The past seven years of Operation Perfect Hedge have been a “whirlwind,” said David Chaves, Securities Program Coordinator of the Federal Bureau of Investigation. He was the third speaker in the four-part webinar panel on March 11, 2014, “Fixing the Financial Industry’s Broken Windows,” sponsored by GARP.
The undercover operation was born in 2007, amid the confluence of several factors that produced the financial crisis. At the time, there were a couple of “pump and dump” schemes but the FBI “couldn’t put anyone in,” Chaves said. Two individuals were identified by the Securities and Exchange Commission through market analysis. “Those two people cooperated and led to catching others.”
Chaves said that agents spent months in full-day surveillance. It required “a lot of effort on the front end to win these people over.” The FBI used computer-based tools to sift through data to find “aberrational” trading and relationships.
Since then, the FBI in its undercover Operation Perfect Hedge has gone on to other cases, resulting in charges of insider trading against 83 individuals and 4 entities.
“You will be wiring up against friends and family,” the cooperators are advised. Once wired, they are instructed to engage in conversations about insider trading schemes.
In order to present the evidence, Chaves said, “we attempt to show the court we have advanced the case as much as possible through other means—such as surveillance and record review—but still needed to do a wiretap.” Efforts to throw out Title 3 material have been “largely unsuccessful,” he said, referring to the capability of the FBI to gather information on individuals which would normally be protected under the US Constitution through the use of FISA, Title 3 monitoring.
All told, about fifty people have pled out. Chaves said it has been “worthwhile” for cooperators, when the time comes to sentencing. He noted that only two cooperators have gone to jail—one was an attorney, and one was a recidivist.
Chaves emphasized that, by and large, markets are good and function well. Still, “there’s lots going on, because greed drives the markets.” He estimated there was “1 to 2 percent aberrational behaviour, no matter what sector you look at.” ª