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Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks |
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The former Blue Index brokers charged with insider trading in the UK in late November were also far from the top of the City pecking order. They were brokers in contracts for difference – simple derivatives used to take leveraged stock positions that have a reputation for attracting disreputable financial types, even though they are also widely used for legitimate trades.
There is little confidence among bankers and investors that investigations into market abuses will remain confined to the financial fringes, however.
Preet Bhahara, the US attorney for Manhattan, recently stated that insider trading is rampant and he has been steadily widening the scope of a probe that initially focused on hedge fund Galleon and its founder, Raj Rajaratnam.
Subpoenas and interviews by federal investigators indicate that Bhahara and FBI investigators have been pursuing enquiries relating to SAC, a hedge fund run by Steve Cohen, one of the highest-profile investors in the US.
Cohen is a hedge fund chief from central casting. He is known for being aggressive even by Wall Street standards. He has an extensive art collection, including Cezanne and Picasso paintings, although his best-known purchases in recent years have been of modern art, including Damien Hirst’s shark in formaldehyde work: The physical impossibility of death in the mind of someone living.
Cohen has been dogged by innuendo about sharp trading practices for years and was accused of insider trading by his former wife in a lawsuit at the end of 2009.
A case against SAC, or Cohen himself, will therefore not be a shock. But any accusations could indicate that prosecutors are keen to take down high-profile market participants, in order to tackle the perception that the only people who have to worry about pursuit over market abuses are minor players.
Senior investment bankers have not been accused of insider trading in recent years, although low-level employees regularly feature in cases involving leaks of information – often relatively anodyne disclosures, such as a change in a stock recommendation by an in-house analyst. Bankers, however, are well aware that even a hint of involvement in an insider-trading scandal can pose a potentially enormous threat to a franchise.
Michael Milken, the former chief executive of junk bond pioneer Drexel Burnham Lambert, now takes pains to advertise the fact that he was never convicted of insider trading. The website advertising his present incarnation as philanthropist and medical research sponsor takes more than 6,000 words to address what it portrays as myths about Milken. High among the listed myths is the widespread belief that he was convicted of insider trading.
Milken’s website does not find space to detail the way that a 98-count indictment that included insider-trading charges effectively spelled the end of his firm. Drexel filed for bankruptcy within a year of Milken’s 1989 indictment and had clearly been fatally wounded well before Milken himself reached a plea deal on six of the charges against him and went to jail.
The knowledge that a criminal case against a senior executive can pose a threat to the life of an investment banking franchise helps to explain the cautious approach that was taken by investigators who wished to question former Morgan Stanley chief executive (and present chairman) John Mack about his involvement with trades by hedge fund Pequot.
The SEC launched, then dropped, a probe into Pequot, where Mack was briefly employed, and was later accused in a congressional report of showing “undue deference” to the Morgan Stanley head, along with other missteps in its investigation of potential insider trading.
Pequot head Arthur Samberg wound down what had once been the biggest hedge fund in the world in 2009, then in March 2010 agreed to pay $28 million to settle charges of insider trading of Microsoft shares.
The present SEC enforcement head, Robert Khuzami, appears to be keen to avoid accusations of showing undue deference to Wall Street bigwigs – as can be seen from his willingness to accuse Goldman of CDO fraud. That case ended in effective stalemate but it will be no surprise if further action is taken against big names on Wall Street.
