Dunkin Donuts
“And what we did was approach them in places like Dunkin’ Donuts, where our team knew exactly how they took their coffee …” Getty Images/Joe Raedle


When the FBI wants to get a hedge fund portfolio manager to be a cooperating witness in an insider-trading case, they’ll literally follow that person everywhere, according to FBI Special Agent David Chaves.

Basically, the FBI learns how you take your coffee, what you do in the gym, and whom you’re sleeping with.

On Thursday evening, Chaves gave a presentation on insider trading at an event hosted by the New York Hedge Fund Round Table at the Penn Club of New York.

Since 2009, the government has been cracking down on insider trading in the hedge fund industry with dozens of arrests and convictions made.

Finding a cooperating witness has been essential to many of those cases.

A cooperating witness is someone who has also committed a crime. The FBI approaches this individual and says if they wear a wire, cooperate, and testify against others, they along with the US Attorney’s office will submit a letter to the court explaining how that person helped in the investigation when it’s time for their sentencing.

To find these people, the FBI has partnered with the Securities and Exchange Commission. Together, they look for traders who seemingly guessed right over the last few years on mergers and acquisitions, earnings, or good or bad news affecting a company’s stock.

“Let’s take a look at those people — are they the best traders in the world or are they cheating?”

The FBI would then examine bank records, trading records, and phone records. They’d look for phone calls with a company insider and then see if it matched up with the timing of a trade in that company’s stock.

Once they know they have someone, they’d follow that person for months at a time. It’s important that they gather intelligence to make sure they have the leverage to get them to cooperate. They can’t afford to have them not cooperate and then go back to the hedge fund and sound the alarm that the FBI is onto them.

Here’s how Chaves said it works:

I could tell you that we would watch these people put their kids on the school bus every morning, watch them drive to work, follow them, get on the subway with them, get on the train with them, follow them to work, watch them at the office, watch them work out at gyms — gyms that we work out in so that we could hear, listen to what was going on, who they talked to. We would see them after work, meeting a drug dealer, meeting an escort, meeting a girlfriend. We knew more about them, certainly more than their wives knew about them.

And we waited for the right opportunity. And what we did was approach them in places like Dunkin’ Donuts where our team knew exactly how they took their coffee. So when they got in the line and it was their turn to order, we’d just get in front of them and say, “Oh we’re buying today. He takes three sugars and a cream.” Hand that coffee over to them and now they are really off guard.

We’d sit them down. We’d say, “That’s the door and you can walk out that door right now because you’re not under arrest, but let me tell you before you do that, that this is what you’ve been doing in your professional life, this is what you’ve been doing in your personal life. And again, you can walk out the door, but in a few weeks you’re going to hear a pounding at your door at 6 a.m., the anointed time the FBI arrests people, and your opportunity to cooperate will be no longer. However, pick up the phone right now and call this insider you’ve been talking to and just talk about that last deal you did and talk about what’s on the horizon and we’re going to record that call.”

Nine times out of 10 that’s exactly what they do, Chaves said.

As reported by Business Insider