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Home > Regulation > UK Regulation

Feel the power of the regulator

Law enforcement agencies have been getting tough and targeting market abuse in financial services

By Monique Melis and Alison Adcock | Published Sep 05, 2012 | comments

The conviction of Rajat Gupta, the former director of Goldman Sachs, on charges of insider trading on Friday 15 June was a major coup for the US prosecutors, sending a loud and clear message to the industry that the authorities can, and will, use their powers of detection and prosecution to crack down on cases of market abuse.

This latest development, which follows the dramatic conclusion of the first case in 2011 when Raj Rajaratnam, the founder of Galleon and Gupta’s business associate, was convicted and sentenced to 19 years’ imprisonment, signals yet again that regulators around the world are determined to clean up the markets.

We believe that this, together with other recent high-profile cases, demonstrates that it is now not sufficient for market participants to be only aware of their own regulatory regimes. Capital flows around the world are connected and firms operate globally. Enforcement regimes in the major financial centres today are similar, yet different, but still evolving and firms need to be cross-jurisdictional in their approach to managing the risk of market abuse (including insider dealing) being committed by their employees, directors and clients.

The original Galleon case gave new insight into the shady world of what some traders, both on Wall Street and in the City of London, were getting up to behind closed doors, bringing the hedge fund industry into the spotlight. What is interesting about Gupta’s prosecution is that, unlike Rajaratnam’s case, it succeeded largely on circumstantial evidence – phone records, trading records and witness statements. It also shed light on both the strategies employed by insider traders in circumventing the law and those used by the regulators investigating their criminal activities. The techniques employed by the Securities and Exchange Commission show that the regulator will go to considerable and protracted efforts to tackle market abuse.

The case has also served to highlight the breadth of people who can become involved in these cases and that involvement in illegal trading is not confined, as tradition dictates, to traders. Since 2007, US prosecutors in New York, the FBI and the SEC have arrested approximately 60 people across the financial services spectrum

In the process of investigating Gupta and Rajaratnam, the SEC hired FBI agents to assist them and used sophisticated data-gathering techniques, wiretaps and body microphones in order to secure a conviction. The US regulator has said that it was likely to use more intrusive techniques now to detect and prosecute market abuse, therefore hedge fund managers should be prepared for a new era of intensified scrutiny.

The use of these techniques reflect that financial crime of this nature is no longer considered to be a ‘white collar crime’, as it has traditionally been labelled, but is now considered to be on the same level as drugs or vice crime. Indeed on sentencing Gupta, Preet Bharara, a US attorney, said “it bears repeating” that law enforcement will continue to uncover Wall Street crimes.

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