Remarks of FBI Assistant Director Joseph M.

Demarest at
11/5/09 press conference on hedge fund insider trading case.

Shortly after the announcement of charges in the Galleon case

three weeks ago, the financial press began reporting about an
anticipated second wave of arrests. The arrests and charges
announced today should not be viewed as the other shoe dropping.
No one should assume that our aggressive policing of the hedge fund
industry – now publicly disclosed – will stop at two cases. This is an
ongoing process.
The defendants we arrested today – 5 here in New York, 1 in
Connecticut, 1 in New Jersey, and 1 in California – carried out several
insider trading conspiracies that cumulatively reaped tens of millions in
illegal profits. They traded on – and in some instances traded – inside
information.
Material, non-public information provides such a competitive
edge – albeit one it’s illegal to exploit – that it was itself a tradable
commodity. Several of these defendants bartered inside information
for inside information from others.
Trading on inside information is like betting on a game when you
already know the outcome. The profits can be sizable and sudden:
• For example, in the account of defendant Craig Drimal, shares of
stock in 3Com, Axcan and Hilton were purchased during short
periods in 2007 preceding public announcements of the
companies’ acquisitions. In each case, the stock was sold
immediately after the announcement, at an aggregate profit
exceeding $8 million.
These investigations present challenges: the subjects are
generally smart, capable people; they know the industry, so they know
– or think they know – how to avoid detection. Several of the
defendants in today’s case relied heavily on prepaid cellphones, taking
a page out of the drug cartel playbook, in the hope of thwarting
investigators.
But we have smart, capable agents and financial analysts
running the investigations.
And some of the people we investigated chose to cooperate, so
we developed our own type of inside information. One cooperating
witness started working with the FBI over two years ago.
In addition, court-authorized wiretaps provided a view into the
conspiracy in the conspirators’ own words. One intercepted
conversation had defendants talking about printing out research
reports on a company, to make it appear that trading was based on
the research and not inside information.
Trillions of dollars of investor money is in hedge funds in this
country, increasingly including pension fund money and pooled money
from smaller investors.
Insider trading provides an illegal competitive edge over honest
players in the hedge fund business, and undermines investor
confidence. That can adversely affect the industry and the economy.
The message today’s announcement sends should be quite clear:
No matter how clever you think you are, if you traffic in inside
information, there’s always a chance that the person you conspire with
is working for us. If you talk on the phone, we may be listening. It
may not be easy, and it may not happen overnight, but we are
determined and we are patient – and we will catch you.