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Speech by SEC Staff: News Conference Remarks

Robert Khuzami

Director of the SEC’s Division of Enforcement
U.S. Securities and Exchange Commission

U.S. Attorney’s Office for the Southern District of New York, New York, N.Y.

Jan. 18, 2012

Good afternoon. My name is Robert Khuzami, and I’m the Director of the SEC's Division of Enforcement.

Once again, so-called white collar professionals who enjoy so many advantages break the law in a likely craving for more money, more celebrity, and the mirage of success.

Once again, so-called white-collar professionals who should know better disregard the most basic wisdom that we teach our children – to do right and not wrong.

Once again, in a new year, I find myself here alongside our criminal law enforcement partners announcing new but troublingly familiar charges of insider trading by hedge fund firms, fund managers, and analysts.

The SEC today has filed civil charges against seven individuals, and additionally has charged two prominent hedge fund advisory firms, Diamondback and Level Global.

Why is this action so significant?

First, today’s action lays bare an organized network of analysts and fund traders who set up and used a corrupt network to obtain insider information.

This is very different from – and far more disturbing than – cases where we see opportunistic trading by someone who happens to come into possession of valuable inside information, such as a once-in-a-lifetime takeover of other extraordinary corporate announcement, and succumbs to the temptation of illegal profits.

Rather, this involves professionals who illegally obtain routine business information, such as quarterly earnings and profit margin estimates.

They then use their sophisticated trading skills to analyze the likely impact of the discrepancy between actual and expected financial results.

And then they put on trades using large amounts of capital and increasingly liquid options markets to magnify their illegal profits.

To put this last point in perspective, we allege these defendants obtained $78 million in illegal profits and avoided losses based on insider information from only three quarterly earnings reports.

This is systemic dishonesty, and it exposes a deeply embedded level of corruption.

Second, but perhaps the most worrisome, the illegal conduct alleged in today’s action was not perpetrated by fringe players in the investment adviser industry, but rather by some of the largest and most sophisticated hedge funds in the country, including Level Global and Diamondback.

There is nothing wrong with hedge funds, which can and do provide valuable services for clients and liquidity for markets.

But hedge funds are also characterized by a lack of transparency in trading practices, market power that can give them influence over those who possess insider information, access to leverage and enormous amounts of capital, and the techniques to trade extremely quickly.

These characteristics, if put to use for illicit purposes, present a grave threat to the integrity of the markets and the level playing field that is the foundation for those markets.

In closing, I’d like to thank Preet Bharara and Janice Fedarcyk and their teams from the U.S. Attorney’s Office and the FBI.

Their work, as always, has been outstanding and represents the very best in public service.

Lastly, I want to recognize the hard work and dedication of the SEC staff that conducted this investigation with thoroughness and tireless enthusiasm. Their effort has been exceptional, and I could not be more proud of what they have accomplished.

The SEC personnel are:

  • George Canellos, Director of our New York Regional Office
  • Sanjay Wadhwa, Associate Director of our New York Regional Office and Deputy Chief of our Market Abuse Unit
  • David Rosenfeld, Associate Director of our New York Regional Office
  • Joe Sansone
  • Dan Marcus
  • Matt Watkins
  • Steve Larson
  • Neil Hendelman
  • Diego Brucculeri
  • James D’Avino

Thank you.

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