By Matthew Goldstein and Jennifer Ablan
Nov 26 (Reuters) - The FBI sees social media as a potential
breeding ground for securities fraud, and has agents scouring
Twitter and Facebook for tips, according to two top agents
overseeing a long-running investigation into insider trading in
the $2 trillion hedge fund industry.
April Brooks, a special agent in charge of the New York
field office of the Federal Bureau of Investigation, and David
Chaves, a supervisory agent, said it is hard to predict the next
wave of securities fraud, but they add that it will have a lot
to do with advances in technology and social media.
"I will tell you technology will play a huge part, social
media, Twitter. Any kind of technology that is new and doesn't
exist today, if there is any way to exploit it, these
individuals will exploit it," Brooks told Reuters TV in an
interview for the Reuters Investment Outlook 2013 Summit.
Brooks and Chaves oversee what the FBI calls "Operation
Perfect Hedge," which has led to more than 60 convictions of
hedge fund traders, analysts and industry consultants.
Last Tuesday, a day after the Reuters TV interview, the
government charged a former employee of Steven A. Cohen's SAC
Capital, Mathew Martoma, with a $276 million insider trading
scheme that prosecutors called "the most lucrative" ever.
While Cohen, whose $14 billion hedge fund is one of the most
successful and best known on Wall Street, was not charged with
any wrongdoing, the complaint says he signed off on trades in
Elan Corp and Wyeth in July 2008 ahead of bad news about
a clinical drug trial the companies were working on.
Brooks and Chaves gave no hints about the SAC case in the
interview, and declined to talk about active investigations.
"Some view insider trading as reaching this crescendo, and
we have reached a top. I would suggest we have not," Chaves
INVESTORS EMBRACE TWITTER
Hedge funds, big institutional investors and investment
research firms, such as Muddy Waters (@muddywatersre), have
embraced Twitter as a platform for sharing their ideas and
On Nov. 20, PIMCO's Bill Gross tweeted via @PIMCO: "Bernanke
confirms PIMCO's New Normal after 3 years! 2% economic potential
at least for a time. Probably lower & longer Mr. Chairman."
Gross was referring to Ben Bernanke, chairman of the Federal
Reserve, and PIMCO's portfolio positioning for what he calls a
"New Normal" developed world economy - 2.0 percent real growth
and 2 percent inflation.
"People have used Twitter as a powerful distribution
mechanism, occasionally with meaningful market impact," said
independent analyst Daniel Yu, who is an avid user of Twitter
under the handle @LongShortTrader.
Studies and research reports have shown that Twitter can be
used as an early indicator of changing investor sentiment around
particular stocks and commodities. This allows Twitter data to
be used to predict price fluctuations in the market.
One report, authored by academics Johan Bollen, Huina Mao
and Xiao-Jun Zeng, says the degree of "calmness" of the
Twitterverse can predict - with 87.6 percent accuracy - how the
Dow Jones industrial average will move two to six days ahead of
Some hedge funds and other investors have criticized U.S.
authorities for cracking down on insider trading to distract
attention from the fact that law enforcement has not been able
to bring any prosecutions against Wall Street bankers over the
Brooks and Chaves acknowledged the criticism. They said
there is a desire to prosecute, but the laws are not there to
criminalize actions that some think deserve to be punished.
"I wouldn't say we have missed opportunities," Brooks said,
commenting on the 2008 financial crisis. "There may be others
who are responsible, but who don't necessarily violate the
The two agents, who both work in the securities division of
the New York branch of the FBI, said that when they meet with
people on Wall Street, they explain there is no vendetta or
campaign against the hedge fund industry. The insider trading
investigation is simply part of an effort to make the markets
more fair for everybody.
"The message is we are out there, and we are going to
continue to be out there," Brooks said. "This type of violation,
this type of crime impacts everyone."
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