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Federal investigators expose vast web of insider trading

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By David S. Hilzenrath and Jia Lynn Yang
Sunday, February 13, 2011

About 2 a.m. on a November night, a former hedge fund manager named Donald Longueuil allegedly left his apartment in Manhattan with fragments of chopped-up hard drives tucked in his jacket. He walked through the darkened city tossing the pieces in the backs of garbage trucks - four of them, to be safe.

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Longueuil had just read that law enforcers were zeroing in on suspected insider-trading rings, and he was trying to destroy evidence, the government said Tuesday. But Longueuil, 34, made the mistake of vividly describing his late-night coverup for an associate who was cooperating with the feds, according to an FBI affidavit.

Using wiretaps and body wires, turning little fish against bigger fish, federal authorities have been waging the most concerted attack on insider trading in a generation, charging dozens of individuals over the past year and a half.

Taken together, the cases raise a basic question: To what extent are some of the financial world's most successful investment firms profiting from fraud?

Last week, as the government unveiled charges against Longueuil and several others, a federal prosecutor described the cheating as "pervasive."

"Given the scope of the allegations to date, we are not talking simply about the occasional corrupt individual; we're talking about something verging on a corrupt business model," Preet Bharara, the U.S. attorney for the Southern District of New York, said in a statement.

The heightened focus on insider trading by the Justice Department and the Securities and Exchange Commission comes as the financial crisis has shaken confidence in the honesty of the financial markets.

Far from being a victimless crime, insider trading takes advantage of honest investors. In a series of cases, financiers are accused of gaining - or avoiding the loss of - more than $100 million trading such familiar stocks as Google, IBM, Hilton and Intel.

"What's at stake is the credibility of our markets," said former senator Ted Kaufman (D-Del.), chairman of a panel Congress created to review the Treasury Department's $700 billion bailout of financial companies. Insider trading, he said, "sends a clear message to people who want to invest in the United States that . . . I'm not going to get a fair shake in the market. And that's very dangerous."

It is unclear whether insider trading is on the rise or is merely getting more attention from the authorities. Bharara has said the government is employing extraordinary tactics to expose it - wiretaps previously reserved for such targets as mobsters and drug cartels.

Not since Ivan Boesky and Michael Milken were sent to prison for corruption on Wall Street has the drumbeat of insider trading revelations been this loud.

The current wave of investigations has focused largely on hedge funds - investment vehicles for wealthy individuals and institutional investors that often deliver outsize returns. It also has cast a spotlight on employees of public companies who allegedly feed information to investment firms for a price - sometimes through "expert network firms" that specialize in matching insiders with traders.


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