The Department of Justice seems to have nailed hedge fund managers Donald Longueuil and Samir Barai for destroying evidence in the massive insider trading investigation on Wall Street.
Upon reading of the investigation, Longueuil used pliers to rip up disk drives and then took a middle-of-the-night walk around the neighborhood, throwing parts of the drives into different garbage trucks. DOJ has him on tape explaining precisely how he did it, and it has video of him walking out of the office just before 2 a.m. and returning a half-hour later.
Similarly, Barai told a colleague to delete messages, shred documents, and give him a laptop so he could delete files in a way that would make them unrecoverable. Too bad for Barai, that colleague was cooperating with Justice.
What's striking about the men charged is their indiscretion: On the one hand, they seem to be professional, organized crooks, using a vast network to gather inside information for trading; but on the other, they appear like bumbling amateurs who don't know how to keep their mouths shut. Or as the FBI told The Wall Street Journal, "The evidence laid out in the complaint is largely the defendants' own words. . . . For all their presumed sophistication, they lacked a mobster's better-honed instincts for conversational discretion, and that was to our great advantage."
Justice added: "When people frantically begin shredding sensitive documents, and deleting computer files and smashing flash drives and chasing garbage trucks at 2 a.m. . . it is not because they have been operating legitimately. . . . It is because they have broken the law, they know it and they don't want to get caught."
From 2006 to 2010 the hedge fund managers -- plus two others who have been cooperating with Justice -- allegedly paid insiders at several companies for detailed financial results before they were publicly announced. The companies include Marvell Technology Group (MRVL), NVIDIA (NVDA), Fairchild Semiconductor International (FCS), Advanced Micro Devices (AMD), Actel (ACTL), and Cypress Semiconductor (CY).
Systematically trading on inside information is a great gig until the traders get caught. It's an easy way to make big profits, along with bigger salaries and bonuses. No real work, beyond knowing who to purchase information from and being discreet, is involved.
Insight or Cheating?
The scale of Justice's investigation is so large -- it goes way beyond those charged yesterday -- that it brings into question just how many traders have some variation of this business model in place. Without inside information, professional traders would all need to have some kind of special analytical insight to trade more successfully than the amateurs. How many are doing the homework needed to get that edge? Obviously some, but is it many?
In any case, it's good to see that Justice is finally taking white-collar crime as seriously as mob crime, in the sense that it's using similar investigatory tactics: wiretaps, informants wearing wires, etc. Past losses show that emails may not convince juries, but surely these videotapes will.
And if Justice maintains this level of tactical seriousness in the future, insider trading on a mass scale's going to be hard to carry out. Communication is the essence of insider trading, so wiretaps and wired informants are potent weapons.
In light of Justice's new-found aggressiveness, it was heartening to learn the department is also looking into fraud in connection with mortgage-backed securities, according to theFinancial Times.