Securities Law

Secret SEC Data Mining to Fuel New Insider-Trading Cases; Lawyers Targeted

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After a two-year investigation using unusually aggressive evidence-gathering techniques, the feds are getting ready to crack down on a broad array of insider-trading networks.

In addition to the securities fraud case and civil insider-trading charges announced last week against billionaire Galleon Group hedge-fund manager Raj Rajaratnam, authorities are targeting hedge fund managers, securities professionals—and lawyers—in a wide network of interrelated schemes, according to Bloomberg. Some are related to Rajaratnam’s alleged over-the-line pursuit of sources for nonpublic stock-trading tips; others aren’t, the news agency reports, relying on unidentified sources.

Although it has traditionally been difficult to obtain enough evidence to pursue such cases, authorities used wiretaps in their investigation of the 52-year-old Rajaratnam.

Additionally, a number of the expected new cases were generated by a secret Securities and Exchange Commission data mining project, Bloomberg says. It churned through a massive amount of trading information to identify clusters of individuals who were involved in similar, fortuitously timed securities trades, providing a blueprint for further investigation.

“Insider-trading cases are notoriously difficult to prosecute because the evidence is often circumstantial,” says Bill Mateja, a former prosecutor now at Fish & Richardson in Dallas. “If law enforcement is actively going to go out and target this with covert investigative techniques, I think it’s going to keep people on their toes.”

Spokesmen for the SEC and U.S. Department of Justice declined to comment.

Rajaratnam hasn’t yet pleaded but his attorney says prosecutors are misconstruing the evidence against him.

Earlier coverage: “The Feds Were Listening: Wiretaps Led to Arrest of Billionaire Hedge Fund Manager”

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