U.S. nearing end of major insider-trading probe

By Zachary A. Goldfarb and Jerry Markon
Washington Post Staff Writers
Saturday, November 20, 2010; 10:36 PM

Federal prosecutors in New York are in the advanced stages of an extensive insider-trading investigation that could lead to criminal charges against Wall Street traders and executives, federal law enforcement officials said Saturday.

Authorities had been preparing to file charges in the probe within weeks, but that timetable could be accelerated after an article about the investigation appeared in the Wall Street Journal on Saturday, the officials said.

The investigation, conducted by the U.S. Attorney's Office in Manhattan and the FBI, has been underway for several years and extends far beyond Wall Street to financial offices across the country, the paper reported. Officials would not discuss specific companies or individuals under scrutiny or provide further details. The Securities and Exchange Commission is conducting a parallel civil probe, officials said.

The Journal reported that authorities are investigating bankers at Goldman Sachs in particular who may have given confidential information about health-care mergers to certain investors. Goldman is the top provider of investment banking services in health-care deals. A Goldman spokesman declined to comment.

The Journal also said that prosecutors are examining consultants with industry expertise who may be providing confidential information to hedge funds and mutual funds. It reported that one subject of the investigation is Primary Global Research, a Mountain View, Calif., firm. Chief executive Unni Narayanan said in an interview: "We have no insight into what the government is investigating. All we know is Primary Global Research is not a target."

Spokesmen for the U.S. Attorney in Manhattan, Justice Department and SEC declined to comment.

Federal authorities, including U.S. attorneys and the FBI, have been pouring resources into investigating what one senior federal law enforcement official called "rampant" illegal insider trading.

Officials say they are up against new challenges in detecting, investigating and prosecuting abuses given the speed and complexity of the financial markets and a burst of new electronic media over which traders can communicate.

Preet Bharara, U.S. attorney for the Southern District of New York, has led the charge on insider trading investigations, calling the area a "top criminal priority" and embracing new, controversial tools such as wiretaps to investigate potential abuses.

Last year, Bharara joined the SEC in filing the largest insider trading case in history against Raj Rajaratnam, founder of the Galleon Group hedge fund, and a host of associates. Rajaratnam has maintained his innocence and is fighting the charges in court. More than 20 people have been charged in the investigation.

"Illegal insider trading is rampant and may even be on the rise," Bharara said in a speech last month to the New York City Bar Association. But he cautioned: "It has perhaps never been more difficult to attack through traditional investigative means."

Bharara said the challenges include the innovations that allow stock trading at such high speeds and in such high volume that it can be difficult to pinpoint specific transactions completed with the advantage of inside information.

He said the growth in the number of financial newsletters, Web sites, blogs and social media outlets "publishing every last rumor and report of potential mergers and acquisitions and earnings reports" has made it easier for those accused of insider trading to claim they acted on the basis of something they read. Bharara also defended the use of wiretaps to investigate insider trading cases.

In the Galleon case, Rajaratnam's lawyers have argued that their use should be reserved for especially severe types of criminal cases - such as narcotics and terrorism - and that prosecutors acted improperly in obtaining a judge's approval for a wiretap. Another judge is weighing whether to allow prosecutors to use the wiretaps as evidence in the case against Rajaratnam.

"Some have asked, why use court-authorized wiretaps in insider trading cases?" Bharara said in the speech. "The quick answer is that every legitimate tool should be at our disposal - especially where, as in the case of insider trading, an essential element of the crime is a communication. It does not take a rocket scientist to understand that it would be helpful to have the actual recording of the communication."

Prosecutors and the SEC have been pressing other insider trading cases recently, too. Earlier this month, prosecutors in Manhattan charged a French doctor with providing illegal inside information to a hedge fund manager about a drug undergoing review.

Last month, former Countrywide chief executive Angelo Mozilo agreed to settle insider trading and other charges brought by the SEC for $67.5 million. About $22.5 million of that amount is being paid by Mozilo; the rest is being covered by Bank of America, which acquired Countrywide.

goldfarbz@washpost.com markonj@washpost.com

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