SEC Targeting Hedge Funds in Insider-Trading Crackdown

The insider-trading case against billionaire hedge-fund manager Raj Rajaratnam underscores the emphasis by the SEC to put the brakes on what may be prolific insider trading by hedge funds.

Normally these types of cases are extremely difficult to win because evidence presented in the past has been largely circumstantial.

In order to build stronger cases, the SEC has employed the use of computer software over the last couple of years which is able to mine through millions of trading records and find those that have the most probability of being insider trading practices. The idea is to locate patterns that are most likely the result of insider trading tips.

Once that is determined, authorities then use wiretaps, like they did in the Rajaratnam situation, to get further evidence in order to present a stronger case and attain higher convictions.

Another means of receiving information is through the stock exchanges themselves, which will send the SEC reports on those that make trades just before a specific announcement by a company which moves the stock price up or down (you can make money either way).

It looks like the wave of the future and the practice which will help rein in insider trading by hedge funds is the uncertainty on whether they’re under investigation and if they are being wiretapped. There’s not much more solid than using the very words of a trader against them in a court of law.

In the case of Rajaratnam, it wasn’t the data-mining which brought about his arrest, but the reports from the stock exchanges sent to the SEC which launched the investigation, which ended with the incriminating wiretaps.

Per the wiretaps, investigators not only found the other suspects in the case which have also been charged, but there are evidently more that will be brought in as a result of the surveillance.

At this time Rajaratnam hasn’t entered a plea, and his lawyer, Jim Walden, asserts the evidence presented isn’t as strong as the SEC and the prosecution is making it out to be.

Although it’s impossible to curtail all illegal trading, these are moves meant to put some fear in those that are tempted to participate in the practice, and at minimum make them think twice before entering into it.

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