Business

Feds are only grandstanding with insider-trading case

Last week we learned that the Department of Justice and the Securities and Exchange Commission are conducting criminal and civil investigations into what has been characterized as potentially a widespread insider-trading ring on Wall Street.

Federal investigators, led by US Attorney Preet Bharara, have focused on whether hedge funds received inside tips from experts about companies the funds invest in.

Federal investigations are normally highly secretive affairs.

Yet here we have seen highly publicized raids on three hedge funds and the disclosure that numerous other subpoenas have been issued.

So what gives? Why is such a large amount of information suddenly being released on these usually secretive investigations?

In a word, grandstanding.

The feds’ aggressive raids are an attempt to publicly demonstrate they are cracking down on Wall Street’s excesses.

Tellingly, the raids only happened after the feds were caught flatfooted when an expert who had been visited by the FBI and pressured to cooperate revealed their investigation.

As a former assistant regional director for the SEC, I know that proving an insider-trading case against the hedge fund managers will be extremely tough.

The law requires that the prosecutors prove that the hedge funds knew that the experts were obtaining information illegally and then passing it on to them.

But even if an expert did obtain information illegally, it is highly unlikely they would have disclosed that fact to a hedge fund.

It seems to me that federal prosecutors are overreaching in their attempts to criminalize the hedge funds’ use of experts to ferret out corporate information.

In the Internet age, when information is a readily available commodity, it seems hopelessly antiquated for prosecutors to investigate hedge funds or experts for uncovering business information about public companies.

Let’s hope the feds move on from chasing headlines to prosecuting real cases of fraud.