Photo: Vanity Fair
The unfolding insider-trading investigation has now engulfed not just a few powerful hedge funds, but massive mutual funds like Wellington, Janus, and MFS Global. And given that the Feds are still raiding offices and issuing subpoenas, the investigation is likely far from a conclusion.
That sounds scary, but it’s actually good news for Wall Street.
If the powers-that-be decide in hindsight that a widespread research practice that everyone was using should have been illegal, there will be safety in numbers. Ultimately, the firms will just have to pay some money and promise not to engage in the practice again.
That’s not to say that there won’t be some fireworks and casualties along the way. The three smaller hedge funds that got raided two days ago, for example–Loch, Level Global, and Diamondback–are almost certainly toast, as are any “expert networks” named in the investigations (Here’s a who’s who of everyone involved).
Big hedge-fund investors like pension funds are a conservative lot, and they don’t risking ridicule and scandal by doing business with funds and firms that are under federal investigation. So look for the hedge funds to pretend for a while that everything is fine and then quietly announce that they’re returning investor capital and winding down.
(Don’t cry for their staffs, though. Except for the handful of folks who have the misfortune to get sued or charged personally, they’ll just start new firms.)
SAC Capital and Citadel, two massive hedge funds that have been hit with sub-poenas, are probably strong enough to weather the storm–unless the government actually finds something scandalous that they were directly involved in. These firms have many funds and businesses, and they should be able to blame any transgressions on the usual “bad apples” and go on their way.
Mixed in with the general use of “expert networks” and “channel checks,” of course, there will undoubtedly have been a couple instances of bona fide insider trading, which will lead to theatrical press conferences and perp walks. But those will be few and far between.
In short, the huge insider trading investigation is now shaping up to be a typical Wall Street scandal: loud, outrage-inducing, but ultimately meaningless.
Prosecutors will express outrage, firms will issue denials and vow to defend themselves, the press will slam the un-level playing field, and Congress will hold hearings, and everyone will conclude that Wall Street will never be the same again.
And then, a few months later, all the firms will settle and some disclosure and rule language will be changed, and it will be business as usual again.