Top 10 Insider Trading Cases

Raj Rajaratnam is latest in long line of high-profile insider trading cases.

ByAyana Harry
October 20, 2009, 5:22 PM

Oct. 21, 2009— -- Friday morning FBI agents swept in on six men from New York City to San Jose, Calif., busting what U. S. Attorney Preet Bharara called "the largest hedge fund insider trading case ever charged, criminally.

"I want to emphasize that this is not a garden-variety insider trading case," Bharara told reporters Friday.

The group that includes Fortune 500 executives, a hedge fund manager and a management consultant are accused by the Justice Department and the Securities and Exchange Commission of making more than $20 million in profits by taking confidential information from corporate insiders and using it to gain an unfair trading advantage on stocks, including Google and Hilton.

Bharara, whose jurisdiction covers New York City, announced that Friday's arrests Friday were part of a crackdown on hedge fund insider trading.

"We are targeting white collar insider trading rings with the same powerful investigative tools that have worked so successfully against the mob and drug cartels," he said.

"The real impact of this case could well be in Congress," said John Coffee, a Columbia University law school professor and expert in securities regulation and white collar crime.

"On the congressional level, we increasingly have a conflict between Main Street and Wall street. Main street sees high unemployment, few jobs, scarce credit, and they are getting increasingly resentful that Wall Street is having a record year with high profits, record bonus years coming and champagne corks popping and all of this funded by a tax-payer funded bailout," Coffee said.

Paraphrasing the 1987 movie Wall Street, the U. S. attorney said Friday "greed, sometimes, is not good. This case should be a wake-up call for Wall Street."

Insider trading is not a new phenomenon on Wall Street, but this new focus on hedge fund cases is. Hedge funds have traditionally slipped regulation by the Securities and Exchange Commission, because they are not public investment advisers, subject to more oversight.

In light of Friday's arrest, ABC News took a look at 10 of the best-known insider trading cases. From the 1980s Junk Bond King Michael Milken to the sale of ImClone stock that landed Martha Stewart in a federal prison camp, these cases captured news headlines and exposed the world of making money off information and tips.

At the center of Friday's arrests is billionaire hedge fund manager Raj Rajaratnam of the Galleon Group. Rajartnam, a large contributor to Hillary Clinton among others, is one of the wealthiest men in America, having amassed a reported fortune of more than $1.3 billion.

According to documents filed in federal court Friday, Rajartnam worked with managers from the hedge fund New Castle, and virtually all the illegal trading was done within those hedge funds.

Friday's indictment alleges the scheme was made possible because of insider information from executives at top national companies -- Rajiv Goel of Intel Capital, Robert Moffat, a senior vice president at IBM and Anil Kumar a director at McKinsey & Co.

McKinsey & Co., a prestigious consulting firm helps clients improve their performance by analyzing confidential data on sales, growth and performance. In a press release the U. S. Attorney's office wrote "Kumar obtained inside information regarding certain of McKinsey's clients, including AMD, and communicated it to Rajaratnam in violation of duties of trust and confidence Kumar owed to McKinsey and its clients."

The government was able to make its case with the help of a cooperating witness and as Rajaratnam allegedly took calls and instant messages with illegal stock information, the government was listening in and recording.

"We've seen a new enforcement tool used, for the first time the government had engaged -- or acknowledged engaging -- in a sustained use of wire taps. That has to have people sweating all over Wall Street," said Coffee.

Business mogul, talk show host and lifestyle expert Martha Stewart has her own line of furniture, home goods and a national magazine. But in 2002, the media magnate came under scrutiny for selling nearly 4,000 shares of ImClone stock right before the company announced it did not get Food and Drug Administration approval for a cancer drug. The announcement by ImClone sent its stock plummeting but not before Stewart sold off her stake.

On July 16, 2004, Stewart was found guilty for lying to investigators about the sale, conspiracy and obstruction of justice. Stewart reported to federal prison camp in West Virginia Oct. 8, 2004, and served her five-month sentence.

In 2006, Martha Stewart settled the insider trading civil suit brought against her by the Securities and Exchange Commission. Stewart agreed to pay $195,000, three times the amount of money she would have lost had she not sold the ImClone stock.

Billionaire Mark Cuban is embroiled in an ongoing battle with the Securities and Exchange Commission over his 2004 sale of Mama.com stock. According to a lawsuit filed by the SEC last November, in 2004 Cuban avoided losing $750,000 by selling his stake in the company after learning confidential information from the site's CEO.

The SEC's case was dismissed this summer by a federal judge but earlier this month, the agency filed an appeal and is now taking their case in the U. S. District Court in Dallas.

Mark Cuban owns the NBA Dallas Mavericks team along with HD Net TV.

Jeff Skilling led Enron through the company's meteoric rise, and later its rapid decline. Skilling abruptly resigned as CEO of Enron Aug. 14, 2001. By December of that year Enron went bankrupt but not before Skilling sold nearly $60 million worth of shares in the company. Skilling was later charged with lying to investors and government regulators about the company's financial losses and insider trading. Skilling was convicted in 2006 and is currently serving a nearly 25-year sentence in a Littleton, Colo., federal correctional institution.

Last week the U. S. Supreme Court agreed to hear an appeal by Skilling of his conviction, asking the court to review the government's use of an "honest services" prosecution in which the defendant is accused of operating for personal gain, and providing the company of his honest services.

In 2002, George Soros was convicted of insider trading and fined more than $2 million by a Paris court. The charges stemmed from 1988 when Soros bought and then sold shares in Societe Generale after receiving a tip about a corporate raid on the bank. Soros denied the charges against him and appealed the ruling, but it was upheld by France's highest court in 2006.

During the 1980's Boesky made millions betting on the aggressive company takeovers that the decade became famous for. "Most of his illegal insider trading was based on mergers and acquisitions trading where he would learn in advance of a perspective takeover," said Coffee. Thought to be a mergers and acquisitions whiz, Boesky was exposed for trading on inside information ahead of company takeovers. In 1987, Boesky was sentenced to 3 ½ years in prison and given a $100 million fine after cutting a plea deal and wearing a wiretap that helped convict other Wall Street titans including financier Michael Milken.

By 1989, Wall Street star Michael Milken was earning hundreds of millions of dollars a year using high-yield junk bonds to fund corporate mergers and acquisitions. Dubbed the Junk Bond King, Milken was indicted by a federal grand jury in March 1989 on 98 counts, including fraud, tax evasion and racketeering.

"All insider trading cases are hard to find the evidence for. It's very easy to hide insider trading and difficult to find a cooperating witness," Columbia's Coffee told ABC News. "You pretty much need a witness to say I tipped him or I heard he was tipped by his own revelation to me."

In the Milken case, that witness was Ivan Boesky who served as an informant for the SEC. After a plea bargain, Milken ultimately only served two years in prison and later became a philanthropist providing funding for academic research.

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