Financial crime is not limited to bank robbers and charlatans. Today’s criminal may be found sitting behind a glossy boardroom table or on the internet. As a due diligence investigator, I am hired by clients who suspect financial malfeasance from within their company or from their competitors. There are varying levels of intensity in due diligence investigations. On one hand, you can check out someone’s Facebook page or LinkedIn profile and get a sense of who they portray themselves to be. On the other hand, you can spend tens of thousands of dollars on a battalion of investigators to ferret out every last bit of information available.

After twenty years of conducting both types of investigations, Hg has developed the Phased Approach—a systematic process that enables us to explain to our clients the various types of due diligence investigations. The benefit of a phased approach for the client is their understanding of what is supposed to happen when and the costs involved. Much of our work is concluded after Phase 1, because we are able to answer the client’s key questions through online research. Phase 2 is needed in the event there are outstanding questions that require boots-on-the-ground work.

In this blog series, we examine the most common types of financial fraud—Ponzi Schemes & Manipulation, Backdating Stocks, Insider Trading, Short Selling, and Pump and Dump Schemes—and how due diligence investigators can protect your company’s assets and investments by tracking down fraudsters.

Insider Trading

Insider trading is the act of buying or selling a security with the foreknowledge of critical information not yet released to the public. The SEC explains that insider trading violations can include “‘tipping’ such information, securities trading by the person ‘tipped,’ and securities trading by those who misappropriate such information” such as “friends, business associates, family members.”

At the beginning of 2009, Raj Rajaratnam was head of one of the world’s largest hedge funds—Galleon Group— and his personal net worth was over $1 billion. But insider trading is fraudulent behavior, and his crimes began to catch up with him. By the end of 2009, he was under arrest and Galleon shuttered its operations. After a wide-sweeping investigation, which included over 18,000 wiretap recordings, the FBI charged Rajaratnam with 14 counts of conspiracy and securities fraud. Found guilty of all charges in 2011, he was fined $10 million, sentenced to 11 years in prison, and had to forfeit $53 million. At the time, it was the longest sentence for insider trading. U.S. District Judge Richard Howell described Rajaratnam’s crimes as “a virus in our business culture that needs to be eradicated.” Rajaratnam’s fraudulent dealings had long tentacles.

In early 2019, the Second U.S. Circuit Court of Appeals in Manhattan refused to overturn former Goldman Sachs Group director Rajat Gupta’s 2012 insider trading conviction. Gupta served a 19-month prison sentence after being found guilty of tipping information about Berkshire Hathaway Inc.’s investment in Goldman Sachs as well as 2008 financial losses to his friend and colleague, Raj Rajaratnam. At the time, Gupta was serving as chairman of Galleon International and had invested several million dollars in the funds. Released from prison in 2016, Gupta has continued to declare his innocence, and sought to have the conviction cleared from his record, arguing he never “received even a penny” from tipping off Rajaratnam.

That did not sway the court, however. In their decision, the court noted, “There was ample evidence to permit the jury to find that Gupta intended Rajaratnam to trade on the basis of the confidential information Gupta passed to him and that Gupta personally benefited.”

Cynthia Hetherington, MLS, MSM, CFE, CII is the founder and president of Hetherington Group, a consulting, publishing, and training firm that leads in due diligence, corporate intelligence, and cyber investigations by keeping pace with the latest security threats and assessments. She has authored three books on how to conduct investigations, is the publisher of the newsletter, Data2know: Internet and Online Intelligence, and annually trains thousands of investigators, security professionals, attorneys, accountants, auditors, military intelligence professionals, and federal, state, and local agencies on best practices in the public and private sectors.