon to earn millions of dollars in profits.
Rajaratnam has said through his lawyers that his trades were all based on public information. Both face potential penalties of more than 100 years in prison.
Prosecutors have given nearly all the defendants an opportunity to cooperate so that the government can uncover new instances of insider trading. Harlan Protass, a lawyer who represented one of the Galleon defendants, said the number of defendants who pleaded guilty and cooperated was not surprising and there is ample incentive for them to do so.
"The benefit that a defendant stands to gain from cooperating with federal prosecutors is directly linked to the quality and quantity of information he can provide," said Protass, who teaches a class on federal sentencing at Cardozo Law School. "Thus, once a defendant decides to flip, the more wrongful conduct in which he was involved, the better off he ultimately will be when it comes time for sentencing."
His client, Ali Hariri, was a former vice president of Atheros Communications, a chipmaker based in California. He was sentenced earlier this month to 18 months in prison after pleading guilty to securities fraud and conspiracy to commit securities fraud. He is not cooperating in the other investigation.
The crackdown on insider trading has been a boost for the pocketbooks of white-collar defense attorneys, said Eric Snyder, a former federal prosecutor. He was at a traditional gathering of about 1,000 white-collar crime defense lawyers the day before Thanksgiving at a midtown Manhattan hotel.
"Everybody was talking about how they're going to get a piece of it," he said of the arrests expected to result from the latest probe. "Every firm in the city is expecting they're going to become involved in that case."
The first arrest turned out to be Chu of Somerset, N.J. It apparently was rushed after investigators who interviewed him on Sunday learned that he was supposed to fly to Taiwan days later, a trip that he makes frequently.
His lawyer, James DeVita, said only: "We will have an opportunity to present a defense, and we'll pursue that."
According to court records, the case against him was built when a cooperator from the Galleon probe engaged him in conversations in which he talked about inside information and how to prevent federal authorities from learning about it electronically.
The wiretaps on a hedge fund phone were cited in a criminal complaint filed in U.S. District Court in Manhattan, where a judge on Wednesday upheld the government's right to use wiretaps. The judge rejected defense contentions that they were unconstitutional because they were not specifically authorized under rules written by Congress regarding wiretaps.
Marc Mukasey, a former federal prosecutor who now represents white-collar defendants, said prosecutors will still need to be selective about when to seek court authorization for wiretaps.
"I would not necessarily assume that further investigations mean that it's wiretaps gone wild," he said.
(This version CORRECTS spelling of lawyer's last name to Protass, not Protess.)
- Janus Capital Group
- securities fraud
- white collar crime
- insider trading
- Raj Rajaratnam
- Wall Street