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Insider trading: Why do feds treat it like a mob crime?

Insider trading cases are now built with the kind of wiretaps used to catch mobsters. Do insider trading crimes really rise to the level of the mafia's?

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In this October file photo, Galleon Group founder Raj Rajaratnam leaves Manhattan federal court following his sentencing, with his attorney Terence Lynam, left, in New York. Rajaratnam, who was convicted in May of insider trading, was sentenced to 11 years in prison and fined $10 million.

Louis Lanzano/AP/File

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Should the Securities and Exchange Commission and the Federal Bureau of Investigations really pursue insider trading with the same tactics they use in pursuit of gangsters?

That question is left largely unanswered in the long, must-read piece by Patricia Hurtado on the background of the nation-wide insider trading probe.

It’s very clear that from the perspective of the FBI agents who first decided years ago that traditional methods of uncovering white collar crime were ill-equipped to penetrate the insular and secretive world of hedge funds. In order to conduct an effective nation wide probe into insider trading, they’d have to bring in more firepower.

That additional firepower came in the form of wiretaps.  But in order to get the wiretaps in place, they first needed to infiltrate the networks to obtain evidence that would support a court authorization of wiretapping.

And now that the government has obtained the conviction of Raj Rajaratnam, wiretaps are likely to be employed more frequently. The government has proven that the taps can be effective for catching insider traders.

But does this justify the taps? There seems to be something out of all proportion of the crimes here alleged—basically, victimless insider trading—and the means to pursue them. Congress has signaled out a few categories of criminal activity that can be pursued by wiretaps—and insider trading isn’t one of them.

To get the wiretaps, prosecutors had to stretch the law toward its breaking point. They argued that insider trading could amount to racketeering—one of the categories of law breaking that can be used to justify wiretaps. But this was itself a stretch. Racketeering laws were intended to be used against brutal gangsters, not traders taking advantage of informational asymmetries.

Clearly, the use of wiretaps in these cases goes far beyond the intent of Congress when it allowed racketeering as a justification for taps.

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But because the law was worded so broadly, it may be that Congress accidentally created room for this kind of legal creativity.

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