Revealed: the dirty tricks of rogue traders

Date: Monday, March 24, 2008
Author: Robert Winnett, Telegraph.co.uk

A hedge fund based in London set up a "dirty-tricks unit" to manipulate share prices and get illicit information on companies in an attempt to make millions on the stock market, an insider has revealed.

As the official hunt began for the rogue traders who tried to bring down Britain's biggest mortgage lender, HBOS, The Daily Telegraph can reveal a whistle-blower's account of how a multi-billion pound fund allegedly used illegal tactics to drive down stock prices.

Private detectives were allegedly employed to hack into executives' emails and telephone records.

Front companies were set up to allow the hedge fund traders to pose as independent researchers or journalists.

Negative information on companies was then distributed to leading investment banks in the hope that rumours would spread and some share prices would fall.

The hedge fund, which cannot be named for legal reasons, stood to make millions from "short-selling" the shares as they fell in value.

The allegations — made in a sworn statement seen by The Daily Telegraph and which has been sent to financial regulators — will add to growing concern over the activities of rogue traders in the City.

The Financial Services Authority, the City regulator, has begun a criminal investigation to find the trader who allegedly made £100 million from the 17 per cent slump in HBOS shares on Wednesday.

The shares fell after "malicious" rumours were spread in the City about the bank, sparking fears that the price had been illegally manipulated — a move described as "the modern day version of bank robbery".

FSA investigators are seeking emails sent to traders that are thought to have prompted widespread selling of HBOS shares. They claimed the bank was experiencing difficulties.

It has emerged that the rumours are thought to have originated in the Far East, with Singapore named as the most likely source. Nick Leeson, the notorious rogue trader responsible for the collapse of Barings Bank, also operated in Singapore.

In a separate development, Credit Suisse, the investment bank, admitted that it had uncovered a separate £1.4 billion share-dealing scam by rogue traders — many of whom were based in London — who were trying to protect their bonuses.

The Credit Suisse traders are understood to have sought to cover up their trading losses at the end of last year.

The revelations follow a week of turmoil in the global markets after the near collapse of the American investment bank Bear Stearns.

Following a meeting with the major banks, it emerged that the Bank of England was considering helping to alleviate the financial crisis by easing the restrictions on banks seeking to borrow money from it.

The accusations about the hedge fund form the most detailed account yet of the illicit activity carried out by the London office of a major international hedge fund. Such tactics are also thought to be used by other hedge funds.

The sworn statement containing the allegations is understood to have been sent to the FSA last year although it is not known what action the regulator took.

The document alleges that:

- Employees of the hedge fund ordered an American-based private detective to hack into the corporate email systems of two firms in which the hedge fund had an interest.

- A bogus firm — with a phoney internet address — was established to allow employees to pose as independent researchers and approach company executives to garner information on their firms' future financial prospects. The firm was also used to gain access to industry conferences.

- A false website — with a bogus address — was also registered to allow hedge fund traders to pose as journalists. The offices of American politicians were approached by people claiming to be journalists to obtain information about potential new laws banning internet gambling that would hit British firms.

- Jurors and their families in a sensitive legal case into whether a firm had exclusive patent rights in which the hedge fund had invested were "tapped up". Money was allegedly paid to jurors' families for information about jury-room deliberations.

- Hedge fund staff gathered "sensitive" negative information on firms in which they had an interest in the share price falling. This information was distributed to leading investment banks whose experts were encouraged to take a dim view of the prospects of the company's shares. A German "media consultant" was also used to disseminate information.

- A safe containing large amounts of cash was installed in the hedge fund's office. Money was paid to "sources" providing valuable inside information. On one occasion, an anonymous informant was paid $50,000.

The hedge fund at the centre of the allegations has offices in London's West End and traders spent their staff Christmas party on a luxury cruise.

It was set up by former senior executives from a blue-chip investment firm. However, from 2005, the "dirty-tricks unit" was staffed by former corporate investigators and investigative journalists hired from newspapers.

Pressure is growing on the FSA to clamp down on the worst excesses of the hedge fund industry after a series of scandals culminating in the attempt this week to start a run on HBOS.

The hedge fund "dirty tricks unit" exposed today was set up in London but operated around the world. It is alleged that this was to avoid tougher regulatory controls in New York.

On Thursday, Britain's biggest banks met with the Bank of England to urge them to loan more money to help alleviate the impact of the global credit crunch.

The Bank, which agreed to some of the demands, released another £5 billion for the money markets. The stock market, which dropped slightly, is now closed until Tuesday.

HBOS shares recovered on Thursday, closing up more than six per cent.