Insider Trading: Why do Investigations take so long

As a golf fan, I have been following the case that involves Phil Mickelson. A few weeks ago, it was announced that the FBI (and whoever) were questioning Mickelson with insider trading with billionaire Carl Icahn and Vegas Gambler Billy Walters. These trades apparently happened three years ago and Mickelson was questioned by the FBI back in September of last year.

Then two weeks ago, Mickelson was exonerated with the Clorox deal, but he is still involved with a case of Dean Foods.

These trades happened a couple of years ago. I am just curious on why this takes so long to connect the dots. Is it a question of resources from the Feds? Its not like they are waiting for DNA evidence from a overworked lab. If there is evidence, it should be apparent immediately and flagged from computers.

Any insight from the teeming millions? Not really looking for anything specific in the Mickelson Case, but in general, why it takes so long

I’m not that familiar with insider trading investigations, but my understanding is they usually come from a few different sources:

  1. Unusual trading activity occurs in the market and the SEC decides to investigate
  2. It is discovered in the course of another investigation
  3. Anonymous tips

I don’t know that much about this case, but it appears it may have come from number 2. If so - that means it really requires extra time and these investigations can be several fold before the final arrests and convictions are made.

I kind of just quickly scanned this article:

I didn’t quite understand what was going on, but it looks also like the Feds were thinking about using wire taps - and actually concerned that Icahn might find out cause he has a stake in the company that would be conducting the wiretap.

When you are investigating a murder - most of the defendants are going to be poor an relatively uneducated. You can just do your investigation - and lots of people actually confess.

When dealing with White Collar crime - people have lawyers and things can take quite a while to nail down.

Insider trading - if memory serves - isn’t a simple thing to prove. You can trade based on inside information sometimes - it depends how you got it.

They also want to make sure any further investigations they can do based on what they learned won’t be tipped by arresting any of the existing participants.

For example - if Icahn was guilty - and was let’s say sending his profits to a cayman island lawyer to launder. They might not want to arrest Icahn before they make a case against the lawyer - so that the lawyer doesn’t destroy evidence when he hears about Icahns arrest.

Again - I have no way to know if that type of thinking is a factor in this case, but it can be in complex white collar crimes.

I have zero idea about this case, but it seemed like there was a question about why cases involving purely electronic evidence take so long, and I can maybe help answer that in the larger context…

So, not specific to this case, but I did work in the electronic discovery industry for some time. This is the industry (yes, entire industry) that exists around the process of turning over relevant electronic data between different parties who are hostile to each other (e.g. because of a lawsuit, or a DOJ investigation, etc). It is notoriously expensive and slow (and inaccurate!).

Yes, the data exists on computers… of a sort. The evidence needed is the proverbial needle in a stack of needles: you are searching for some incriminating email or document among potentially many, many other emails and documents. The main problem is sheer volume.

Imagine a lawsuit against a large manufacturer, who employs tens of thousands of people and produces many thousands of products. If someone successfuly files a discovery motion against them to turn over “all documents and correspondence pertaining to defects in product X”, that search is going to be over a LOT of documents. Depending on the time ranges involved and the number of people named in the motion, the results could easily be several terabytes of email and document data.

All of this data needs to be loaded into a system where a team of lawyers can search and review everything in it: this means that email archives need to be pulled and exported from whatever mail server/tape backup/network storage/etc system. This data has to be dumped onto hard drives and shipped, and loaded into whatever system is to be used by the lawyers - this means processing whatever format the IT dept used to dump the data in the first place. The data has to be then processed extensively: Exotic document formats need to be converted into searchable form. Email headers need to be normalized and indexed and cross referenced. Images needs to be OCR’d (people scan documents quite a bit!). Any foreign language needs to be identified for special handling/indexing. All text needs to be indexed so it is searchable.

(All of this data processing is slow, and requires a reasonable amount of computing power. I worked on systems that involved dozens of servers dedicated to this task, working around the clock.)

Lawyers for the company then need to review all of these documents and identify any that are covered under attorney client privilege, or otherwise fall outside of the criteria for discovery. Finally, once they’ve gathered all of the documents to be turned over, the whole bundle needs to be itemized and exported into a format that can be shipped to the party who filed the motion in the first place… depending on the case, this may not be much data, or it can be massive. I’ve been involved in cases with millions of pages turned over.

All of that data gets dumped onto new hard drives, and shipped.

At this point, the party that filed for discovery get to have THEIR team of lawyers comb over everything they received to actually look for evidence. Usually, they use a software product similar to the one used to locate the documents in the first place, so that data needs to be loaded, indexed, etc. all over again…

Also, sometimes documents are redacted during this process, which is typically a manual process and very slow. There is also a fair amount of gamesmanship that goes on about the format that data is handed over in, which helps keep the process slow.

Again, I don’t think this necessarily is what happened here, and the amount of data may have been fairly small in this case. But in general, this is a thing.

Insider trading cases are not cases involving purely electronic data. In fact the most pertinent data is not electronic at all.

The government must prove that the tippee received material non public information and then traded upon that information. The tippee and the party as the tipper can be in trouble. Proving these communications happened can take a long time.

Consider the case of Martha Stewart. She got a call from her friend about his company losing a request for approval of a drug, and she then sold her stock; later she erased the information about her call from her computer log, then thought about it and retyped the information in.

However, both she and the friend denied they’d discussed the stock. She claimed the stock was sold because it hit a trigger point.

Eventually, the prosecution could not convict her of insider trading; they could get her on obstruction for lying to the investigators and for the temporary erasure of data on her phone log. If nobody speaks, even a blatantly obvious case is just circumstantial evidence. The prosecution tried all sorts of tricks. They threatened, for example, to destroy the life and reputation of her stockbroker’s assistant if she didn’t cooperate. “Speak or this junior level clerk will do 20 years in jail”. Even with this level of ethics they could not get a conviction on insider trading. I think it was Richard Nixon talking about Alger Hiss who said, “sometimes it’s easier to get a conviction on the coverup than on the original crime”.