February, 2016 –The Federal Bureau of Investigation’s 2009 arrest of Galleon Group founder Raj Rajaratnam for insider trading and his conviction shortly thereafter sent shockwaves through the alternative investment industry. And subsequent investigations into high profile firms from Diamondback Capital Management to SAC Capital Markets have made it clear that the FBI and other regulators have no intention of easing their pursuit of insider trading activity anytime soon. Nonetheless, despite the significant media coverage of the FBI’s successful pursuit of some of the industry’s highest profile firms, members of the Roundtable believe insider trading will remain an issue because of the simple fact that institutional money still gravitates to the largest firms with the highest returns –and the reality that there will always be fund managers willing to do just about anything to be part that group.
To see how the efforts of the FBI and regulators have impacted overall investment practices within the alternative investment industry, The New York Hedge Fund Roundtable recently surveyed its membership about the topic.
The FBI on Wall Street was the topic of the Roundtable’s most recent monthly gathering, where David Chaves, a senior official in the FBI’s New York division discussed the FBI and the Securities and Exchange Commission’s sweeping investigation into insider trading activities within the alternative investment industry. Chaves noted that in many of the cases where the FBI has successfully pursued insider trading it was clear that a lax attitude towards insider trading practices was set at the top among senior management.
“We appreciate that the FBI acknowledged the overwhelming number of hedge fund managers are compliant with insider trading laws and give no reason to believe they are bad actors,” said Timothy P. Selby, President of the New York Hedge Fund Roundtable. “But it is clear that the FBI and the regulators it is working in tandem with mean business. And their sophistication and ability to detect red flags among the most seemingly insignificant factors is far beyond what anyone in the alternative investment industry might imagine.”
New York Hedge Fund Roundtable members had the opportunity to weigh in on sustainability reporting at the Roundtable’s most recent event, as well as through an online electronic poll.
*Of the respondents to this survey, 21% were fund managers; 18% were allocators; 12% were risk management or trading; 39% were service providers and 10% were other industry participants.
Following are some of the key findings of that survey:
- 91% of respondents believe that their firm is completely compliant with regulations prohibiting insider trading.
- While 25% of respondents believe that insider trading practices in the alternative investment industry have become less prevalent since the FBI arrested Raj Rajaratnam and scared the bejeezus out of everyone, 39% of respondents think the news of arrests and convictions there has had little impact on insider trading because those who engage in such practices think they are smarter than everyone else and will never get caught; 36% of respondents believe the influx of money into funds in recent years and the explosion in the number of hedge fund firms has put enough pressure on fund managers that there will always be a few desperate enough to try anything, including insider trading.
- When asked where they believe the biggest risks for insider trading lie, 59% of respondents chose rogue employees; 24% said it is firms with an attitude of being untouchable among the top level management; and 17% think it is the ease of circumventing company monitoring through work around technologies, such as gaming stations and disposable mobile phones.
- 90% of respondents said their firms have been extremely diligent in efforts to make sure employees know what constitutes insider trading; 10% of respondents said that even though their firms have no insider trading policies, they are uncertain that everyone understands all the actions that fall under the insider trading umbrella or where the lines are when it comes to sharing sensitive company information.
- When asked whether their firms allow employees to trade on their own behalf through external accounts, 51% of respondents said employees and spouses can trade on their own behalf as long as they report their activities to the company; 25% said their firm’s no-trading policy is strictly enforced and is a major deterrent to outside trading activities; 12% said their company has a no trading policy and that it is clear that violation it is a fireable offense; and another 12% said that while their firms have no trading policies, they are loosely enforced and of little concern to employees.
- When asked whether the U.S. Court of Appeals’ 2014 decision to overturn government convictions for insider trading against former hedge fund managers Todd Newman and Anthony Chiasson has made prosecutors less threatening regarding insider trading, 39% of respondents said that, regardless of where the courts weigh in on the issue, the hedge fund industry is acutely aware that the mere suggestion of a regulatory investigation for insider trading activities is enough to brand a fund manager or a hedge fund firm as toxic among investors; 27% think the mere fact that regulators are so actively pursuing the issue is enough to deter most people; 17% think the U.S. Court of Appeals’ assertion that fund manager must specifically know that company insiders are improperly leaking confidential information for their own personal gain created a major loophole for anyone prone to insider trading and diminishes the threat of prosecution; and another 17% think the fact that the Supreme Court has decided to weigh in on the issue will be enough to deter anyone from going down that road –at least until it is clear what side the Supreme Court takes on the issue.
February’s “bonus” question: Now that nominations for the 2016 Oscars have been announced and the pundits have begun weighing in on which film they believe will take home the award for best picture, Roundtable members were asked to predict which film they believe will win the award. 33% of respondents predict the best picture award will go to The Revenant; 18% think The Big Short will win; 12% think it will be Spotlight; 5% think Bridge of Spies will dominate; 2% think Brooklyn will win; another 2% think The Martian will win; and 28% of respondents said they are so busy with work that they haven’t been to the movies in ages and don’t have a clu.
About The New York Hedge Fund Roundtable:
The New York Hedge Fund Roundtable is a non-profit organization focused on promoting ethics and best practices within the alternative investment industry. The membership consists of investors, fund managers and other industry professionals who regularly meet to discuss current issues within the industry and connect with peers. Monthly events center around thought-provoking speakers and panels designed to keep members apprised of timely and important issues within the alternative investment industry. The Roundtable’s goal is to provide a forum for thought leadership, where industry professional have the opportunity to enhance their knowledge and skills and to network with other individuals committed to advancing the industry with the highest ethical standards. For additional information about the Roundtable, visit: http://www.nyhfr.org
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