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Why the FBI and SEC Insider Trading Investigation is so Theatrical

“They could have just as easily come in before hours and gotten what they wanted,” said an employee at Diamondback Capital Management. “Why did this have to be in a dramatic, Hollywood manner?”

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Paul Giamou | Aurora | Getty Images
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Criminal defense attorney Gerald Lefcourt said that while the raids on the offices of hedge funds earlier this week might have been prompted by a fear that evidence would be destroyed, he wasn't convinced the motives were legitimate. "There may be another motive, but I view this as an improper motive—and that is to simply scare people," Lefcourt said. "And it certainly does have that effect."

What's going on here? Felix Salmon thinks the raids might have been staged in part to send a message to employees at firms possibly under investigation.

"In other words, the theater has a very specific target audience: the employees of any banks or hedge funds which are being investigated. It’s a sign that they can’t kid themselves that this is any kind of routine investigation, and that they should seriously consider turning witness against their bosses," Salmon writes.

The truth, however, is less complex. The FBI and the SEC have been very open about why they conduct these raids during the work day, under the watchful eye of reporters and camera men. In fact, they invite the media to join them on the raids, hoping the pictures of agents carrying out boxes will make it onto television. And, despite what Lefcourt may think, the reason is that the federal authorities have a legitimate interest in scaring people.

"Scaring people" doesn't sound like what we want the government to do. The polite word for it is "deterrence." But it comes to the same thing: making potential lawbreakers worry that the consequences of their action will not only be the wrath of regulators but public humiliation.

I'm not convinced this works very well, especially when the potential lawbreakers are hedge fund traders and the laws are as ill-defined as insider trading rules.

But there is something jarring about hearing an employee at a hedge fund complaining that the authorities could have "easily come in before hours." It bespeaks a sense of entitlement, a self-righteousness that is as incriminating as any daylight raid could be.

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