NEW YORK — The aggressive push federal prosecutors are making against potential insider trading is sending investigators into a legal gray area that may redefine insider trading itself.
Mutual fund company Janus Capital Group said Tuesday it was cooperating with an inquiry on insider trading. A day earlier, the FBI searched the offices of three hedge funds in New York, Connecticut and Massachusetts as part of what outside experts say could turn out to be one of the largest investigations in Wall Street history.
Investigators are thought to be pursuing suspicions of trading by hedge funds and mutual funds that might have profited illegally using inside information not available to ordinary investors.
But the behavior being targeted by investigations appears more elusive and complex than the common understanding of insider trading — high-powered executives picking up the phone, whispering secret tips about big deals, and trading stock at an unfair advantage. These were the types of cases that ensnared executives such as Ivan Boesky in the 1980s and Enron's Jeffrey Skilling more recently.
How the alleged scheme may have worked is unclear. Federal prosecutors declined to comment Tuesday. But what is clear is that the way information is shuttled around the world of finance today is faster, more complex and more shadowy. It involves an increasingly digitized financial world in which networks of insiders can share bits of information with blinding speed.
It can also tap into so-called expert networks of industry analysts, experts and consultants who squirrel details between corporate America and Wall Street about what companies are up to — potentially giving some investors an unfair edge.
Investors can use the expert networks to glean details of what's occurring within certain industries or particular companies. The expert networks connect the investor and the source, getting a fee from the investor and then paying the source, who could make $400 to $500 an hour, says Sanford Bragg, CEO of the consulting firm Integrity Research Associates, which connects investors with these research firms.
The federal crackdown on insider trading that burst into view this week is being led by Preet Bharara, the top United States prosecutor in Manhattan. Bharara has called insider trading "rampant" and suggested it is growing.
In a strikingly revealing speech last month to the New York City Bar Association, Bharara said the detection of insider trading has "perhaps never been more difficult to attack through traditional investigative means."
Bharara also spoke of the need to target insider trading by using a tool more typically deployed in racketeering cases: wiretaps.
"The question of why we use wiretaps to investigate illegal insider trading is, to my ear, like my asking a defense lawyer, why do you cross-examine the government's witnesses at trial?" he said.
Monday's raids targeted three hedge funds: Level Global Investors in New York, Diamondback Capital Management in Stamford, Conn., and an address that matched Loch Capital Management in Boston.
Hedge funds have been paying people to dig for hard-to-find numbers on companies for years.
Tammer Kamel, president of Iluka Consulting Group Ltd. in Toronto, recalls visiting a Hong Kong fund 10 years ago that wanted to better gauge future sales by a company with factories in China. Its solution: Pay Chinese farmers near a company warehouse to count trucks leaving the site.
Stephen A. Miller, a longtime federal prosecutor before becoming a criminal defense lawyer in Philadelphia, said Bharara seemed to be packaging insider trading cases for "dramatic effect" to send a message of deterrence to the industry.
Miller said Monday's raids might have been a reaction to the leak of the investigation in published reports over the weekend. He said it would be difficult to pinpoint when arrests might result, though he said he thought hundreds of people could be potentially subject to charges given the size of the net that has been cast.
Miller added: "I think it's wrong when you think of these arrests to demonize the entire hedge fund industry. There are a lot of really honorable people working at hedge funds making good, smart investment decisions and not doing anything wrong."