White Collar and Securities: New Investigation of Hedge Fund

Today, The New York Times is reporting that Samir Barai and his hedge fund Barai Capital Management is under investigation for insider trading (http://dealbook.nytimes.com/2011/01/31/another-hedge-fund-linked-to-insider-trading-inquiry/?ref=business). The report says that the Federal Bureau of Investigation executed a search warrant at Barai Capital last November.

The investigation is associated with a criminal complaint against Winifred Jiau. In December the government charged Jiau with leaking confidential information about technology companies to two money managers. One of those managers is reportedly Barai. The companies involved are Marvell Technology and Nvidia. The complaint against Jiau alleges that she provided the information to the money managers in 2008. It says that she provided specific financial information about the companies before the public release of that information.

Specifically, regarding Marvell, the complaint against Jiau alleges that she told the fund managers that Marvell's revenue for the upcoming quarter would be approximately $805 million and its gross margins would be 53%. In a follow up call she amended her figures to a more exact prediction of $804 million in revenue, gross margins of 51.6%, and earnings of $.11 per share. Those numbers turned out to be quite prescient. It is alleged that Barai's fund made in excess of $820,000 by trading Marvell securities between May and June 2008.

On the scale of complexity insider trading cases are easier for prosecutors to establish that frauds allegedly based on products and statements that led to the economic crisis but significantly more difficult than penny stock "pump and dump" schemes.

White Collar Crime and Securities: Wire Taps Lead to Insider Trading Charges

A federal grand jury in the Southern District of New York brought insider trading charges against six individuals, including a billionaire hedge fund operator and executives of major corporations. The indictment alleges that Raj Rajaratnam, a billionaire who operates the $7 billion Galleon Group hedge fund, Rajiv Goel, manging director of strategic investments at Intel Corp., Anil Kumar, a director at McKinsey & Co., Robert Moffat, a senior vice president for IBM, and two former Bear Stearns executives engaged in an insider trading scheme. The indictment charges conspiracy and securities fraud, alleging that the scheme produced more than $20 million in illicit profits. The case appears to be the largest fraud involving a hedge fund ever brought. The Securities and Exchange Commission announced the bring of a civil enforcement action simultaneously.

The government has alleged that Google, Advanced Micro Devices and Hilton Hotels were among the stocks traded upon inside information. Intel has instituted an internal investigation to determine whether its stock was the subject of any insider trading.

Insider trading is the unlawful trading of securities while in possession of material non-public information. For the government to sustain a charge of fraud based on insider trading it must establish that the defendant breached a duty to someone or some entity by acting on the insider information or acted on the information while aware of an other's breach in communicating such information. In many insider trading cases there is difficulty in establishing knowledge of the inside information by those trading. Traditionally, either circumstances or the testimony of a scheme insider provides the proof.

In this instance the government built the indictment, in part, on court ordered wire taps. The recorded statements of the defendants themselves purportedly provide the evidence of the breach of duty and knowledge (referred to as "scienter" by securities litigators). This appears to be the first instance in which the investigation of alleged insider trading employed wire taps.

Court ordered wire taps require investigators to undertake the process of "minimization." This requires agents to monitor the intercepts to determine whether the conversations intercepted involve discussions or evidence of crime. If not, the agents must "minimize" the intercept to avoid capturing innocent conversations. Thus, the use of wire taps is an expensive and laborious undertaking. The fact that the government employed wire taps indicates the importance that federal authorities placed on this investigation.

For more information about the case please see the following articles: Los Angeles Times, "6 Accused of Insider Trading after Wiretapping Investigation," http://www.latimes.com/business/la-fi-hedge-fund17-2009oct17,0,4843899.story, and The New York Times, "Hedge Fund Chief Is Charged with Fraud," http://www.nytimes.com/2009/10/17/business/17insider.html?_r=1&scp=5&sq=rajaratnam&st=cse