We all wonder why Wall Street pros make so much more money than everyone else. But investment bankers are pikers compared to hedge fund managers, who make their money by taking a small cut of the assets they attract as well as a larger slice of the profits they earn in a given year. The higher their profits, the more money they make. That gives them a huge incentive to take risks and -- in some cases -- engage in illegal insider-trading.

Now, a probe by Federal investigators is indicating one way they might be able to find those inside tips. The Wall Street Journal reports that a three-year Federal investigation is about to culminate in indictments related to hedge funds using so-called expert networks -- research firms that specialize in finding executives who will dish on their industry to investors for a few hundred dollars an hour. In this investigation, the expert networks may have helped investors get inside information about health care mergers before they had been publicly announced.

Focus on Health Care Deals

Details are fairly sketchy at this point but the investigators are collecting evidence to show courts that the hedge funds paid experts who tipped them off to pending mergers, the Journal reports. Those investigators will have to prove that the hedge funds then bought shares in the targets before the mergers were announced.

Investigators are also looking into whether investment bankers tipped off investors about pending mergers. Specifically, the Journal reports that Goldman Sachs (GS) is being investigated to find out whether its health care bankers tipped off some investors -- possibly hedge funds -- to pending health care mergers.

Why would the bankers do this? No answers are available but there are two possibilities that come to mind. The first is that the bankers could have had investments in the hedge funds. The second is that their bosses asked them to do it in order to boost their ties to the hedge funds that do their trading through Goldman.

Remember Galleon?

If this all sounds familiar, it should. That's because Raj Rajaratnam, who ran a $3.7 billion hedge fund, Galleon Group, was previously indicted for insider trading. As I posted on Daily Finance in April 2010, Galleon allegedly used inside information to make money trading in technology and other stocks. He is to go on trial in 2011.

The investigation dragged down a director from the international consulting firm, McKinsey & Co., Anil Kumar, as well as Rajat Gupta, a Goldman director who had previously served as McKinsey's worldwide managing director. This raised questions about whether the world's most elite consulting firm and its premier investment bank were profiting from their inside knowledge of mergers -- using hedge funds as the conduit for their trading.

The latest investigation is also pulling in Todd Deutsch, a Galleon Group alumnus who left in 2008 to go out on his own. Deutsch, "has specialized in health care and technology stocks," according to the Journal.

If the Journal's reporting is accurate, the coming weeks could yield some stunning revelations about widespread insider trading. This does nothing to boost the public's confidence that their retirement money is in good hands.


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hrharkgr

A lot of this info I already knew. Is anyone surprised really? Has anyone here read about Highfields Capital Management? Highfields' investment funds have over $10 Billion in net capital invested worldwide in public and private companies across a wide variety of industries. https://www.highfieldscapital.com/Default.aspx

November 24 2010 at 9:09 AM Report abuse rate up rate down Reply
cross61roads

Their are crooks on Wall St????????????? Say it ain't so..........How could this be?????????

November 23 2010 at 9:46 PM Report abuse +2 rate up rate down Reply
crimson00king

Americans we must agree on 1 issue and that is NO TAX BREAKS FOR THE RICH NO EXTENTIONS NO MILLION DOLLAR CUT OFF. People such as the Wallstreet thieves, the drug addicted Hollywood brats, Mel Gibson Charlie Sheen Linsay Lohan Paris Hilton on and on. The Real Housewives of every major city in America flaunting their wealth on T.V. Please take a few mins. of your time and contact the White House your senators and congressmen and tell them NO TAX BREAKS FOR THE RICH they have had them for 10 years. Still no jobs. E- mail or call them please time is running out. Nov. 30 they will meet on the issue.

November 22 2010 at 2:30 PM Report abuse +5 rate up rate down Reply
gulfvilla

Is it illegal (like insider trading) to run a hedge fund and at the same time also be a director of a public company where you buy and sell that company's (stock option acquired)shares ?

November 22 2010 at 8:08 AM Report abuse +2 rate up rate down Reply
joaquinabco

MADOFF'S FRIENDS DO WHAT?

November 22 2010 at 3:57 AM Report abuse +3 rate up rate down Reply
Richard

Whatever happened to honesty and integrity? Somehow being fast and slick has replaced the old values.

November 21 2010 at 8:39 PM Report abuse +6 rate up rate down Reply