A Quick Look At How The FBI Turns Insider Traders Into Informants

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Business Insider on January 19, 2012 released the following:

“Yesterday, three people were arrested and seven people were charged in a hedge fund insider trading scandal that prosecutors are calling, “the circle of friends.”

At the press conference U.S. Attorney General Preet Bharara showed an infographic depicting the circle of four guys in New York, Boston, and San Francisco sharing information about Dell, and then passing that knowledge up to their supervisors at hedge funds Diamondback Capital and Level Global.

It was a “tight knit circle of greed,” said Bharara, where these men got an “illegal inside edge over law abiding investors.”

Okay, tight knit. But if it’s so tight knit, what does the FBI do to get inside?

Business Insider spoke to attorney Jeffrey Smith, a partner at DeCotiis, FitzPatrick & Cole. A former assistant U.S. Attorney, Smith is now in private practice specializing in the defense of individuals in cases against the Department of Justice, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

In short, white collar crime.

“The government’s got a good run here,” said Smith. In this case, “they probably have cooperating witnesses, tapes…” all a defense lawyer can do is go through discovery and try to find the holes in the government’s evidence.”

It’s a tough job that becomes a lot tougher if the FBI has flipped someone on the inside. That’s what happened in this case, as two analysts from the hedge funds (Spyridon “Sam” Adondakis and Jesse Tortora), and the man who was passing them information from Dell (Sandeep Goyal) were/are cooperating with authorities.

Smith explained how that might happen.

“A pair of agents might show up at your house really early in the morning or late at night when no one is around,” he said. “They’ll use a combination of threats and inducements… They’ll say there’s overwhelming evidence against you. Overwhelming force is their first technique.”

Basically, the agents will say, we have such and such information on you, but if you’re willing to help us out we can help you. They may also say they have information on a friend of family member’s insider trading activity, though that’s less common.

Smith also said that the fact that prosecutors are revealing the identities of informants means that the government has probably gotten all the useful information they can out of them.

On the other hand that doesn’t mean that all the information connected to this case is out. There could be more informants who remain unknown because they still have information to share. Specifically, in this case, we still don’t know who was passing Goyal information from inside of Dell — that could be nothing, but its an example of a big, important question that remains unanswered here. When reporters asked about that at the press conference, Bharara just said he wasn’t sharing any information beyond what could be found in the complaint.

“There’s every indication that the government has more in the pipeline,” said Smith. “Things have changed a lot. Five or ten years ago it (insider trading) was little prosecuted, sentences were like tax offenses. I don’t think they (insider traders) have illusions about that anymore.””

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Douglas McNabb – McNabb Associates, P.C.’s
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