Insider trading is "theft". It is "fraud". It is "rampant" on Wall Street, a "performance-enhancing drug" to which bank and hedge fund traders have become addicted. And it is "intolerable". Suffice, then, to say that Preet Bharara wants to do something about insider trading.
Mr Bharara is the US Attorney for the Southern District of New York, the beat that covers Wall Street and which propelled the equally ambitious Rudy Giuliani and Eliot Spitzer to higher office.
And now, the US Attorney's office, with the FBI and the Securities and Exchange Commission, the Wall Street regulator, are set to mount a new swathe of prosecutions before year's end, officials have confirmed.
It was reported over the weekend how investigators had tried to persuade the owner of one so-called "expert network", which provides access for hedge funds to people working for companies or in industries of interest to their traders, to wear a wire to record conversations with one client, SAC Capital. And yesterday lunchtime, the FBI raided the offices of three hedge funds, Diamondback Capital and Level Global Investors, both in Connecticut, and Loch Capital in Boston, as the investigation intensified.
It seems we are soon to find out how pervasive insider trading has become – or whether, as some on Wall Street complain, Mr Bharara is seeking to unfairly extend the definition of insider dealing.
A little over a year ago, when the US Attorney's office laid criminal charges against Raj Rajaratnam, one of the most aggressive and successful hedge fund managers, plus more than a dozen sources alleged to have tipped off his firm about upcoming takeovers and market-moving deals, the authorities warned that this would be the first of many cases. While 14 alleged moles have pleaded guilty, Mr Rajaratnam is defending his innocence. Of course he relentlessly pursued extra intelligence to give his trades an edge over his rivals – that is his job, on behalf of his investors – but he did not cross the line by trading on what he knew to be protected, market-moving information. The court case, scheduled to open in January, will be a seminal moment for the hedge fund industry.
Knowledge is profit. Large parts of the industry are engaged in short-term trading, attempting to harvest a quick buck from a big share price move, perhaps one triggered by a profit warning or a takeover or, in the healthcare sector, regulatory approval or rejection of a new drug breakthrough. Armies of traders and analysts are therefore employed to seek out any information that might allow them to guess what is coming.
Retail analysts spend a lot of time talking to store managers or suppliers, seeking out anecdotal evidence they can extrapolate into sales trends. Agricultural analysts will spend big on detailed weather forecasts, with which they might calculate likely crop yields. Technology analysts will always ring their contacts in the industry for rumours about the next gadget to come out of Apple or its rivals.
And now there is a whole sub-industry out there called the "expert network", which puts together investors and experts with detailed scientific or industry knowledge, or knowledge of a particular company – perhaps because they recently worked as an executive there, or even still do. The fees paid by hedge funds (and private equity firms and mutual funds, too, increasingly) can amount to hundreds of dollars per hour.
The US Attorney's office believes that these networks have become a conduit for insider information. John Kinnucan from the network Broadband Research told his clients last month that he had been contacted by the FBI, according to information leaked to The Wall Street Journal.
"Today two fresh-faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information," he wrote, in a round robin email. "We obviously beg to differ, so have therefore declined the young gentleman's gracious offer to wear a wire and therefore ensnare you in their devious web."
Details of this latest investigation are still few and far between, but what has been reported so far raises the possibility that some big Wall Street names could become ensnared in the prosecutions, if and when they arise. SAC, controlled by the secretive Steve Cohen, has already attracted the attention of the authorities, who have gleaned information about SAC from a cooperating witness in the Raj Rajaratnam case, and earlier this year, aware of the gathering risks to his reputation, he gave an interview to Vanity Fair – only the second in his entire career – denying insider trading rumours.
Junior traders at Goldman Sachs are also a subject of an investigation into trading around healthcare sector deals.
Michael Mayhew, the founder of Integrity Research, which has chronicled the rise of expert networks from just four firms in 1998 to more than 40 today, says that the industry provides real value – and does not need to give insider tips to provide it. "The problem is that investors don't find traditional Wall Street research all that useful, and even if it does contain real insight it is published to everybody simultaneously, so that it does not give you an 'edge'. The attraction of expert networks is that the information you get is based on the questions you ask, so that even if your competitors are speaking to the very same experts, if you are asking better questions then you are able to gain a unique insight."
Most of the larger networks have extensive compliance procedures in place to prevent insider information from being leaked – and many of their hedge fund clients, too, are aware of the legal and reputational dangers of being seen to cross the line into insider trading. For example, SAC tells the expert networks that it hires that it does not want to speak to anybody currently employed by a publicly traded company.
The courts will be testing and better defining the line over the coming months, it now seems, as Mr Bharara makes good on a promise he made just last month to step up the pressure on insider traders. In a speech, he said: "Disturbingly, many of the people who are going to such lengths to obtain inside information for a trading advantage are already among the most advantaged, privileged and wealthy insiders in modern finance. But for them, material non-public information is akin to a performance-enhancing drug that provides the illegal 'edge' to outpace their rivals and make even more money."