Over the last 18 months, the Manhattan U.S. Attorney’s office has charged 47 individuals with insider trading crimes. Last week, Galleon founder Raj Rajaratnam was found guilty of fourteen counts of conspiracy and securities fraud, in the largest hedge fund insider trading scheme in history. It was the first insider trading prosecution to use wiretaps, a method usually reserved for mobsters, drug dealers and terrorists. We discuss the crackdown on white collar crime and what it could mean for Wall Street as well as individual investors.


  • Solomon Wisenberg Former federal prosecutor, currently a partner and co-chair of the white collar crime practice group for the law firm Barnes & Thornburg.
  • Joan McKown Partner in the law firm Jones Day and former chief counsel of the SEC's Enforcement Division
  • Scott Friestad Associate director of the SEC's division of enforcement.
  • Peter Lattman Reporter, New York Times Deal Book


  • 10:06:55

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. A billionaire investor, who once ran one of the world's largest hedge funds, is now facing up to 20 years in jail for illegal insider trading. Last week, he became the 35th person convicted in the past year-and-a-half by the U.S. Attorneys' Office in Manhattan. Joining me in the studio to talk about the crackdown on white collar crime is Joan McKown. She is a partner in the law firm Jones Day. And from the NPR bureau in New York, Peter Lattman of The New York Times Deal Book.

  • 10:07:48

    MS. DIANE REHMI look forward to hearing your questions, comments. Join us on 800-433-8850. Send us your email to drshow@wamu.org. Join us on Facebook or send us a tweet. Good morning to you, Joan.

  • 10:08:11

    MS. JOAN MCKOWNThank you, Diane.

  • 10:08:12

    REHMAnd good morning to you, Peter.

  • 10:08:15

    MR. PETER LATTMANGood morning, Diane.

  • 10:08:16

    REHMPeter, I know you've been covering the Rajaratnam trial in New York. Talk about why there was such intense personal interest in this trial.

  • 10:08:30

    LATTMANWell, for a few reasons. Number one, Rajaratnam, at his peak, was one of the world's largest hedge fund managers. So, you know, hedge funds, a once sort of obscure pocket of Wall Street, had emerged over the past decade as some of the most powerful players in finance. And Rajaratnam ran about $7 to $8 billion dollars of other people's money. He was regarded as one of the best stock pickers out there, and, suddenly, in October of '09, he was arrested for insider trading.

  • 10:09:05

    LATTMANSo there was obviously an interest because Rajaratnam is very high profile, but, of course, insider trading sort of ebbs and flows over the years. And over the past couple of years, we've seen a really widespread crackdown on insider trading. And it just seems to really generate a lot of interest out there.

  • 10:09:24

    REHMAnd, Joan McKown, explain to us just what is insider training -- trading.

  • 10:09:33

    MCKOWNInsider trading is when you trade on the basis of nonpublic material information.

  • 10:09:39


  • 10:09:40


  • 10:09:41


  • 10:09:41

    MCKOWNYes, that's the key.

  • 10:09:42

    REHMAnd where might that nonpublic information come from?

  • 10:09:48

    MCKOWNWell -- and that's just it. The hedge funds and other large traders are always looking for sources of information. They argue that they get pieces of information that are public, and they tie the information together. However, as alleged in this case, they got information directly from individuals that worked at public companies. And they received material -- nonpublic information that was not otherwise available to the general public.

  • 10:10:15

    REHMAnd give me a sense of what it is that could arouse suspicion.

  • 10:10:22

    MCKOWNWhat gets the prosecutors interested in you?

  • 10:10:24


  • 10:10:25

    MCKOWNWell, actually, what's happening, Diane, right now, is there's been a huge effort at the SEC to be not merely reactive when they hear about a problem, but to be proactive and go out and find the problems. And what they've started doing is trader-based analysis, instead of securities-based analysis.

  • 10:10:41

    REHMWhat does that mean?

  • 10:10:42

    MCKOWNAnd what that means is instead of seeing a spike up in trading in a particular stock and looking at who traded in that, they look at trading in advance of a merger or an acquisition, whether -- they look at those spikes in trading. But then, once they become interested in a trader, they don't just look at the trading in that security. They look at all the different trades that that trader makes, and then they look at who else has similar trades. And then -- they now use -- they're increasingly using technology to tie those individuals to the sources of information.

  • 10:11:19

    REHMAnd, Peter, is this crackdown, in your view, a result of the economic crisis that the entire country is going through, in other words, looking more closely at what happens to our money in general?

  • 10:11:40

    LATTMANRight. Well, I think -- look, broadly, what it suggests to the general public out there is that Wall Street was never a level playing field and that these hedge fund managers had some sort of abetted advantage that the prosecutors have now sussed out. But you raise a really interesting point because there's a lot of people out there that feel that insider trading is merely a sideshow. It's just bread and circus compared to what really was the cause of the financial crisis, you know, reckless lending.

  • 10:12:09

    LATTMANAnd you have these bank executives out there, whether it's, you know, Angelo Mozilo of Countrywide or, you know, Lloyd Blankfein at Goldman Sachs. These are the symbols of the financial crisis and what led to, you know, the global economy nearly collapsing. So a lot of people think insider trading -- while, of course, it's a very significant crime and very interesting -- it is not really the crux of, you know, what happened here to the nation's economy.

  • 10:12:37

    REHMHow much money, though, did Rajaratnam make from his own insider trading, Peter?

  • 10:12:45

    LATTMANMm hmm. Well, the prosecutors alleged in their case about $64 million in illegal gains. Now, that's just what they allege, right? They -- and this is an important issue. They wiretapped his phone over nine months in 2008, and in those nine months, that's what they caught him doing. Now, this is a guy who ran $7 billion. It's unclear whether it was just that $64 million in gains in which he was generating, you know, illegal profits. You could suspect that it would be more than that, but the prosecutors limit it to that number.

  • 10:13:21

    MCKOWNWell, I'm certain they limit it to what they thought were their best -- the best case they could put forward.

  • 10:13:25

    REHMI see. I see.

  • 10:13:27


  • 10:13:28

    REHMWould one have to speculate, Peter, that there are a number of other people out there doing exactly what Rajaratnam was doing?

  • 10:13:42

    LATTMANMm-hmm. Well, if you listen to Preet Bharara, the U.S. attorney in Manhattan who has spearheaded this investigation, yeah, he thinks this is an epidemic. And he doesn't think this is limited to just one traitor in the case of Rajaratnam. As you said at the start of your show, there have been -- by the U.S. attorney in Manhattan alone, there have been about 50 individuals charged with insider trading crimes over the past 18 months. And if you talk to Bharara or just listen to his comments in the public, he feels like this is a serious problem on Wall Street. And the 47 is merely the tip of the iceberg.

  • 10:14:20

    REHMNow, what I'd like to understand from you, Joan, wiretaps were used in this case. I thought wiretapping had been restricted to other kinds of cases. How come wiretapping was allowed here?

  • 10:14:38

    MCKOWNBecause the U.S. Attorneys' Office said that what they were looking at was money laundering and wire fraud. And so they did not say it was insider trading, and they did not say that the SEC was investigating insider trading. You're absolutely right, Diane. Typically, we think of wiretaps in cases where somebody's life is on the line. It's the mob. It's terrorism, something like that. But, you know, no one died from insider trading, so -- it's not good. It's a market integrity issue. But, no, this is not the type of case. And that's what makes this case so interesting because of the use of wiretaps.

  • 10:15:18

    REHMAnd isn't that, Peter, exactly how the defense is going to mount its own case?

  • 10:15:28

    LATTMANRight. So that will be issue number one on appeal, is that the wiretaps were, you know, on a couple of levels, improper. They were an unconstitutional search and seizure of an individual. The government should have carried out a more traditional investigation, using more conventional techniques, and wiretaps were unnecessary. But that's going to be a tough appeal, I will tell you, because this issue was fought at the trial court level. Before the trial, there was a four-day hearing, which is called the Franks hearing, where they argued the legitimacy of the wiretaps.

  • 10:16:01

    LATTMANAnd the trial judge in the case issued a 68-page opinion that was well thought-out, and he said the wiretaps were justified here. So you're correct. It's an unprecedented use of wiretaps in the pursuit of white collar crime, normally reserved for drug trafficking and Mafia cases. But it seems to be, you know, opening up a new front in the way the government goes after these crimes. So that's exactly right.

  • 10:16:26

    REHMDo you agree with that, Joan?

  • 10:16:28

    MCKOWNI agree. What we're hearing from the Department of Justice and the U.S. Attorneys' Office in New York, which is where a lot of this case is happening, is that they are -- the government is opening up and thinking broadly in terms of how to prosecute these cases. And they...

  • 10:16:41

    REHMReally cracking down.

  • 10:16:43


  • 10:16:44

    REHMNow, Peter, there's another trial beginning today. Zvi Hoffer? (sic)

  • 10:16:52

    LATTMANGoffer. That's what the...

  • 10:16:53

    REHMGoffer. Goffer.

  • 10:16:54

    LATTMANGoffer. Yeah, yeah.

  • 10:16:55

    REHMAnd tell me about his.

  • 10:16:58

    LATTMANSure. So he's part of a sort of related insider trading ring to the one that Rajaratnam was involved in. In fact, for a short period of time in 2008, he worked for Rajaratnam at the Galleon hedge fund. And then he's sort of a hedge fund journeyman. He bounced around to a couple of different firms. But, like you guys were talking about it earlier, he had tremendous sources of information out there. In fact, the government says that his colleagues had nicknamed him Octopussy, which is a James Bond film, because he had his tentacles deeply into so many different sources of information.

  • 10:17:34

    LATTMANAnd this is going to be a mirror case to the Rajaratnam trial. They're going to play 60 audio tapes, showing him trading on insider tips -- in this case, from lawyers. In fact, some top law firms -- Ropes & Gray, which is a very prominent law firm, two lawyers there have already pleaded guilty to passing on illegal tips about mergers and acquisitions to Goffer. And at least one of them is going to testify at the trial. So you're going to see a lot of the same stuff here, not as high-profile a guy as Rajaratnam, but, still, you know, an instance here where we're seeing more of the same.

  • 10:18:10

    REHMAnd we even heard about disposable cell phones?

  • 10:18:16

    LATTMANThat's right. So -- because of the fear of wiretaps and that the government could be tapping your cell phone, it now seems that the method of choice for communicating confidential information is prepaid cell phones because those are anonymous, and they can't really be tracked by the government. So...

  • 10:18:35

    REHMAll right. Peter Lattman, he's a reporter for The New York Times Deal Book who covered the trial of Raj Rajaratnam. Right back.

  • 10:20:03

    REHMWe're talking about the conviction last week of Galleon founder, Raj Rajaratnam. He became the 35th person convicted of insider trading. And joining us now by phone is Scott Friestad. He is associate director of the SEC's Division of Enforcement. Good morning to you, sir.

  • 10:20:30

    MR. SCOTT FRIESTADGood morning. Happy to be with you.

  • 10:20:32

    REHMThank you. Can you talk about the SEC's role in bringing about the charges against Rajaratnam and the others accused of insider trading?

  • 10:20:46

    FRIESTADSure. Before we begin, though, I have to give you a disclaimer, that my comments today are my own personal views...

  • 10:20:52


  • 10:20:53

    FRIESTAD...and not necessarily those of the commission or other staff here at the SEC.

  • 10:20:57

    REHMAll right, sir.

  • 10:20:59

    FRIESTADSure. And with respect to this case, I mean, the first thing I would say is give credit to the Department of Justice for prosecuting this case. They did a tremendous job and put on a very strong case against Mr. Rajaratnam, and we're all very pleased with the result. Talking about the SEC role, what I can tell you is, back in 2007, at the beginning, we were able to develop a compelling circumstantial case against Mr. Rajaratnam and others through what I would refer to as good old-fashioned detective work, including review of trading records, telephone calls and other information.

  • 10:21:37

    FRIESTADOnce we had done that, we referred the matter to the prosecutors in New York and then continued to work with them to help develop the case that you have seen play out in court over the past several weeks.

  • 10:21:48

    REHMBut help me to understand what it was that first attracted you to what he was doing. How far out in the mainstream did it seem?

  • 10:22:04

    FRIESTADWell, we've brought a number of these cases over the past several years. And so, in that respect, it was not different than some of them. And what I mean by that is that there are many of these situations that have involved similar misconduct. But what we noticed and what gave us a strong view that there was a compelling case to be brought against Mr. Rajaratnam was the repeat pattern of fortuitous trade that he had made...

  • 10:22:31


  • 10:22:32

    FRIESTAD...and the timing of those trades in advance of significant corporate earnings announcements or mergers of acquisitions announcement of transactions and other are very timely and significant trading that occurred. And our view was that that pattern was not luck or, you know, something that derived from his financial ability and analysis, that there was something improper that was the explanation.

  • 10:23:01

    FRIESTADAnd as we dug deeper, we developed some of the connections to other individuals who were the sources of that information. And that evidence continued to develop after we got the prosecutors involved in New York.

  • 10:23:15

    REHMNow, I understand that the Securities and Exchange Commission has only civil authority, that you cannot use wiretaps or other tools. How did you manage to get wiretaps involved?

  • 10:23:35

    FRIESTADWell, you're exactly right on that. We don't have criminal authority. We're only a civil law enforcement agency. Only the Department of Justice can prosecute people and put them in jail. That said, we frequently work closely with the criminal authorities during the course of our investigations and throughout the related criminal trials to help achieve those ends. In this case, what we can do and what we did on the front end was we can get access to trading records, to telephone records and other information.

  • 10:24:08

    FRIESTADThat puts some of the circumstantial -- gets some of the circumstantial evidence collected to help put that -- a case together. The wiretaps -- actually, it's important for people to understand that the FCC does not -- cannot conduct the wiretaps. And, in fact, we can't even have access to that information during the course of the investigation.

  • 10:24:31

    FRIESTADIn this case, to give you an example, we never learned -- we, the FCC never learned the content of the wiretaps until we got them from Mr. Rajaratnam himself during the course of civil discovery in the case that we filed against him. Up until that point in time, the only people who had access to that information were the FBI and the prosecutors in New York.

  • 10:24:54

    REHMInteresting. I understand that the -- as well as you do, that the SEC came under a lot of criticism after the Madoff scandal came to light. Did the SEC then toughen its whole approach to dealing with these kinds of issues?

  • 10:25:18

    FRIESTADWell, one of the things that events over the last couple of years have taught us is that there's an ongoing need to improve the way we operate. And since our chairman, Mary Shapiro, has arrived and our director of enforcement, Rob Khuzami, have arrived to the agency a little over two years ago, we've been doing that nonstop, trying to change our organizational structure, trying to think of new and better ways to conduct investigations within the Division of Enforcement. And we've taken a number of steps to improve the way we operate.

  • 10:25:54

    REHMDidn't you also initiate a cooperating witness program?

  • 10:26:02

    FRIESTADThat's -- the cooperation program is one of the key points that we've undertaken to try to improve things going forward, and that coupled with the whistleblower program, which you may have read about, our two initiatives that I think are going to have significant long-term benefits for the SEC. And in a nutshell, what both of those things will do is incentivize people to provide information about wrongdoing to the SEC and the Division of Enforcement at earlier points in time and create incentives for them to do that under circumstances where it's possible they might avoid prosecution themselves.

  • 10:26:48

    FRIESTADAnd with respect to the whistleblower program, even potentially receive financial bounties for providing that information to us. And we think that those two programs, collectively, will result in significant compelling leads for us to follow up on and pursue.

  • 10:27:07

    REHMSo how many investigations is the SEC pursuing now regarding insider trading?

  • 10:27:18

    FRIESTADWell, I can't give you an exact number of how many ongoing investigations we have. But I would tell you that, a typical year, we bring in the neighborhood of 50 or 60 enforcement actions that do involve insider trading and that many of them -- and, increasingly, over the past five years or so have involved cases like the Galleon case, which involved serial insider trading, that is repeat insider trading by groups of individuals in a significant number of stocks.

  • 10:27:57

    REHMAnd, Scott, finally, when you think about insider trading and the amounts of money amassed by people who engage in it, what does it mean for the ordinary investor? Does he or she get gypped out of the money that otherwise might come to that individual investor?

  • 10:28:25

    FRIESTADWell, I don't quite think about it that way precisely. But the way I think about it is that one of the basic principles that lies at the heart of our capital market system is that there is a single uniformed set of rules, and that that principle applies to everyone. There are no exceptions. It's important because it gives investors confidence that the markets are fair and that there's a level playing field.

  • 10:28:49

    FRIESTADOur view is that bringing cases like the one against Mr. Rajaratnam and others helps support investor confidence in the markets because they know that the SEC and other law enforcement agencies are out there aggressively and creatively pursuing that type of misconduct so that there is a sense of fairness in the markets. And we think that (word?) to all of their benefit.

  • 10:29:14

    REHMScott Friestad, he is associated director of the SEC's Division of Enforcement. Thank you so much for joining us.

  • 10:29:26

    FRIESTADSure. Happy to do it.

  • 10:29:28

    REHMThank you. And turning to you now, Peter Lattman, that same question, does money that insider traders achieve to accrue their own wealth, does that have a direct bearing on what individual investors achieve or not?

  • 10:29:55

    LATTMANWell, I appreciated Scott's comments, and I agree with them. I will say, you know, look, as a practical matter -- my father taught me this a long time ago -- every time somebody buys a stock, there's somebody selling a stock. So if you think about it, if Raj Rajaratnam or anyone else that's insider trading has material, nonpublic information that the rest of the investing public doesn't have, he's buying a stock, knowing that something is going to happen.

  • 10:30:24

    LATTMANSomeone is selling that stock to him, presuming they don't have that same amount of information, so it's really an unfair trade. So, in a sense, the public is losing out because he's, after all, buying that stock from someone, whether it's a mutual fund manager, an individual investor, who, if he had that same information, might not do the transaction. So there is, in some ways, a real practical loss for the general public when someone is insider trading.

  • 10:30:50

    LATTMANBut I think the broader issue that Scott touched on is the right one, which is, you know, there's a set of rules out there that everyone has to follow. And there really should be a more level playing field than if people have material, nonpublic information, it's a rigged game, and it's unfair.

  • 10:31:05

    REHMPeter Lattman, he's a reporter for The New York Times Deal Book who covered the trial of Raj Rajaratnam. And joining us now from Alexandria, Va., is white collar crime defense attorney and former federal prosecutor Sol Wisenberg. He's a partner with the law firm Barnes & Thornburg. Good morning to you, sir.

  • 10:31:36

    MR. SOLOMON WISENBERGGood morning, Diane.

  • 10:31:37

    REHMIn your own years as a federal prosecutor of white collar crimes, were white -- were wiretaps ever used?

  • 10:31:48

    WISENBERGWell, I never used the Title III wiretaps, which is what was used in the Rajaratnam trial. We did do consensual monitoring, where -- that's where you have an individual cooperating with the government, who makes a telephone -- a particular telephone call and tapes it. And that's okay because he's one party to the conversation who has consented. But back in those days, the '90s and the '80s, a Title III wire for a white collar case would be considered very, very rare.

  • 10:32:23

    REHMSo what is your instinct in regard to the use of wiretapping in this case?

  • 10:32:33

    WISENBERGWell, wiretapping is a little more common now in white collar cases. Of course, there's never been a major insider trading case with a Title III wiretap, like you had in Rajaratnam. So it's going to have tremendous deterrent effect, I think. But, keep in mind, Title III wiretaps can only deal with ongoing suspected criminal activity. You're not allowed to give a Title III wiretap for something that happened in the past.

  • 10:33:00

    WISENBERGSo it's uniquely situated to be used in insider trading cases. In order to even get a wiretap, there has to be what we call temporal specificity. You've got to connect suspect activity with a particular telephone line, and it has to have occurred within the last 30 days.

  • 10:33:20

    LATTMANIf I could just...

  • 10:33:21

    REHMNow, how do prosecutors actually feel about using them?

  • 10:33:27

    WISENBERGWell, I think, they see it as an effective tool, but they are kind of a pain in the neck because they're difficult to administer. You've got to make reports to the court every 15 days. Each wiretap is only good for 30 days. They're labor intensive. You've got to have agents listening in on the call and minimizing conversation, so that they don't listen to personal conversations or attorney-client conversations. So there may be a certain kind of prosecutor, federal prosecutor, who says, it's just not worth it.

  • 10:33:55


  • 10:33:56

    WISENBERGAlso, if you screw up and do it wrong, you can get lambasted, like the Rajaratnam prosecutors were for some of the things they did. So, you know, it is a useful tool. Obviously, I think they're very happy they used it in his trial, but there could be all kinds of reasons why you just don't want to mess with it.

  • 10:34:15

    REHMBut I would think it speeds up things if you do it right.

  • 10:34:22

    WISENBERGWell, it gives you tremendous evidence...

  • 10:34:23


  • 10:34:23

    WISENBERG...like it did in Rajaratnam's...

  • 10:34:24


  • 10:34:25

    WISENBERG...trial, the kind of evidence you don't normally get when people are basically, literally, engaging in the crime as you listen to it. Or they're saying -- and this didn't necessarily happen in Rajaratnam's case, but they're saying -- they're speaking in whispers and saying, don't tell anybody this or saying, I just destroyed my hard drive. You know, that's, that's gold. That's dynamite…

  • 10:34:47


  • 10:34:48

    WISENBERG...in front of a jury. And it's very clear from conversations with one of the jurors that they listened to that, and it had an effect on them.

  • 10:34:54

    REHMDo you expect this strategy, this approach to be used more in the future?

  • 10:35:02

    WISENBERGAbsolutely. It'll not be the last time. And, like I said, it'll have a very chilling deterrent effect on this kind of activity.

  • 10:35:12

    REHMJoining us from Alexandria, Va., former federal prosecutor Sol Wisenberg. He's a partner with the law firm Barnes & Thornburg. Thank you so much for joining us.

  • 10:35:28

    WISENBERGThank you.

  • 10:35:29

    REHMAnd you're listening to "The Diane Rehm Show." Peter, before you had the use of wiretaps, how were these cases prosecuted?

  • 10:35:43

    LATTMANWell, they were prosecuted largely on circumstantial evidence, which was featured in the Rajaratnam trial, too. So what that means is you would basically have phone records where you would see -- let's use Rajaratnam as an example. You would see him calling somebody at a certain time or somebody call him in a certain time, and then, shortly after that, you would have trading records.

  • 10:36:07

    LATTMANAnd you would see that, five minutes after that phone call, he bought stock in a particular, you know, company that there was information passed on. And based on that circumstantial evidence, the phone records and the trading records, the government would build a case. And, of course, in the first instance, they would see that there was suspicious trading activity, which was alluded to earlier in this conversation.

  • 10:36:29

    LATTMANSo circumstantial evidence isn't nearly as powerful, right, as playing an audio tape before a jury where you hear Rajaratnam talking about secret corporate information with informants. So it's a lot more powerful than the circumstantial evidence.

  • 10:36:44

    REHMCan you give us any quotes of what he would say that would very specifically alert prosecutors?

  • 10:36:56

    LATTMANOh, yeah. So it was pretty brazen. In some cases, you would hear him tell a fellow trader that a -- well, he would say -- in this case, he said, a director of Goldman Sachs told me that Goldman Sachs is going to lose $2.50 next quarter instead of $2 next quarter. And that's hugely valuable information to a trader. In another case, a consultant who he had known for a long time called him and said, one of my clients is about to do a multibillion-dollar deal. They've shaken hands. You can buy the stock.

  • 10:37:32

    REHMWow. Peter Lattman, he is a reporter for The New York Times Deal Book. We'll take a short break. When we come back, time for your calls.

  • 10:40:03

    REHMAnd before we open the phones, continue our discussion about insider trading, I would like to welcome our new affiliate listeners in Houston, Texas, on KUHF. We're delighted to have you join us in the weekday broadcast. And, now, let's go first to Indianapolis and to Phillip. Good morning to you.

  • 10:40:39

    PHILLIPGood morning.

  • 10:40:39

    REHMHi, there.

  • 10:40:40

    PHILLIPIt's interesting that your last guest mentioned Goldman Sachs because my question is not so much about the Rajaratnam case. It is about if, in fact, the SEC and Justice Department are being more proactive, why are we seeing so little activity with regard to the activities of Goldman Sachs, specifically with bundling CDOs with the subprime mortgages, counting those to their clients and at the same time ensuring themselves against losses?

  • 10:41:21

    PHILLIPThey were betting both sides of the trade.

  • 10:41:23

    REHMYep, yep.

  • 10:41:24

    PHILLIPAnd there's so little of that. And I wonder if it's because they are so closely tied to every administration in Washington in some fashion.

  • 10:41:33


  • 10:41:34

    MCKOWNWell, actually, of course, the SEC did bring a very large case against Goldman Sachs. And there have been a number of actions brought related to the financial crisis. Also, we should not assume that they're done investigating and bringing cases in that area.

  • 10:41:48

    REHMPeter, can you comment?

  • 10:41:51

    LATTMANYeah, I would agree with that. Goldman settled with the SEC for $550 million. But the gentleman from Indianapolis' comment really echoes -- even if you read the reader comments on The New York Times website, a lot of readers think, like, hey, this insider trading stuff is a sideshow. Let's focus on the main actors that caused the financial crisis. And, look, there have been a lot of civil cases brought -- very few criminal cases. The investigations continue, and we'll see what happens. But his comments really echo, I think, a lot of what people are thinking out there.

  • 10:42:21

    REHMAll right. To Indianapolis, good morning, Bill. Bill, are you there? Okay, I guess not. To Southern Pines, N.C. Good morning, Jeff.

  • 10:42:39

    JEFFGood morning, Diane. How are you?

  • 10:42:41

    REHMFine, thanks.

  • 10:42:43

    JEFFHello to your panel. I'd like to just make a brief statement. I've been under federal regulations in the transportation industry for years, and I really feel that there should be no holds barred on the prosecution of these people. In the industry that I'm in, I'm only a small portion of the transportation industry. And I have guidelines that I had to follow -- I have to follow. Likewise, they had guidelines they had to follow.

  • 10:43:18

    JEFFAnd they should -- there should be no holds barred whatsoever on prosecution of those people. And I hope that they can wiretap the daylights out of them, and the more the better because they've done such a horrific...

  • 10:43:35


  • 10:43:37

    LATTMANYeah, I mean, I think what's he's saying is what the prosecutors say after they bring these charges, which is we want to level the playing field. We want to make sure everyone's following the rules. And that's what these cases are largely about. So he was talking about, you know, transportation regulations. But, I think, a lot of people feel out there that the purpose of these cases is, really, to bring people to justice who aren't behaving properly.

  • 10:44:02

    REHMNow, here's an email from David, who said, "The panelist who said no one died from insider trading is simply not accurate. What happens on Wall Street affects the pension funds, investments, retirement budgets of the formerly working public. Every day, there are suicides, elderly dying from starvation, nonexistent health care. People are living on dog food and other American embarrassments.

  • 10:44:38

    REHM"Those who worked at manufacturing jobs receive pennies on the dollar when large corporations do not fund their agreed retirement accounts. And that affects lots of average Joes and Marys." Joan.

  • 10:44:57

    MCKOWNWell, that's absolutely true. And, of course, insider trading is a problem and directly affects the integrity of the markets. A lot of what this person's talking about, of course, is more related, as Peter's talked about, the financial crisis and issues, such as that and corporations being honest about their financials. So I do think we need to think carefully before the government intrudes and listens in on our conversations. Is it really something that they should be listening in on? And so wiretapping for white collar crimes, I think, is a question.

  • 10:45:29


  • 10:45:31

    LATTMANWell, I think the government would say here, you know, the ends justify the means. They listened in for nine months to Rajaratman's phone. And the evidence that they turned up was really nothing short of stunning, time and again, just trading in material, nonpublic information, and that was over a very short period of time. So to sort of root this stuff out, it seems like wiretaps have been a very effective tool. And, of course, you do need to balance privacy issues here. But it seems to me that the government is really emboldened by the result of this case.

  • 10:46:04

    MCKOWNOh, there's no question of that.

  • 10:46:05

    LATTMANAnd -- yeah, and I wouldn't be surprised to, you know -- to see them continue to use these means to ferret out with wrongdoing on trading floors.

  • 10:46:15

    REHMNow, here's an email from Oliver who says, "Please discuss the fact that, while this is illegal and unfair, not a single person lost a penny as a result of insider trades. The market as a whole may be a victim. No individual is a victim." Do you agree with that, Peter?

  • 10:46:41

    LATTMANLook, insider trading is a very complicated crime. You know, after all, the concept, even, of material nonpublic information isn't necessarily intuitive. And as I tried to explain before, you could really see a scenario where someone is losing money because the person on the other side of the trade possesses information that they don't. But his comment is a legitimate one.

  • 10:47:03

    LATTMANI mean, people think that -- you know, is insider trading -- should this be the really, you know, A1 focus of the Justice Department when there's so many other things going on out there? And, look, you know, there's finite resources in the government, so you have to pick and choose your priorities...

  • 10:47:19


  • 10:47:20

    LATTMAN...and what you're going to prosecute and what you're not going to prosecute. And, here, they think there's a real problem, so they're going after it.

  • 10:47:25

    REHMAt the same time, here's something from Steven, who says, "I believe anyone who's guilty of insider trading is a criminal. But I do not believe that sending them to jail, where taxpayers will have to pay to care for them, is a good idea. The thing that would hurt the individuals most and, therefore, would be a deterrent to others is to take away their money, force them to obtain a regular job and live as such, five to 10 years, make them do charity work, take away all of their ill-gotten assets as they try to hide or protect money with members of the family." How do you feel about that, Joan?

  • 10:48:20

    MCKOWNWell, of course, the government will take away...

  • 10:48:23

    REHMDo that.

  • 10:48:23

    MCKOWNThey will take away, actually, not just the ill-gotten gains, the millions of dollars that Peter discussed before. But in insider trading, actually, the SEC can receive penalties up to three times the amount of the ill-gotten gain.

  • 10:48:37

    REHMBut what about Bernie Madoff's wife? Does she still have money?

  • 10:48:44

    MCKOWNMy understanding is that she gave away substantial amounts of it. She does have some money. And, of course, that was a deal that was cut to be able to get the money back, as I understand it, more quickly for the defrauded investors to avoid litigation.

  • 10:48:56

    REHMI see. All right. To Dallas, Texas. Elijah, good morning.

  • 10:49:03

    ELIJAHGood morning. My question was actually in reference to the wiretaps and some comments touched on it before. But my question was, when questioning the immorality of using wiretaps, people's livelihoods are actually on the line and they have to take a cut in the quality of life in order -- I mean, just because of one person's actions. And so my question is what are the opinion of the guests on the fact that wiretaps could be used to actually save the quality of people's lives based off of, you know, not having -- them not having to change the entire way they live off of one's person's decision, putting them in the poorhouse?

  • 10:49:40

    REHMI'm not quite sure I get that. Peter, do you understand that?

  • 10:49:45

    LATTMANI actually don't.

  • 10:49:47

    ELIJAHWell, I'm sorry. Let me rephrase. The questioning of the morality of using a wiretap.

  • 10:49:55


  • 10:49:56

    ELIJAHMy question was actually in reference to what do they think about the fact that one person's decisions -- i.e. the people who trade these stocks and use this insider trading -- can affect the lives of other people? Do you believe we should be able to use wiretaps if it's going to save other people's quality of life?

  • 10:50:15

    REHMAll right. Peter.

  • 10:50:17

    LATTMANYeah, well, I'll answer the question slightly differently. I think Sol, earlier, explained it very well. Traditionally, you can do consensual recording where you can get someone to record a conversation on the government's behalf. And, in fact, that's exactly what happened here. The government flipped an informant who recorded a conversation with Rajaratnam, which is in more traditional investigative means.

  • 10:50:42

    LATTMANAnd from that conversation, they said to themselves, hey, it really looks like this guy Rajaratnam is engaging in insider trading. So with that consensual recording, they went to a judge and asked for an application to wiretap Rajaratnam's phone and got it granted. So it's a real process that the government has to follow. And Sol referred to these Article 3 wiretaps -- that's a federal law that allows for the wiretapping of the public's phones.

  • 10:51:09

    LATTMANSo you have to follow the rules very closely. There are privacy issues, and they're going to keep coming up as the government continues to use these means to investigate.

  • 10:51:18

    REHMAll right. To Orlean, Va. Good morning, Mark.

  • 10:51:23

    MARKGood morning. I'm calling about just one example of how insider trading contributed directly to the financial meltdown in 2008, specifically the case of Bear Stearns. Now, I heard about this by -- it was an author that was on the Jon Stewart show. And I'm not a financial expert, so my terms or terminology may be somewhat inaccurate. But, essentially, what it amounts to is this, is that Bear Stearns and other large investment banks need to have a daily flow underwritten by a large lending institution.

  • 10:51:54

    MARKAnd I can't remember the name of the specific institution. But what happened was Bear Stearns, every day, had to renew his line of credit. And he would essentially get, you know, several billion dollars underwritten in their account to cover their daily trades. What happened was the investment bank or lending institution that was responsible for renewing this contract every day with Bear Stearns denied it one evening, you know, after hours.

  • 10:52:22

    MARKAnd, immediately, or, apparently, simultaneously, they (word?) purchased millions of dollars of shorts, knowing that Bear Stearns would go bankrupt as a result of their withholding of the daily flow funds, that Bear Stearns would need to (sounds like) stay solid.

  • 10:52:39

    REHMAll right. Peter, do you know about this?

  • 10:52:42

    LATTMANWell, yeah, I'm not sure what that has to do with insider trading. But, in 2008, when the financial crisis really reached its peak, a lot of these investment banks, they basically live off of daily funding, you know, from large -- other large financial institutions that cover their trades and give them liquidity each day. And the pulling of that money is what brought down Bear Stearns and then, you know, later that year, Lehman Brothers.

  • 10:53:09

    LATTMANSo I'm not sure of the insider trading connection, but he's identifying what, you know, became a serious problem in the financial markets back then.

  • 10:53:16

    REHMAnd you're listening to "The Diane Rehm Show." Now, let's go to Bay City, Mich. Good morning, Dan.

  • 10:53:26

    DANGood morning. I think that any means that they can use to catch these criminals -- and these people are criminals. They're no different than the Mafia. They cheat. And I heard the number of 35 people who have been -- already convicted. There's probably 35,000 informants and people in these greedy corporations that -- and they are, you know, just greedy, corrupt people.

  • 10:53:54

    DANBut anyway, I don't think that we should allow any further thought of putting our government money into the stock market basically to run our Social Security or our Medicare or any other government functions because it's too easy to manipulate these markets. And that's just what these guys do. They manipulate markets. They have billions of dollars in funds, and I just don't think it should ever be thought of again by Paul Ryan or any other of the other Republicans. Thank you.

  • 10:54:23

    REHMAll right. Thanks for calling. Joan, any comment?

  • 10:54:26

    MCKOWNWell, again, this is why -- this is exactly why the U.S. Attorney's Office and the SEC is so focused on this issue because they realize they don't want people so concerned that they don't invest in the stock market.

  • 10:54:38

    REHMAnd, unfortunately, I mean, so much trust...

  • 10:54:43


  • 10:54:44

    REHM...has been lost...

  • 10:54:45

    MCKOWNYes, it has.

  • 10:54:45

    REHM...in Wall Street. How far back does that trust loss go, Joan?

  • 10:54:52

    MCKOWNWell, the Congress created the laws. The penalties that I was talking about came about in the mid-'80s. And that was another time period where there was an explosion of cases in the insider trading area. The laws were changed, so that it was easier for the government to get information from abroad. So it's something that has ebbed and flowed. I would say it's ebbed and flowed based on whether there's large mergers and acquisitions taking place, whether there's basically interesting information that is available that traders are interested in.

  • 10:55:21

    REHMAnd, finally, here's an email from Chris in Greensboro, N.C. He says, "I know someone who worked at NASDAQ in internal investigations. He bragged about his technique for insider trading, how he learned it from those who got caught and that 'it's easy and everyone does it.' He recently retired with millions." Chris goes on to say, "It makes me sick. I'm sure other honest citizens, when hearing about this, feel it should be generally overlooked because that isn't what brought down our financial industry.

  • 10:56:04

    REHM"But crime is crime, blue or white. The rest of us pay indirectly for this attitude." Peter, any final comment?

  • 10:56:16

    LATTMANWell, I think Scott Friestad of the SEC might be contacting that email -- emailer for his friend's phone number. But, look, there is a perception out there that it is widespread. And, as Joan just mentioned, this is exactly why the U.S. Attorney and the SEC are pursuing these crimes so aggressively, you know, to level the playing field and to give the public a perception that the government does have their back in this area.

  • 10:56:41

    REHMAll right. That's Peter Lattman. He's a reporter for The New York Times Deal Book. Joan McKown is a partner in the law firm Jones Day, former chief counsel of the SEC's Enforcement Division. Thank you both.

  • 10:57:00

    MCKOWNThank you.

  • 10:57:01

    REHMThanks for listening, all. I'm Diane Rehm.

  • 10:57:04

    ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Susan Nabors, Denise Couture, Monique Nazareth and Sarah Ashworth. The engineer is Tobey Schreiner. Dorie Anisman answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our email address is drshow@wamu.org. And we're on Facebook and Twitter. This program comes to you from American University in Washington. This is NPR.

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