Hedge fund managers remain a prime target for civil and criminal insider trading charges. This is so for at least five reasons. First, regulators and prosecutors have been emboldened by the May 11, 2011 conviction of Galleon Group founder Raj Rajaratnam on 14 counts of conspiracy and securities fraud. See “Implications of the Rajaratnam Verdict for the ‘Mosaic Theory,’ the ‘Knowing Possession’ Standard of Insider Trading and Criminal Wire Fraud Liability in the Absence of a Trade
,” Hedge Fund Law Report, Vol. 4, No. 18 (Jun. 1, 2011). Second, wiretapping has become a viable tool for investigating insider trading by hedge fund manager personnel, and a source of persuasive evidence. See “Will a Criminal Court Admit into Evidence a Recorded Telephone Conversation Between a Hedge Fund Manager Charged with Insider Trading and an Alleged Co-Conspirator?
,” Hedge Fund Law Report, Vol. 4, No. 24 (Jul. 14, 2011). Third, in the course of examinations of hedge fund managers, SEC examination personnel are looking for (among other things
) evidence of insider trading that can serve as the basis of referrals to the SEC’s Enforcement Division. See “Are Hedge Fund Managers Required to Disclose the Existence or Outcome of Regulatory Examinations to Current or Potential Investors?
,” Hedge Fund Law Report, Vol. 4, No. 32 (Sep. 16, 2011). Fourth, the staff of the SEC’s Enforcement Division can now use tools developed in the criminal context in bringing, negotiating and settling insider trading charges against hedge fund managers. See “Entry by SEC into a Non-Prosecution Agreement with Clothing Marketer Illustrates How Hedge Fund Managers May Survive Discovery of Certain Insider Trading Violations
,” Hedge Fund Law Report, Vol. 3, No. 50 (Dec. 29, 2010). And fifth, budgetary constraints have led the SEC to place a higher priority on deterrence, and insider trading actions against hedge fund managers are thought to have a powerful deterrent effect. See “Key Insights for Registered Hedge Fund Managers from the SEC’s Recently Released Study on Investment Adviser Examinations
,” Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011). In light of the vigor with which civil and criminal authorities are pursuing insider trading actions – and the ongoing susceptibility of hedge fund managers to insider trading charges – the Regulatory Compliance Association’s Fall 2011 Asset Management Thought Leadership Symposium will feature a session entitled “Insider Trading – The New Enforcement Paradigm.” That RCA Symposium will take place on November 10, 2011 at the Pierre Hotel in New York. (Subscribers to the Hedge Fund Law Report are eligible for a registration discount.) One of the speaking faculty members expected to participate in the insider trading session is Kevin J. O’Connor. O’Connor is a Partner at Bracewell & Giuliani and Chair of the firm’s White Collar Practice Group. Previously, O’Connor was Associate Attorney General of the United States, the third-ranking official at the U.S. Department of Justice, and United States Attorney for Connecticut. In anticipation of the upcoming RCA Symposium, the Hedge Fund Law Report interviewed O’Connor regarding insider trading considerations for hedge fund managers and related topics. Specifically, our interview covered: implications for hedge fund managers of the increased use of wiretap evidence in insider trading investigations; the use of criminal wiretaps in civil proceedings; wiretaps of mobile phones and Voice over Internet Protocol lines; “tapping” of Blackberries and social media
; how to incentivize internal reporting under the new SEC whistleblower rule; whether hedge fund service providers
can be whistleblowers; activities other than insider trading that may serve as the basis of a whistleblower complaint; best compliance practices for engaging expert network firms
; compliance training with respect to the use of expert networks; due diligence on expert network firms; and how to avoid FCPA violations
when engaging third-party placement agents to solicit investments from sovereign wealth funds. The full text of our interview with O’Connor is included in this issue of the Hedge Fund Law Report.