Four different hedge funds were implicated in the recent insider trading scandal involving Dell Computer shares. But only one of them managed to escape from the three-year investigation with their hedge fund jobs and business intact.
Diamondback Capital Management managed to hold onto half of its $5 billion in assets, although it did pay a $9 million penalty and signed an agreement with the government that admitted guilt.
So how did they manage to keep their hedge fund jobs when others went to jail? Well, according to Reuters, there are a number of defensive moves a hedge fund manager can implement, but few firms know about these steps or bother to take them.
It all comes down to being able to demonstrate a knowledge of all your employees’ business contacts and social connections. An insider trading case often centers around friendships that glide gradually into criminal behavior.
“Law enforcement now focuses on aggressively identifying and building insider trading cases around relationships – personal, social and professional – in a way that is unprecedented. For lack of a better term regulators are now “mapping” trader relationships, using both technology and human sources, to triangulate outlier trades against any personal contacts that may have been the source of non-public information.”
To protect your own hedge fund job and reputation, your firm needs to create and maintain its own “map” of employee networks. It’s a daunting task but one that now involves using proprietary software to sift through emails, phone traffic, even instant messages to identify connections that could present a risk before there’s an actual problem.
The days of settling for a quick background check are over. Now you can expect that if you have a hedge fund job, your firm will hire specialists (or outsource the job) who will dive much more deeply into your personal background and social relationships. They will also be looking for stock purchases or investments that fall outside your normal patterns of trading.
Have you or your firm taken steps to insulate yourself against possible insider trading charges? How do you feel about this further intrusion into your privacy? Add your comments below.