Wednesday, 25 May 2011

How Hedge Funds Can React to the Insider Trading Enforcement Initatives of the US Govt

According to law firm Baker & McKenzie, the recent conviction of Galleon Group's Raj Rajaratnam serves as a further alert to hedge funds of the heightened risks posed by the US government’s sweeping insider trading enforcement initiative and the need to mitigate those risks proactively. In a client alert partner Marc Litt gave six things you need to know about the government focus on insider trading, and proffered some suggestions as to how hedge fund management businesses  should respond.  As a significant part of the readership of this website is hedge fund managers based in the United States I thought I would share the most relevant parts of the client alert.

Six Things You Need To Know

Among the lessons to be drawn from the government’s ongoing focus on insider trading and the conviction of Rajaratnam are the following:
1. More to come. Although the Rajaratnam conviction marks the highwater mark, to date, of the government’s crackdown on insider trading, it does not mark the end of that effort; there is more to come.
2. Aggressive enforcement tactics. Prosecutors will continue to use aggressive enforcement tactics, including wiretaps, search warrants and recordings made by cooperators, to build criminal insider trading cases.
3. Not just criminal enforcement. Where there is insufficient evidence to bring criminal prosecutions, regulators may instead seek sanctions through civil and administrative proceedings.
4. Reputational damage. Mere association with insider trading allegations visits severe reputational damage on the institutions involved and, especially in the case of hedge funds, can result in dissolution.
5. Compliance counts. The best way to avoid being swept into the enforcement net is to develop a rigorous insider trading compliance program, including a zero tolerance tone from the top, routine training, clear policies on using, or serving as part of, so-called “expert networks,” and spot-checks on whether the compliance program is being followed.
6. Be prepared. Develop a plan and provide training on how to react should the Government knock on the door.

How A Hedge Fund Business Should Respond

1. Review your compliance program, particularly your policies and procedures designed to prevent insider trading. Assess whether sufficient resources have been devoted to compliance.
2. Make sure that the use of expert networks or consultants is carefully controlled. Although the use of such resources is not per se illegal, it is a practice that is under scrutiny. A hedge fund should take appropriate steps to ensure that any information it receives is not material nonpublic information, including conducting due diligence on the source of the information.
3. Provide regular training on insider training geared to the investment strategy followed by the fund(s). Make sure that traders understand the risk to the firms reputation and existence were it to be associated with insider trading or any other illegal activity.
4. Prepare for the unexpected. Develop protocols and train employees with respect to: (a) securing information (hard-copy and digital) in the event the fund receives a subpoena; (b) responding to a search warrant; and (c) responding to approaches by law enforcement.

 For further input go to the website of the law firm ( or contact Marc Litt at +1 212 626 4454 ( or

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