United States

How Operation Perfect Hedge stopped the perfect crime


Burner cellphones, trading information in the bunkers on PlayStation war games and encoded emails were just a few of the ways David Chaves, Securities Program Coordinator at the FBI, described traders getting and receiving inside information at the Sixth Annual RSM Investment Summit. In the early years of hedge fund trading, many mangers got away with using inside information, but since the financial crisis, and most notably the Madoff scandal, the FBI has been embedded with the Securities and Exchange Commission (SEC) in order to catch criminals.

"I think mostly it's a good industry, but you do still have a criminal element,"Chaves said. "Early on, we didn't know how to stop it, we didn't know what to look for. But we've developed a collaborative relationship with the SEC."

He explained that the exponential growth of the hedge fund industry spurred the growth of arrests and settlement cases the public has seen in recent years. "It's really a culture issue. The tone at the top of the organization sets the tone for the whole operation. "The tone at many shops is hypercompetitive. People feel like if they don't cheat to get ahead, they won't do as well and they will get fired. It's a culture issue," Chaves said.

The FBI also cleared out expert networks, another way hedge funds and financial firms were getting insider information – making 32 arrests from expert networks to date.

"The FBI's behavioral science team is one of our greatest assets for profiling people who will do this. We look for the actions that match a pattern of behavior, and we follow people for a long time, through every part of their daily routine. You don't want me to know what your Starbucks order is."

The next phase will be the Foreign Corrupt Practices Act (FCPA), which can catch financial firms in its crosshairs, if they allow criminal funds or funds backing terrorists into their firm. "FCPA is big, and it's brutal; you do not want to get caught up in that,"Chaves said in his closing comments.

For more information, contact Alan Alzfan, partner, RSM US LLP, at 212.372.1380 or David Chaves, Securities Program Coordinator, Federal Bureau of Investigations, at 212.384.5000, ext. 7822.