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Traditional Investigation Methods and New Tech Help Catch Insider Traders

As insider trading rises globally, regulators and banks are using complex event processing and remote-control software to catch rogue traders.

CREDIT SUISSE investment banker Hafiz Naseem's last move before boarding a plane from Pakistan back to his Madison Square Park office in New York was to take out his BlackBerry and, just like millions of users worldwide, add a telephone number to his contact list. What Naseem didn't know was that the move, like every single keystroke on his mobile device and laptop, was being monitored and logged in real time by an FBI agent back in the U.S.

When the 37-year-old banker landed in New York, he was arrested on insider trading charges in what proved to be the culmination of four months of investigation harnessing both traditional methods and new technology.

Unfortunately, it wasn't an isolated case. Recent booming M&A markets have provided increased opportunities for information sharing among bankers, traders, hedge fund managers and private equity executives on Wall Street.

After buyouts are announced, U.S. companies usually submit documents to regulators that pinpoint key dates during their confidential negotiations. Regulators flag cases in which prices for stocks, credit default swaps and options jumped at those turning points, when participants were meant to be sworn to secrecy.

In March, the SEC caught a 14-person insider-trading ring that netted more than $15 million in profits and included a UBS research executive, a Morgan Stanley compliance lawyer, a Bear Stearns stockbroker, three hedge funds and a day-trading firm. In May, the SEC froze brokerage accounts owned by a Hong Kong couple it accused of turning an $8 million profit on Dow Jones & Co. shares after allegedly receiving insider information on News Corp.'s $5 billion offer for the group.

Since April 2006, the SEC has filed insider-trading-related lawsuits against more than a dozen investment bankers, analysts and executives -- a higher number of cases than emerged during the entire decade of the 1990s. And the number of cases is rising around the globe. The Financial Services Authority (FSA), the independent body that monitors the financial services industry in the U.K., recently said insider trading may have tainted one-quarter of Britain's announced takeovers in 2005.

To catch rogue traders, regulators and banks increasingly are employing technology, such as complex event processing (CEP) and remote-control software, to monitor insider trading.

Credit Suisse's Naseem was charged with illegally sharing nonpublic information with a banker in Pakistan on the leveraged buyout of TXU Corp. by an investor group led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group. Credit Suisse had served as a financial adviser to TXU on the deal.

Building the Case

The SEC alleges that Naseem had telephoned the Pakistani banker on several occasions in February 2007 and disclosed nonpublic information about the proposed but unannounced TXU buyout. The Pakistani banker allegedly traded on the inside information and reaped millions of dollars in profits when the buyout was publicly announced. In addition to tipping off the Pakistani banker, the SEC alleges that Naseem tipped off at least one trader in the TXU case and possibly others concerning a total of eight additional mergers or business deals since joining Credit Suisse's New York office in March 2006.

Building the case, according to the SEC, was an unprecedented example of tight collaboration between the public sector and private sector (i.e., Credit Suisse), which worked in tandem to piece together evidence from across the globe, such as phone and brokerage records, and unraveled a complex web of international insider trading. "The SEC is especially appreciative of the tremendous assistance provided by Credit Suisse in the process of identifying Naseem and the cooperation afforded by the NYSE, Chicago Board Options Exchange, the Swiss Federal Banking Commission and the Financial Services Authority of the United Kingdom," Katherine S. Addleman, associate regional director of the SEC's Fort Worth, Texas, regional office, said in a release.

"How can you catch an employee devoted to federal crime?" poses an investigator involved in the case who spoke on the condition of anonymity. "It's a multistep process," he continues, explaining that the SEC, the FBI, the U.S. Justice Department and Credit Suisse worked closely together on the investigation, which started when the SEC brought to Credit Suisse's attention the fact that it had noticed suspiciously timely options trading ahead of the TXU deal.

With access to shared sensitive information, investigators were able to use technology to monitor the actions of Credit Suisse employees who were under suspicion. For example, "We were able to see what share drives they accessed, what E-mails they wrote," the investigator relates. Investigators took the unprecedented step of working "backwards from data points," identifying five or six investors around the world who had "traded very luckily" and had no direct links to Credit Suisse, he adds.

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio

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