Phone Calls Can Get You Caught Insider Trading

The insider trading prosecution of Raj Rajaratnam was centered around phone calls. Prosecutors were able to get a recording of those calls. Can you get a conviction merely by tying phone calls to trades, without knowing the content of the calls? The Securities and Exchange Commission is hoping that old-fashioned phone call logs will be enough.

In bringing an insider trading case against John Femenia and group of his friends, the SEC merely lays out a series of trades made after Femenia called his friends. Pursuant to the complaint, Femenia was the source of information based on his position in the Investment Bank Group of Wells Fargo Securities.  Femenia and his friends have not had a chance to publicly respond to the charges, so I just looking at what the SEC is saying and why the SEC thinks there is enough evidence for insider trading charges.

Femenia Tips Wens Who Trades on the Inside Information.
96. Prior to May 27, 2010, Wens had no history of trading in ATC.
97. On May 27,2010 at approximately 12:04 a.m., Femenia called Wens. The call lasted approximately 32 minutes.
99. On May 27,2010 at approximately 9:31a.m., Wens made his first purchase of ATC in a TD Ameritrade brokerage account.
100. Between May 27,2010 and June 29,2010, Wens bought thousands ofATC shares. During this time  period, Wens exchanged frequent telephone calls with Femenia, including calls often on the same day or the days before the trading in A TC securities.

Wells Fargo provided financing to GENCO to help in its acquisition of ATC. The complaint goes on and on linking phone calls to the times the group made trades.

The complaint charges Femenia with knowledge of the underlying capital transaction, but does not link it to specific pieces of information or internal emails. Similarly, the SEC does not have recordings of the phone calls. (At least Femenia and his group were smarter than these guys who communicated about insider trading on internal IM that gets archived.)

Will it be enough?


Image of a 1896 Telephone is from Wikimedia