U.S. Joins Multinational Insider Trading Crackdown

and on Bloomberg dot com slash podcasts. Federal prosecutors are investigating an international network of traders suspected of infiltrating banks and companies and making tens of millions of dollars by using confidential information to trade ahead of media reports about takeover talks or merger announcements. That's according to Bloomberg sources. Joining me is Peter Handing, a professor at Wayne State

University Law School. Peter explain this UH, this network that prosecutors are looking into, Well, what they're focusing on is that they were able to develop different sources inside UH investment banks, including the Wall Street Journal report ordered that the governments are looking at UM, someone who was inside

City Bank in London. And really what makes this different from the typical insider trading case is that, at least according to the reports, that information was fed to journalists so that then it could get into the media, which of course will cause a stock to pop up at least somewhat, and that way they don't have to wait for any deal to be completed, because as we know, it's not necessarily the case that every deal is going to be completed, But trading ahead of the media report

lets you at least make some money that way. So the traders here allegedly did a lot to cover their tracks using burner phones, shell companies, complex financial instruments. How much harder will that make investigating this Well, certainly the most white collar defend aren't very good about using burner phones, But if they use them in the right way, which was make one phone call and then get rid of it. For those of us UM who watch Breaking bad, then you know that is really going to make it much

more difficult to trace out who their sources are. And using shell companies is especially in the United States, where you don't have to report who owns the company, then that is a pretty easy way to hide who's behind it. Now, you prosecutors are able to trace bank transactions and things like that, but the problem is once the money has left the United States or the United Kingdom or even France, who's also looking at this UM, it's going to be

very hard to ever get it back. And if it goes into the banking system and you're not able to trace it, then that money is gone and proving a case is going to be very difficult if you can't follow the money. And so they are having, uh what often happens in these insider trading cases. They're having a lower level member of this syndicate who flipped and and that's how this really got going. That's right that there was excuse me, a someone in Serbia was arrested and

then extradited to the United States. And you know, as long as you have someone on the inside who can point you in the right direction, that of course can be very helpful. And what we've seen that before, going back a decade with the Raj Raj Ratnam cases, where prosecutors got cooperating witnesses who would say, look at this trade,

look at that trade. Um, getting someone on the inside is absolutely invaluable to investigators and prosecutors because is then you can try to trace the money, but you can also build your case by looking at well timed trades. And I think that's really what they're focusing on. Can they figure out who the source was and can they show these were very well timed trades. This investigation involves US, UK and French prosecutors operating on parallel tracks. How unusual

is that and the cooperation among countries certainly. I mean it's unusual in the sense that typically the Department of Justice just conducts its own investigations. But if you're talking about and international ring, then of course you're going to have to get the cooperation from foreign regulators and foreign prosecutors.

So this one is a little bit unusual in that I think we're going to see a lot of information sharing, which doesn't always happen, but here they're going to have to try to give each other their information if they ever hope to track this down and figure out who was the source inside the different investment banks or there's some talk that gifts were given to people in law firms and places like that, which of course those are always good sources of inside information, and so I would

expect this will take time. So anybody thinking that we'll see charges in the next month or two, I think it's mistaken. This is a kind of case that's going to take months to develop. But once it is developed them I would expect we will see criminal charges filed. UK financial prosecutors did wrap up a trial and got

some convictions. A former UBS compliance officer and her friend were sentenced to three years for insider trading after a London trial that featured accounts of lavish champagne fueled nights out of exclusive nightclubs, racking up eight thousand pound bills, a network of traders who only spoke on burner phones, and evidence stashed in a channel bag. I couldn't resist this one. Well, you know that this is almost like it's coming out of Billions or you know, some kind

of television show. But um, in fact, you know the best way to hide yourself is to use a burner phone as long as you get rid of it and do your best not to leave any kind of paper trail. Um. The problem is going to be if they did contact people in the media, there could be enough of a paper trail there to build a case. So it's certainly going to be interesting in the Financial Conduct Authority won

the conviction. Now they got sentenced to three years. Unlikely they will serve that full amount of time, but still the government might be able to get some cooperation out of them. Or the UK government, and that can open up a way to start to develop as so. Peter compare the prosecution of insider trading in the UK to the prosecution in the US, where we've had so many court rulings about what constitutes insider trading. Is it tougher here than it is there? Certainly it's tougher here than

it is in the EU. UM In the United States you have to show a breach of fiduciary duty or what's called another duty of trust and confidence. In the EU it is what's called a possession theory. If you possess inside information and trade on it, you're guilty, and so it's probably easier to prove it in the UK or in the EU, and it's going to be in the United States. Although building a case here showing a breach of fiduciary duty is sometimes not all that difficult

if you've got an insider who's tipping off. But UM, I would expect it's going to be easier in the EU to all the case by just showing that these people had inside information and then traded on it. That's a much simpler approach than in the United States. While we continue to watch these insider trading trials come to the forefront. Thanks so much, Peter. That's Peter Henny. He's a professor at Wayne State University Law School. Thanks for

listening to the Bloomberg Law Podcast. You can subscribe and listen to the show on Apple Podcasts, SoundCloud, and on bloomberg dot com slash podcast. I'm June Brosso. This is Bloomberg