Citadel Under Federal Investigation

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Citadel LLC unit Surveyor Capital is under federal investigation, per a report that broke late last night on Bloomberg:

…Morgan Stanley and [Morgan Stanley executive Pawan] Passi are intertwined in a sprawling U.S. probe into whether bankers are improperly tipping off investors to stock sales large enough to send prices swinging, according to people with knowledge of the inquiries. 

The list of people whose communications are being sought ranges from executives at prominent Wall Street hedge funds, such as Andrew Liebeskind at Citadel’s Surveyor Capital and Jon Dorfman at Element Capital Management, to money managers at smaller firms focusing on block trades, including executives at CaaS Capital Management and Islet Management, and a former employee at Segantii Capital Management, the people said.

The probe is reaching high levels at Citadel. Liebeskind is one of the firm’s top traders.

Federal investigators are looking for evidence that Morgan Stanley helped hedge funds like Surveyor front run block trades. These large trades placed by institutional investors often move markets.

For example, if you know about a large sell order before everyone else does, you can short the shares. You will then make a profit when that big sell order pushes down the price.

But your short sale drives the price down even more. So, the institutional investor gets a worse price for its shares.

Many of these institutional investors are mutual funds that handle the savings of average Americans. This front running costs them money.

The feds are digging deep for information:

In some cases, authorities are seeking access to online chats, mobile phone texts, emails and messages sent by apps, the people said, asking not to be named discussing the confidential demands.

This is important because Wall Street traders often have sensitive conversations via encrypted apps like Signal or WhatsApp on their personal phones. They do this to avoid regulator-required recording of all messages and conversations within banks.

If there’s dirt to be found, it will be in these apps on traders’ personal phones.

When Citadel may have pressured Robinhood to restrict buying of shares of GameStop Corp. and AMC Entertainment Holdings Inc. last year, it hurt retail traders. But front running block trades hurts institutional investors.

Big institutions have far more political power than the average investor. So, expect to see a stronger response from the federal government.

In time, federal agents may be able to use people like Liebeskind as informants on the managers of their funds, such as Ken Griffin. People will do a lot to avoid punishment.

I’m excited to see where this investigation goes.

What do you think investigators will find? Leave me a comment at the bottom and let me know!

There will be no blog on Monday for the holiday. Have a great weekend and see you Tuesday! 🙂

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More on markets:

FBI Raids Short Sellers

AMC Fails to Deliver Skyrocket 9X

Melvin Capital Under Federal Investigation

Photo: Citadel LLC CEO Kenneth Griffin

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21 thoughts on “Citadel Under Federal Investigation”

  1. This network of SHF has been acting as a unit for a long time. This investigation will make Nick Leeson look like a Saint. People are being stole from and we’re mad. They’re attacking our companies and stealing our money. They have bought politicians for a long time. It has to stop. Right here and now.

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    1. It’s about time that this corrupt system is addressed! Starting with motley fools and all the allegedly analyst behind the mask of analysis and fraud.

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  2. I think nothing will happen. Maybe a fine. But they will gladly pay a million dollar fine to make a billion off trading.. a fine..maybe…nothing more

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  3. I agree, a fine at best!? The 1% make the world go round and that will always be the case! Besides “everybody has a price”… Remember the SEC report? That lead to shit… As will this! They are doing this as a show because way to much attention has been drawn to it! Don’t get me wrong- I’m bullish AMC and hope my 1134 shares change my life but I’m done counting on the gov’t or any other governing bodies to do the right thing by retail…

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    1. Could it be that the government is also corrupt and swimming in the mud with these crooks? I would like to believe that perhaps there is some integrity somewhere in our government!

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  4. Honest investors and listed companies were robbed by Wall-St thugs for many years.
    As they got away with it for so many years, they became so brazen that it posed risks of collapsing Financial Markets. All guilty parties must get jail-time!

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  5. Apparently the DOJ doesn’t mess around. If it were the SEC doing the investigation? There would be no wrong doing found or at maximum a measly $50M fine (AKA the cost of doing business). With the DOJ? Heads will roll. Someone will be going to jail over this. I doubt it will be Ken Griffin, but it will be someone. Ken and all his colleagues in crime are thinking they’re safe already because they burnt their paperwork and records up in that warehouse the other week. People will be pressured with serious jail time and they will turn on bigger fish with the promise of a reduced sentence or get out of jail free card as long as they swear under oath during their testimony if there ever comes to a trial. At best a deposition will happen and the people rolling information over on the bigger fish will just have to type up a confession and sign it. Ken might not even come back to the United States of America. He’s already left the country to go to London/Spain and possibly down into Africa, most likely the country of Zambia…like he did that one time to return $500m of Bitcoin and other cryptocurrencies to the king over there. Y’know, so they don’t hurt him. Ken Griffin as of late reminds me of La Chiffré from the James Bond movie Casino Royale.

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  6. When the fines are equal to the profits nefariously made, only then, we will begin to experience more of an equitable playing field, but no matter what laws are made, the hedge funds will always be searching for loopholes in the system.

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