A number of new ( to me, anyway) pieces of information about the current FBI/SEC insider trading investigation have emerged over the past few days.  They are:

1.  Many commentators have noted that the investigation resembles much more closely an FBI operation against organized crime than the “usual” kind of SEC action.  The latter case typically has involved followup from red flags that emerge from SEC monitoring of trading patterns in individual stocks.

In this case, in contrast, the investigation has apparently been going on for three years, involves the FBI, includes wiretapping, and seeks criminal penalties.

No one I’m aware of has publicly drawn an obvious inference from this behavior, though.  If the focus of this probe is organized criminal enterprises, it seems to me that the government will be seeking, or at least threatening to seek, penalties under the Racketeer Influenced and Corrupt Organizations (RICO) Act of 1970.

Under RICO, which requires that prosecutors establish a pattern (meaning at least two acts) of illegal activity, those found guilty can be sentenced to twenty years in prison for each racketeering act and fined $25,000.  They can also be sued in civil court by those they have wronged for triple damages.  Defendants’ assets can be frozen prior to trial (making it hard to pay your lawyer).  The government’s reach is also extended to include all a person’s assets, not just those connected with the legal entity where a crime has occurred.  In other words, if you’ve traded in insider information as an agent of a corporation or partnership, your house, your bank accounts, your art collection, your cars…are all at risk, not just corporate or partnership interests.

RICO has a history of being used in combatting financial markets crimes.  Corrupt junk bond king Michael Milken was indicted under RICO in 1989.  Drexel Burnham Lambert, the firm Milken worked for, was threatened with a RICO indictment as well.  Both pled guilty to lesser charges.

I think RICO is the next shoe to drop.

2.  Former SEC head, Harvey Pitt, has been making the rounds of financial TV shows giving his opinion about what the FBI/SEC are doing.  The most interesting point he makes, I think, is on CNBC, where he points out that this investigation can’t involve a gray area that may, or may, not be insider trading.  For the resources involved in this case, and given all the publicity the agencies have generated, it must concern clearly illegal activity.  (Mr. Pitt says this around minute 3:10 of the CNBC interview.)

Points Mr. Pitt makes in other interviews:  this action is focussed on hedge funds and comes as a result of authority explicitly granted to the SEC by the Dodd-Frank Act.

3.  Don Ching Trang Chu, an employee at  a California-based “expert network”

firm, Primary Global Research, was arrested by the FBI on November

24th and charged with conspiring to distribute inside information.  The way Mr.

Chu’s business is described in the US Attorney’s press release and by

Bloomberg among others, it seems to have consisted in large part in finding

compliant middle-level employees in technology companies.  These

employees would disclose company operating results, sometimes in great detail, to

hedge funds some hours in advance of their being made public in return for money.

In a narrow sense, for a long-term investor the question of whether a company’s

short-term results are 1% higher or lower than the Wall Street

consensus is of little consequence.  The larger issue, however, is that the

perception that monied interests can rig the game in even one aspect can

undermine the public’s confidence in the markets–thereby delivering lower price

earnings multiples for everyone.

And of course, a sheriff must fear that if everyone believes he’s asleep on the job

he’ll be thrown out office and replaced.

This story will likely get more interesting as it unfolds.