“Isn’t This Illegal?”


January 6, 2014
In To Catch a Trader, FRONTLINE correspondent Martin Smith goes inside the government’s ongoing, seven-year crackdown on insider trading. The film premieres tomorrow night on most PBS stations (check local listings).

It’s phone calls like the one that Turney Duff took early in his career at the Galleon Group that authorities point to as what’s wrong with the hedge fund industry.

The voice on the other end of the line asked for Raj Rajaratnam, the CEO of the hedge fund. Duff explained that Rajaratnam was unavailable.

Then suddenly without warning, the voice whispered that investment analysts at the Jeffries Group were going to upgrade Amazon in six minutes.

In the below scene from tomorrow night’s FRONTLINE investigation, To Catch a Trader, Duff explained the choice he faced.

“If I don’t buy Amazon and the stock’s upgraded and the stock goes up, they’re going to find out,” he said. “But if I do it, isn’t this illegal?”

As Duff would learn, the call was just a hint of what was really going on at Galleon. In 2009, FBI agents raided Rajaratnam’s home and arrested him for insider trading. Two years later, a jury found him guilty on all 14 counts.

The arrest was part of a vast crackdown on insider trading that authorities have come to call “Operation Perfect Hedge.” The results have been sweeping. Since first setting its sights on the hedge fund industry, officials have brought charges against a total of 83 people and four entities, winning at least 78 of those cases through either a guilty plea or conviction at trial.

“We likened it to the first Jaws movie,” an FBI agent involved in the probe told FRONTLINE, “that we’re going to need a bigger boat.”

While it can be hard to gauge just how much the operation has done to level the playing field, at least one recent study suggests progress has been made. In the study, researchers at Florida Atlantic University examined merger deals over a nine-year period and found that abnormal jumps in the stock price of target firms — typically a sign of informed trading — fell 45 percent in the wake of the Galleon case.

A second major target of the federal dragnet has been SAC Capital. Since opening its doors in 1992, the hedge fund has consistently delivered sky-high returns for its investors. In some years, gains topped 70 percent.

According to the government, many of those gains were the product of illegal, inside trades. Since the start of Operation Perfect Hedge, six SAC employees have pleaded guilty to insider trading charges. In December, a federal jury in New York found a seventh employee, Michael Steinberg, guilty on five counts of securities fraud and conspiracy. Jury selection in the trial of an eighth SAC employee, Mathew Martoma, begins tomorrow.

SAC Capital’s founder and CEO Steven Cohen has not been criminally charged, but the firm that bears his initials has pleaded guilty to insider trading violations and agreed to pay a record $1.8 billion in penalties. As part of the settlement, SAC was forced to stop managing money for outside investors.

In To Catch a Trader, which premieres tomorrow, FRONTLINE goes inside the government’s unprecedented crackdown on insider trading. Drawing on exclusively obtained video of Cohen, FBI wiretaps, and interviews with Justice Department insiders, the film traces how an insatiable search for trading “edge” ultimately doomed some of the most successful names on Wall Street.

To Catch a Trader airs tomorrow on most PBS stations (check local listings here), or you can watch the film online, starting at 10 pm EST.

Jason M. Breslow

Jason M. Breslow, Former Digital Editor



In order to foster a civil and literate discussion that respects all participants, FRONTLINE has the following guidelines for commentary. By submitting comments here, you are consenting to these rules:

Readers' comments that include profanity, obscenity, personal attacks, harassment, or are defamatory, sexist, racist, violate a third party's right to privacy, or are otherwise inappropriate, will be removed. Entries that are unsigned or are "signed" by someone other than the actual author will be removed. We reserve the right to not post comments that are more than 400 words. We will take steps to block users who repeatedly violate our commenting rules, terms of use, or privacy policies. You are fully responsible for your comments.

blog comments powered by Disqus

More Stories

9 Documentaries That Provide Context on the Buffalo Shooting
As America grapples with the deadly massacre, FRONTLINE's past reporting sheds light on the current moment and the circumstances that led to it, from guns to America's history of racist killings.
May 17, 2022
War Crimes Watch: Targeting Ukraine Schools, Russia Bombs the Future
The destruction of schools is about more than toppling buildings and maiming bodies, experts told our reporting partner The Associated Press. It hinders a nation’s ability to rebound after the fighting stops, injuring entire generations.
May 17, 2022
Minneapolis Agrees to Pay $200,000 to Settle Discrimination Complaints by Two Former Police Officers
Colleen Ryan alleged she was denied promotion because she's an openly gay woman, while former Deputy Chief Art Knight alleged his demotion was retaliatory.
May 12, 2022
'This Tears my Soul Apart': A Ukrainian Boy and an Execution
Fifteen-year-old Yura’s extraordinary account alleging an attempted execution by Russian soldiers stands out as international justice experts descend on Bucha, a center of horrors and possible war crimes in Ukraine.
May 12, 2022