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SEC Case Prompts Hedge Funds To Sweep for Bugs

Hedge fund managers are hiring security firms to sweep their offices and homes for listening devices, security experts say, in reaction to the US government’s insider trading investigations.

The U.S. Securities and Exchange Commission seal hangs on the facade of its building in Washington, DC.
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The U.S. Securities and Exchange Commission seal hangs on the facade of its building in Washington, DC.

“Over the past six months, there has been a really heightened interest in electronic sweeps for hedge funds,” said Christopher Falkenberg, founder of Insite Security, a security and risk management firm in New York.

“They’re working harder at clamping down on their information security and making sure the telephones are secured and the offices aren’t being bugged. We’ve also been asked to sweep traders’ homes,” he said.

Federal prosecutors in New York have filed criminal charges against more than 40 individuals, alleging they shared secret information about company earnings and takeovers.

According to court papers filed by the Securities and Exchange Commission, at least 15 hedge funds improperly received inside information.

This month prosecutors filed their first charges against hedge fund employees in connection with a new probe.

The investigation is focusing on insider trading allegedly conducted through firms, known as expert networks, that match industry specialists with money managers.

The charges detail communications between company employees and hedge fund traders which were recorded by the Federal Bureau of Investigation and the office of Preet Bharara, US attorney for Manhattan.

The arrests have shaken the hedge fund community.

Some firms have stopped using expert networks while others have overhauled their compliance programs.

Now some managers are wary that they’re being recorded.

“We’re definitely getting more calls from hedge funds and smaller financial institutions related to providing services that arise out of the government’s current investigations,” said Andrew O’Connell, chief executive of Guidepost Solutions, a New York investigation and security firm that does not accept requests to search for government listening devices. “The hedge funds calling for these services, which includes sweeps but also compliance guidance, has grown 1000% over the past year.”

“There’s definitely been an increase in people thinking that the government is bugging everything,” said Edward Stroz of Stroz Friedberg, a computer forensics and investigations company.

Mr Stroz said he counsels clients to think twice before requesting sweeps, noting that “it’s almost never the case” that they have been tapped.

“What led you to think this? Is it really worth the effort, or are you thinking back to some movie you saw?” he asks them.

Calling for sweeps may also give hedge fund managers a false sense of comfort.

Wire-taps are executed through phone companies without any need to enter a company’s office, security experts say, and cannot be detected during sweeps.