A stretch for the long arm of the law

Circle of Friends: The Massive Federal Crackdown on Insider Trading – and Why the Markets Always Work Against the Little Guy, by Charles Gasparino, Harper Business, RRP$28.99/RRP£18.99

It might be wise to wait for the paperback of Circle of Friends. For having narrated the biggest insider trading inquiry of recent times, the author ends on a cliffhanger. Will Steve Cohen, founder of SAC Capital, and the Moby-Dick to the Ahab-like Wall Street investigators who have hunted him for years, finally be prosecuted?

The authorities have to make up their minds by the end of this month on whether to take on Mr Cohen, thanks to the statute of limitations. Mr Cohen, who proclaims his innocence, has become their ultimate target in an investigation that has taken down figures from Raj Rajaratnam, the hedge fund manager, to Rajat Gupta, the former senior partner of McKinsey & Co.

Charlie (as he is known) Gasparino, the hard-hitting, freewheeling veteran journalist, clearly waited as long as he could for his denouement, but ran out of time. It emerged last week that prosecutors doubt whether they have sufficient evidence to file charges of securities fraud against Mr Cohen, which would bring the saga to an end with a whimper rather than a bang.

The story takes a while to get up steam, with Gasparino first pondering, amid a lucid history of insider trading, whether it really ought to be considered a crime. He cites academics who argue it is not fraud in the sense it is considered under US law. No one is robbed, so why the outrage?

One can hear the editor sighing in frustration at the author undermining the point of his own book as Gasparino promises to “provide some perspective on what our regulators view as the white-collar crime of the century”. This pledge jars with the book’s subtitle, which insists that “the markets always work against the little guy”. That doesn’t sound like the kind of thing we should dismiss lightly.

Thankfully for the editor and us, Gasparino sheds his philosophical mood and gets to the dirt, which is his strength. As a reporter, first at The Wall Street Journal and now at Fox Business News, he can be relied upon to break good stories from a network of Wall Street contacts. If he settles a few scores along the way, that is the price of admission.

The inquiry into hedge fund abuse has produced various interesting angles. Anita Raghavan focused on the downfall of Gupta in The Billionaire’s Apprentice. Gasparino drills into the story of how investigators and enforcers at the US Securities and Exchange Commission to the Federal Bureau of Investigation tried to get their men and women.

It suits him since he has an instinctive feel for the triumphs and frustrations of the enforcer’s life. Some of the book’s best scenes come with the preparations of FBI agents to make the small fry of insider trading rings – the Circle of Friends – abandon hope and help to catch bigger fish.

He portrays Preet Bharara, the US attorney for the southern district of New York, as a publicity hound who seizes credit from the lowlier FBI and SEC officials who gathered the evidence. Even the FBI is divided, with rival squads in its New York office competing for the lead.

We witness their growing realisation that insider trading is not confined to petty scams in the “boiler room” retail brokerages that are the dregs of Wall Street but could be an integral part of how some hedge funds operate. Using the “expert networks” that connect traders with corporate executives with inside information, they buy a trading “edge”.

The Rajaratnam case exposed a senior network of contacts, including Gupta and Anil Kumar, a McKinsey partner. “Why don’t we just charge the entire Wharton class of 1983?” exclaimed a senior official in the SEC’s New York office when he saw the college connections involved.

The underlying narrative is the shift in Wall Street power from investment banks to hedge funds who paid whatever it took in commissions and bonuses to make the right trade. “He wanted to make the really big bucks that hedge funds were shelling out, particularly to people like himself who had the connections,” Gasparino writes of one trader.

It could be, as Gasparino argues, that pouring energy into catching and jailing those abusing inside information was a way for the SEC and Department of Justice to make up for the lack of charges against bankers involved in the credit bubble. But insider trading is not a mere misdemeanour – it has become a way for the 0.1 per cent to enrich themselves on the sly.

It isn’t an easy offence to catch, nor to stop. One striking thing, in the US at least, is how much must be proved before anyone can be charged with a criminal offence. Their work is worthwhile – we should not simply allow the crime to happen.

The writer is chief business commentator for the Financial Times

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