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U.S. in Late Stages of Insider Trading Investigation

Peter Lattman|The New York Times
Saturday, 20 Nov 2010 | 5:28 PM ET

Federal authorities are at an advanced stage of an insider-trading investigation that could result in criminal charges or significant civil fines against Wall Street traders and executives, a government official said Saturday.

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“We are far along in investigations of insider trading,” said the official, who spoke on the condition of anonymity because the inquiry is incomplete.

Goldman Sachs is among the firms under scrutiny, according to a person briefed on the investigation who was not authorized to discuss the matter publicly. The person said the inquiry involved several low-level Goldman employees, not executives.

Both the Justice Department and Securities and Exchange Commission have taken an increasingly aggressive — and public — stance in pursuing insider-trading on Wall Street. Among the government officials taking the hardest line is Preet Bharara, the United States attorney in Manhattan.

“Illegal insider trading is rampant and may even be on the rise,” said Mr. Bharara in a speech last month. “Disturbingly, many of the people who are going to such lengths to obtain inside information for a trading advantage are already among the most advantaged, privileged and wealthy insiders in modern finance. But for them, material nonpublic information is akin to a performance-enhancing drug that provides the illegal ‘edge’ to outpace their rivals and make even more money.”

News of the investigation’s advanced stagewas reported Friday night on The Wall Street Journal Web site. The article said that federal authorities could bring new insider-trading charges before the end of the year that it said “could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders and analysts across the nation.”

The government official familiar with the matter confirmed the outlines of The Journal’s article, but would not say whether arrests were imminent or whether specific companies were targets.

Any new charges brought by the government would come on top of a widespread insider-trading case — billed by Mr. Bharara’s office as “the largest hedge fund insider trading case in history” — that has ensnared a number of money managers and company executives, including the Galleon Group co-founder Raj Rajaratnam. Last week two more Wall Street traders were revealed to have pleaded guilty to securities-fraud charges, the 13th and 14th people to have pleaded guilty in the year-old criminal case.

In all, 23 people have been charged criminally in the investigation.

Earlier this month a judge sentenced Ali Hariri, a former executive at Atheros Communications, a technology company, to 18 months in prison for his participation in the Galleon case. Prosecutors alleged that Mr. Hariri provided a hedge fund manager with inside information relating to his company.

The “sentencing provides another reminder of how pervasive insider trading has become and the lengths to which corrupt insiders will go to misuse confidential information for their own personal gain,” Mr. Bharara said in a statement. “It should also remind those who might contemplate similar crimes that we will ultimately find you, prosecute you and convict you.”

Mr. Bharara’s sharp rhetoric is evocative of the insider-trading scandal during the 1980s when Rudolph W. Giuliani, then the United States attorney in Manhattan, prosecuted top Wall Street executives using laws that had rarely been enforced. (Exactly 20 years ago Sunday, a federal judge sentenced the financier Michael Milken to 10 years in prison for securities violations relating to the insider-trading scandal.)

In pursuing insider-trading cases, the United States attorney’s office in Manhattan has adopted increasingly aggressive techniques. In the case against Mr. Rajaratnam, federal authorities took the unusual step of using wiretaps to record his and other stock traders’ conversations. Federal prosecutors have traditionally used wiretaps for organized crime and drug trafficking.

A federal judge in Manhattan is weighing whether prosecutors can use thousands of wiretapped conversations between Mr. Rajaratnam and his purported accomplices at his trial, which is set for next year.

Lawyers for Mr. Raj Rajaratnam argue that the government’s use of wiretaps was improper.

Any new cases brought by Mr. Bharara would add to an already robust lineup of insider-trading cases.

In October, a federal jury found a former hedge fund manager guilty of an insider-trading scheme that prosecutors alleged earned more than $7 million in illicit gains. Federal prosecutors had charged the trader, Joseph Contorinis of the Jefferies Paragon Fund, of trading on tips about coming mergers from an investment banker at UBS . The banker, who had already pleaded guilty, was the government’s key witness at trial.

Earlier this month, the United States attorney’s office in Manhattan charged a French doctor with illegally leaking sensitive material about a clinical drug trial to a hedge fund manager who then traded on the information. The doctor, Yves M. Benhamou, has not yet entered a plea but at a bail hearing last week, his lawyer, David M. Zornow, said the charges against his client were thin and based purely on circumstantial evidence.

Charlie Savage and Louise Story contributed reporting.

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