FBI Expands Crackdown on Insider Trading
From media campaigns to technological advancements, the Federal Bureau of Investigation is changing the way it combats insider trading.
Most recently, the FBI recruited actor Michael Douglas, who famously played a greedy corporate titan named Gordon Gekko in the motion picture “Wall Street,” for a public service announcement that issues a warning.
In the PSA, Douglas says, “The movie was fiction, but the problem is real,” and encourages anyone with information on insider trading to report it to a local FBI office.
The FBI says that it has seen an increase in the prosecutions of insider trading cases since the 2008 financial crisis. The largest of those cases was an insider-trading ring headed by Raj Rajaratnam.
Rajaratnam, once the head and founder of the $7 billion hedge fund Galleon Group, received one of the harshest sentences to date for an insider-trading case.
On Oct. 13, 2011, Rajaratnam was sentenced to 11 years in prison. The judge also fined him $10 million and ordered him to forfeit $53.8 million. In a related civil suit, Rajaratnam was ordered to pay a $92.8 million fine. It is the longest sentence ever for this type of white-collar crime, as well as the largest fine ever imposed by the Securities and Exchange Commission.
Rajaratnam is appealing that conviction on the grounds that wiretaps used to prove the case were obtained improperly.
It is not just the punishment that makes this case one of interest, it is how the case was investigated that makes it unusual.
The Galleon Group investigation became the first insider-trading case in which wiretaps were used to obtain information.
“This is not the first time that we have used wiretaps in securities fraud cases,” said FBI Supervisory Special Agent Richard Jacobs. “It is only the first time we have used it in insider-trading cases and we expect to continue using the technique when we are unable to advance our case using less intrusive methods.”
Wiretaps have been widely used by the FBI in investigating drug and organized crime cases, and recently the agency has found that the use of this technique in investigating white-collar crimes has been very successful.
“In terms of insider trading, it is probably the most effective method that we have,” Jacobs said. “The wiretap gives us the opportunity to have our ears, kind of, in the industry as these conversations are taking place.”
According to Daniel Richman, a professor at Columbia Law School in New York, these recorded conversations can help advance an investigation in new ways.
“It appears to be remarkably productive in terms of information and leads,” Richman said. “The prosecutions that grew out of those series of wiretaps are not over. This is a very rich mother lode of information, and I imagine that the lesson for the government is that this might be a very productive tactic in the future.”
However, obtaining a wiretap is not an easy process.
“There is a lot of work that has to be done in advance of getting a wiretap up,” the FBI’s Jacobs said. “We have to exhaust the other, what we call less-intrusive, methods before we can consider what we call a Title III, a wiretap.”
Before a wiretap can be considered, the FBI says it must demonstrate that other less intrusive methods would be unsuccessful or dangerous if attempted, or fail to advance the investigation.
From there, the FBI can pursue a court authorization to set up the wiretaps.
“The amount of bureaucratic hurdles to jump through to get authorization and the surveillance that needs to be done to keep a wire taping going is phenomenal,” said Columbia Law School’s Richman.
Live monitoring of the phone conversations is essential to avoid intercepting personal, noncriminal conversations.
“Once authorization is obtained, one really has to take pains to not get what one is not entitled to and that would mean turning it off on a regular basis,” Richman said. “Which is often hard when a criminal conversation is going on. A conversation about a sports event could morph easily into an act of the conspiracy.”
To hear the full story of Raj Rajaratnam, watch “American Greed” Wednesday at 10 p.m. EST/PST on CNBC.
A previous version of this story stated Rajaratnam was sentenced to 11 years in prison and ordered to pay a $92.8 million fine on October 13, 2011. In fact, he was sentenced to 11 years in prison, fined $10 million and ordered to forfeit $53.8 million in criminal court. He was later ordered to pay $92.8 million in a related civil suit.
Editor's Note: On March 5, CNBC.com added language to clarify the circumstances in which the FBI uses a wiretap.