Bloomberg News

Douglas’s Gordon Gekko Is FBI’s Latest Insider-Trading Crusader

February 27, 2012

Photograph: Everett Collection

Photograph: Everett Collection

Feb. 27 (Bloomberg)-- Gordon Gekko, the character played by actor Michael Douglas in the movie “Wall Street,” is the newest weapon in the FBI’s arsenal to combat insider trading, part of a law-enforcement initiative agents say will continue for at least five more years.

The message from Douglas in a public service announcement unveiled today isn’t “Greed, for lack of a better word, is good.” In a first for the Federal Bureau of Investigation, Douglas, reprising his Oscar-winning role in the 1987 Oliver Stone film, urges fund managers and Wall Street analysts to avoid taking the same route to the federal penitentiary as his character does.

“In the movie Wall Street I play Gordon Gekko, a greedy corporate executive who cheated to profit while innocent investors lost their savings,” the actor says on the 57-second spot, featured on the FBI’s website and also available on YouTube.

“The movie was fiction, but the problem is real,” Douglas says in the announcement. “Our economy is increasingly dependent on the success and integrity of the financial markets. If a deal looks too good to be true, it probably is. For more information on how you can identify securities fraud, or to report insider trading, contact your local FBI.”

‘Five Years’

Douglas’s spot is the latest element of “Perfect Hedge,” an initiative begun by the FBI New York’s office to combat insider trading at hedge funds, said FBI Special Agents David Chaves and Richard Jacobs, supervisors in the bureau’s New York’s securities and commodities fraud squads.

The law enforcement effort was started in March 2007 by Chaves, Jacobs and their colleagues in New York, who teamed up with the Manhattan U.S. Attorney’s office and the U.S. Securities and Exchange Commission to investigate the sources of inside tips and those profiting from them.

The mission has met with success: at least 64 people have been arrested by the FBI and charged by prosecutors in the office of Manhattan U.S. Attorney Preet Bharara, Chaves said. To date, 59 people have been convicted at trial or pleaded guilty, including portfolio managers, analysts and insiders at publicly- traded companies since 2009, he said.

In a PowerPoint presentation, Chaves and Jacobs depicted these cases as the tip of the iceberg of insider-trading on Wall Street. They predicted their work will continue.

“I don’t want to say it’s infinite, but clearly, in five years we think we’ll be working it,” said Chaves, who added later, “We have cooperators set up for years to come.”

Rajaratnam, Gupta

The cases brought as a result of Perfect Hedge include the conviction of Galleon Group LLC co-founder Raj Rajaratnam, who was found guilty of 14 counts of securities fraud and conspiracy and was sentenced to 11 years in prison last year, and the indictment of Rajat Gupta, the former Goldman Sachs Group Inc. (GS) director accused passing tips to Rajaratnam.

Chaves said the operation was launched after cooperators and insiders reported to them that insider trading was rampant at hedge funds, an industry that manages $1.97 trillion in assets, according to Hedge Fund Research Inc. in Chicago.

Both Chaves and Jacobs say they believe that 99 percent of fund managers are honest, and, like the FBI, want to root out the one percent who aren’t.

“People in hedge funds want the cheats weeded out,” Chaves said. “It’s so much like baseball players on steroids. They would love to get rid of them.”

Fictitious Companies

Chaves said the bureau was willing to be imaginative with Perfect Hedge, a parallel insider-trading initiative called “Market Integrity,” and a third called “Match Makers,” an effort which targeted publicly-traded technology companies employees who passed inside information while moonlighting as expert-networking consultants.

Agents began using law enforcement techniques commonly employed against organized crime, including surveillance of targets and evidence gained through cooperators and informants. They also made ground-breaking use of court-authorized wiretaps to record crimes as they occurred, a technique first authorized to fight the Mafia, said Douglas Leff, the assistant special agent in charge of white-collar crime in New York.

Agents persuaded Karl Motey, an independent consultant who pleaded guilty to crimes, to work for the FBI in a fictitious investment firm set up by the bureau.

‘Push the Envelope’

Motey, wearing a wear a wire for the FBI, recorded meetings with expert networking executives and telephone consultations with employees of technology companies like Dell Inc. (DELL) and Advanced Micro Devices Inc. (AMD) as they passed inside information to him.

“We’re trying to push the envelope on a daily basis,” said Diego Rodriguez, head of the FBI New York’s criminal division who supervises units including securities and commodities fraud squad “It’s not like we’ve never done it before, but it’s now a different target set.”

Chaves and Jacobs said that as innovative techniques were revealed in court testimony from trials, the bureau has had to continually revamp its approach.

For instance, when fund managers learned the FBI was listening in on their office calls, they moved to using disposable phones for their crimes and began passing inside information using Skype Technologies SA, Facebook Inc. and Twitter Inc., Chaves said. The FBI has kept abreast by detecting encrypted inside information passed on social network sites, he said.

Undercover Video

In addition to Douglas’s spot, the FBI today revealed an excerpt of an undercover surveillance video made by FBI agents in the case of Yonnie Sebbag, a California man who pleaded guilty in New York to selling confidential Walt Disney Co. (DIS) information and was sentenced to 27 months in prison.

In the case, Sebbag sent letters in March 2010 to at least 33 investment companies, including hedge funds, offering to sell inside information about Burbank, California-based Disney.

“We’re very happy to say that no one other than the FBI responded to this man,” Chaves said.

The FBI sent an undercover agent posing as a corrupt fund manager who paid Sebbag for the nonpublic Disney documents which Sebbag later provided.

“I give you the information and you make the trades,” Sebbag told the undercover agent in the video recording. He said he could provide “any informations that comes to executives like CEO, any information.”

“What motivates me is money,” Sebbag told the agent. “I want no jail time, thank you,” he added, and laughed while folding his hands into a praying position.

Confused With SEC

Chaves said agents perceived there wasn’t much public recognition of the FBI’s role in bringing these cases. Some news accounts confused the SEC, which has a civil enforcement role, with the bureau’s criminal law enforcement powers, such as raiding a hedge fund or placing handcuffs on suspects.

“At one point it was reported that the SEC was arresting people,” Chaves said.

Douglas told agents that decades after the movie that won him an Oscar for best actor, he’s frequently stopped and greeted as a hero and not a Wall Street villain.

Douglas said he was “startled over the positive response he received as Gordon Gekko,” Chaves said. He quoted Douglas saying, “I don’t know what’s wrong with Wall Street but I would be approached all the time, people would ‘high-five’ me or shake my hand for being this terrible man who stole people’s money. Where are the values? The culture has to change.”

Douglas reprised the character in the 2010 sequel, “Wall Street: Money Never Sleeps.”

‘Staying Away’

Chaves said he hopes the Douglas spot will help deter others. Already, reports from cooperators on Wall Street indicate that the spate of insider-trading prosecutions brought since October 2009 has been a deterrent, he said.

“We’re hearing more and more how people are staying away from inside information,” Chaves said. “We’re still developing cases so there are clearly people out there still breaking the law.”

A Bloomberg story about Perfect Hedge in December had cooperators scrambling to contact their FBI handlers, Chaves said.

“After that story, our cooperators were reporting to us that there were people who were deathly afraid that they were going to get that knock on the door from us,” he said.

To contact the reporter on this story: Patricia Hurtado in New York at pathurtado@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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