Cracking financial 'crime of the century'
WHILE the markets were coming undone in 2008, securities regulators and law-enforcement types were busy. The problem, says Charles Gasparino, is that they were investigating the wrong thing.
Instead of digging into the fraud that helped fuel the crisis, they were on a crusade to clean up an epidemic of insider trading.
'Circle of Friends: The Massive Federal Crackdown on Insider Trading – And Why the Markets Always Work Against the Little Guy', tells the story of lying, cheating hedge funders who broke the law so regularly they couldn't imagine they would ever get caught.
We get all the elements of the insider-trading genre: the bundles of cash (stuffed in Doritos bags), the informants wired by the FBI, the bickering regulators who pout if the media's latest puff piece focuses on someone else's agency.
Since the crackdown began in 2008, the US attorney in Manhattan boasts 73 convictions including jailed Galleon hedge-fund founder Raj Rajaratnam.
Gasparino, who is ready with an anecdote about each of his lawbreakers, shares this gem from a Rajaratnam deposition: "I love what you guys do to protect the integrity of the securities markets," the Galleon chief told his interrogators.
The Feds come away looking almost as bad as their prey. At one point FBI agents arrive outside a Manhattan apartment for an early-morning arrest, camera crew in tow – then speed around the block to stage a screeching halt in front of the target's building for the cameras' benefit.
The author does a good job of putting his stories in context. He shows how the growth of the largely unregulated hedge-fund business was a tinderbox for illegal behaviour and explains the history of legal victories that allowed the Securities and Exchange Commission to go after ever-broader categories of insider trading.
While hedge funds were proliferating, Gasparino explains, regulators were gaining the ability to track traders' funny business on increasingly sophisticated computers. Further strengthening the hands of regulators was that the SEC and the US Justice Department grudgingly decided it was in their best interests to work together instead of competing.
But while regulators view insider trading as "the white-collar crime of the century", Gasparino argues it never harmed investors the way Ponzi schemes, mortgage fraud and reckless risk-taking by banks did.
Gasparino offers an explanation for the insider-trading obsession: several unnamed career prosecutors told him the government needed a white-collar scandal to "satisfy the public's demand for Wall Street scalps" after the crisis. Never mind that insider trading played no noteworthy role in the debacle that almost brought the economy down.
The book has some lazy writing and sloppy errors, but 'Circle of Friends' is an insightful recap of how we got to the place where insider trading became the favourite target of regulators.