NYHFR Survey: Insider Trading Still A Risk

Sep 7 2017 | 5:08pm ET

Eight years have passed since the FBI’s insider trading investigation into Galleon Group, but the subject remains a concern in the minds of alternative investment industry participants, according to a new survey by the New York Hedge Fund Roundtable.

Insider trading was the topic of NYHFR’s August event, entitled From Trader to Whistleblower: How Tom Hardin Wound Up at the Center of Galleon’s Insider Trading Case and featuring Hardin – who was initially known as “Tipper X” in the Galleon investigation. 

“We’re all potentially just a few decisions away from going down that slippery slope,” said Hardin in a statement from NYHFR. “There’s this idea in social science called the fudge factor – that humans all have a fudge factor, but that we want to be able to cheat up to the point where we can still think of ourselves as good people. 

“My self talk in this situation was that ‘this is such a small position, it’s an immaterial position’… the problem is that once you do it once, it becomes very easy to do it again,” he added. 

After Hardin’s presentation, NYHFR surveyed its membership for their thoughts on the topic. When it comes insider trading, it seems Roundtable members are fairly confident the problem is not one within their own firms - 97% of respondents to this year’s insider trading survey believe their firm is completely compliant with regulations prohibiting the practice, up from 91% of respondents who felt this way in January 2016. 

Other key findings of NYHFR’s survey on insider trading:

  • 14% of respondents believe that insider trading practices in the alternative investment industry have become less prevalent since the FBI arrested Raj Rajaratnam and intimidated everyone, a noticeable drop from January 2016 when 25% of respondents felt this way.
  • 37% of respondents think the news of arrests and convictions has had little impact on insider trading because those who engage in such practices think they are smarter than everyone else and will never get caught, compared with 39% of respondents in 2016.
  • 49% of respondents believe the influx of money into funds in recent years and the explosion in the number of hedge fund firms has put enough pressure on fund managers that there will always be a few desperate enough to try anything, including insider trading, a significant increase from the 36% of respondents who felt this way in the Roundtable’s previous survey on this topic.
  • When asked where they believe the biggest risks for insider trading lie, 44% of respondents said that they believe it is firms with an attitude of being untouchable among the top level of management, compared to 24% of people who felt this way in January 2016; 35% think the biggest risk is rogue employees, and 21% think it is the ease of circumventing company monitoring through work around technologies, such as gaming stations and disposable mobile phones. 
  • Fully 90% of respondents said their firms have been extremely diligent in efforts to make sure employees know what constitutes insider trading, while 10% of respondents said that even though their firms have no insider trading policies, they are uncertain that everyone understands all the actions that fall under the insider trading umbrella or where the lines are when it comes to sharing sensitive company information.
  • 61% of respondents said employees and spouses can trade on their own behalf as long as they report their activities to the company. 22% said their firm’s no-trading policy is strictly enforced and is a major deterrent to outside trading activities, 14% said their company has a no trading policy and that violation of it is a fireable offense.
  • When asked whether the December 2014 Newman decision has made prosecutors less threatening regarding insider trading, 44% of respondents said that, regardless of where the courts weigh in on the issue, the hedge fund industry is acutely aware that the mere suggestion of a regulatory investigation for insider trading activities is enough to brand a fund manager or a hedge fund firm as toxic. 25% think the mere fact that regulators are so actively pursuing the issue is enough to deter most people. 
  • 28% think the Newman assertion that fund manager must specifically know that company insiders are improperly leaking confidential information created a major loophole for anyone prone to insider trading and diminishes the threat of prosecution.

Of the respondents to NYHFR’s survey, 26% were fund managers; 19% were allocators; 11% were risk management or trading; 36% were service providers and 8% were other industry participants.

The New York Hedge Fund Roundtable is a non-profit organization focused on promoting ethics and best practices within the alternative investment industry. The membership consists of investors, fund managers and other industry professionals who regularly meet to discuss current issues within the industry and connect with peers.

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