SEC sees evolution in insider trading

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By Jonathan Stempel and Rachelle Younglai

NEW YORK (Reuters) - A top U.S. securities regulator said some funds may now view insider trading as a central tenet of their business models, rather than as a one-time opportunity for big rewards as sometimes happened in the 1980s.

Robert Khuzami, head of enforcement at the U.S. Securities and Exchange Commission, spoke on Friday, a day after the SEC, the Department of Justice and the FBI announced dozens of new charges in what was already the biggest hedge fund insider-trading scandal ever.

Investigators have been examining trading involving Galleon Group and a variety of hedge funds.

The SEC says it has uncovered $53 million of illegal profits through its investigation. Last month, the agency charged the billionaire Raj Rajaratnam, founder of the Galleon hedge fund firm, in connection with the probe. The Sri Lanka native also faces criminal charges.

"We are already seeing a significant expansion as to where this investigation is leading," Khuzami told reporters on Friday at a Practising Law Institute securities conference in New York. He declined to say whether others might be implicated.

Speaking more generally, Khuzami said that in recent years, more people who have set up hedge funds, a largely unregulated industry, may have done so after working at firms that lacked strong compliance oversight, or after leaving firms that did.

He also distinguished the current environment from the 1980s, in that some people may now be more likely to trade on advance knowledge of routine corporate information, such as earnings forecasts, rather than wait for more dramatic events such as mergers.

"A lot of insider-trading cases in the past tended to be more opportunistic: you had a particular announcement and someone with access to information and they traded on that," he said.

"Here, at least with respect to some of the funds, you see a much more systemic, concerted effort to cultivate sources of information within issuers and elsewhere as ... more of a business model approach, as a regular way of doing business."

That, he said, could herald more problems.

"I can't predict or tell you how widespread the conduct is," he said. "I can only tell you that the change in market structure represented by the rise of hedge funds, particularly operating in an unregulated sphere, and markets that are less transparent represent warning signs that this kind of misconduct may occur more frequently. And that is why we are focused on those areas."

(Reporting by Rachelle Younglai and Jonathan Stempel; editing by John Wallace)

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