An article by Ben Protess and Azam Ahmed of the New York Times examined the new techniques by used by the SEC to catch those engaging in insider trading. As the article explained, the Commission "is taking its cue from criminal authorities, studying statistical formulas to trace connections, creating a powerful unit to cull tips and assign cases and even striking a deal with the Federal Bureau of Investigation to have agents embedded with the regulator." As discussed here, last month, Devin Leonard of BusinessWeek profiled Sanjay Wadhwa, a deputy chief of the SEC’s market abuse group, and took a close look at the insider trading investigation of Raj Rajaratnam (and the many leads that investigation has yielded). That article and the Times piece reflect what the SEC is doing to aggressively pursue insider trading defendants.
The Times article compared old and new tactics by looking back at 2009, when the Commission had over 70 tip lines (both e-mail and voice mail), but did not maintain a central depository. Chairman Mary Schapiro directed that the various tip lines be consolidated into a single database. As the article describes, the Commission then created an Office of Market Intelligence (led by Thomas Sporkin) to analyze and manage the information. In addition to the consolidated tip lines, the Office upgraded its technology to include real time stock pricing monitors and built a staff of over 40 individuals to analyze the information. That staff has included an FBI agent to assist – he has the ability "to tap into the FBI database to see whether a subject has drawn past scrutiny."
The Times described how the SEC "has adopted several other Justice Department techniques. Following the lead of criminal authorities, the Commission now makes as offers of leniency for cooperating witnesses, for example. The FBI receives the benefit of having access to the SEC’s database. However, the article notes, there are times when the FBI cannot share information with the SEC (especially when it entails grand jury evidence).
Another new approach involves the Commission’s Market Abuse Unit, which "[r]ather than examining questionable trades in specific stocks, … now analyze[s] suspicious traders and their network of connections on Wall Street." The investigators identify relationships and trading patterns by using statistics, such as "cluster analysis" and "fuzzy matching."
The article described how the new efforts and tactics paid dividends in the April 2011 criminal and civil cases against Matthew Kluger (a former associate at Wilson Sonsini Goodrich and Rosati) and Garrett Bauer (a Wall Street trader) (previously discussed here). Authorities alleged that the men had engaged in insider trading between 1994 and 1999 when Mr. Kluger was employed at the New York law firms of Cravath, Swaine & Moore and Skadden Arps Slate Meagher & Flom, but ceased doing due to fear of being detected. The scheme resumed when Mr. Kluger joined Wilson Sonsini in 2005. In eleven transactions between 2006 and 2011, the men invested $109 million and made over $32 million in profits. The two men, and a middleman, Kenneth Robinson, evaded detection, by, among other things using pay phones and prepaid "throwaway" cellular phones to discuss transactions and destroying computers, cellular phones an iPhone when they became aware that authorities were conducting an investigation.
The article described how when the SEC switched tactics in 2010, "[t]he agency found that many of Mr. Bauer’s trades had come ahead of mergers that were advised by Wilson Sonsini, the law firm of Matthew Kluger." Further investigation revealed that Mr. Robinson was trading in some of the same stocks as Mr. Bauer and then traded in two stocks linked to Wilson Sonsini. The FBI convinced Mr. Robinson to wear a wire, leading to further evidence against Messrs. Bauer and Kluger, and ultimately, guilty pleas by all three men.