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Alternative Investment Community Thinks Insider Trading Will Remain a Serious Threat

ByBritt Tunick

NEW YORK, NY, September, 2017 – It has been eight years since the Federal Bureau of Investigation’s probe into insider trading led to the demise of $7 billion hedge fund firm Galleon Group, yet the issue is far from fading into the background. Since Galleon’s demise, the FBI and regulators have brought countless charges of insider trading –most notably against Steven Cohen’s SAC Capital Advisors, which plead guilty to insider trading charges in 2013 and paid a whopping $1.8 billion penalty. And then there’s Cohen himself, who just last year reached an agreement with the Securities and Exchange Commission over his firm’s activities that will keep him from managing money for anyone but himself until 2018. Most recently, prosecutors filed insider trading charges against seven individuals over trades based on non-public information they were given by Daniel Rivas, a Bank of America employee.

The New York Hedge Fund Roundtable recently hosted an event focused on this continuously relevant topic and then surveyed its membership to see whether or not members’ perception of the issue has changed since the Roundtable last focused an event on the issue in January 2016.

From Trader to Whistleblower: How Tom Hardin Wound Up at the Center of Galleon’s Insider Trading Case was the topic of the Roundtable’s August event, where Hardin, initially known as “Tipper X” in the Galleon investigation, shared his story of how insider trading ended his career for what was ultimately just a $46,000 commission.

“We’re all potentially just a few decisions away from going down that slippery slope… there’s this idea in social science called the fudge factor –that humans all have a fudge factor, but that we want to be able to cheat up to the point where we can still think of ourselves as good people,” said Hardin, discussing the evolution of his involvement in insider trading at the Roundtable’s August 2nd event. “My self talk in this situation was that ‘this is such a small position, it’s an immaterial position’… the problem is that once you do it once it becomes very easy to do it again,” he said.

When it comes insider trading, Roundtable members are fairly confident the problem is not one within their own firms. 97% of respondents to this year’s insider trading survey believe their firm is completely compliant with regulations prohibiting the practice, up from 91% of respondents who felt this way in January 2016. Nonetheless, there is a consensus among members that as long as money continues to pour into alternative investments and the number of funds keeps rising there will always be someone desperate enough to try insider trading as a way of differentiating themselves.

New York Hedge Fund Roundtable members had the opportunity to weigh in on the topic of insider trading reporting at the Roundtable’s most recent event on August 2nd, as well as through an online electronic poll.

*Of the respondents to this survey, 26% were fund managers; 19% were allocators; 11% were risk management or trading; 36% were service providers and 8% were other industry participants.

Following are some of the key findings of that survey:

  • 14% of respondents believe that insider trading practices in the alternative investment industry have become less prevalent since the FBI arrested Raj Rajaratnam and scared the bejeezus out of everyone, a noticeable drop from January 2016 when 25% of respondents felt this way; 37% of respondents think the news of arrests and convictions there has had little impact on insider trading because those who engage in such practices think they are smarter than everyone else and will never get caught, compared with 39% of respondents in 2016; and 49% of respondents believe the influx of money into funds in recent years and the explosion in the number of hedge fund firms has put enough pressure on fund managers that there will always be a few desperate enough to try anything, including insider trading, a significant increase from the 36% of respondents who felt this way in the Roundtable’s previous survey on this topic.
  • When asked where they believe the biggest risks for insider trading lie, 44% of respondents said that they believe it is firms with an attitude of being untouchable among the top level of management, compared to 24% of people who felt this way in January 2016; 35% think the biggest risk is rogue employees, down from 59% of respondents; and 21% think it is the ease of circumventing company monitoring through work around technologies, such as gaming stations and disposable mobile phones, up from 17% in 2016.
  • 90% of respondents said their firms have been extremely diligent in efforts to make sure employees know what constitutes insider trading, compared with 89% of respondents in 2016; 10% of respondents said that even though their firms have no insider trading policies, they are uncertain that everyone understands all the actions that fall under the insider trading umbrella or where the lines are when it comes to sharing sensitive company information, compared with 11% in 2016.
  • When asked whether their firms allow employees to trade on their own behalf through external accounts, 61% of respondents said employees and spouses can trade on their own behalf as long as they report their activities to the company, compared to 51% in last year’s survey; 22% said their firm’s no-trading policy is strictly enforced and is a major deterrent to outside trading activities, slightly down from 25% in January 2016; 14% said their company has a no trading policy and that it is clear that violation it is a fireable offense, compared to 12%; and another 3% said that while their firms have no trading policies, they are loosely enforced and of little concern to employees, down from 12%.
  • When asked whether the U.S. Court of Appeals’ 2014 decision to overturn government convictions for insider trading against former hedge fund managers Todd Newman and Anthony Chiasson has made prosecutors less threatening regarding insider trading, 44% of respondents said that, regardless of where the courts weigh in on the issue, the hedge fund industry is acutely aware that the mere suggestion of a regulatory investigation for insider trading activities is enough to brand a fund manager or a hedge fund firm as toxic among investors, compared with 39% of respondents in 2016; 25% think the mere fact that regulators are so actively pursuing the issue is enough to deter most people, down from 27%; 28% think the U.S. Court of Appeals’ assertion that fund manager must specifically know that company insiders are improperly leaking confidential information for their own personal gain created a major loophole for anyone prone to insider trading and diminishes the threat of prosecution, a sizeable increase from 17% in 2016; and another 3% think the fact that the Supreme Court has decided to weigh in on the issue will be enough to deter anyone from going down that road –at least until it is clear what side the Supreme Court takes on the issue, a major decrease from 17% in 2016.