Insider trading by hedge funds? I’m shocked! Shocked!

November 23, 2010, 1:13 AM UTC

As federal regulators close in on expert networks and their hedge fund clients, a few quick thoughts:

1. Matthew Goldstein writes the following over at Reuters:

Federal authorities also have been looking into whether investment bankers and others may have tipped off some traders to news concerning negotiations in buyouts of several pharmaceutical companies. An SEC official declined to comment.

If charges come of this, I really hope that my peers don’t utter even the mildest expression of surprise. After all, M&A reporters rely on bankers and lawyers for most of their deal scoops. There obviously is a difference between being a gossip and being an illegal profiteer, but those lines can blur in certain situations.

Moreover, we’ve seen this movie before. Just last week, the Galleon case was expanded to include a hedge fund manager who was tipped off about Blackstone’s pending buyout of Hilton Hotels. Also charged were a couple of attorneys who tipped off that same hedgie about HP’s pending acquisition of 3Com.

That last one was obvious from the get-go (the insider trading, not the involved individuals). On the day the 3Com acquisition was announced, I published the following Bloomberg chart showing a pre-announcement spike in $5 strike calls on 3Com:

2. The WSJ advanced its story a bit today, retelling the day that expert network chief John Kinnucan was visited by FBI agents. Seems he was “contractually required” to inform clients of the visit via email (my favorite part is referring to the agents as “fresh faced eager beavers”).

What exactly does that clause look like? Maybe like this:

“If federal authorities approach Mr. Kinnucan about wrongdoing, he is required to immediately inform clients via electronic mail. Such correspondence must be done in narrative form, with as many adjectives as possible. If later approached by a news outlet about the matter, he must provide additional details. Failure to do so will violate the Ego Clause of the client agreement.”

3. The important piece of Kinnucan’s take is that the agents are after SAC Capital boss Steve Cohen, whose minions keep getting scraped up in the Galleon affair. Cohen himself, however, remains caked in Teflon.

If the SEC and FBI roll out dozens of charges without any against Cohen, I’d guess that there will be some major disappointment in DC. But, if it makes them feel better, they can just keep watching this video:

[vodpod id=Video.4967679&w=425&h=350&]

steve, posted with vodpod