Did Hedge Funds Act Improperly on Herbalife?

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May 2 (Bloomberg) -- Former SEC Chairman Harvey Pitt discusses the probe into possible insider trading on Herbalife with Trish Regan on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Let's talk about how the sec might the going about looking at this right now and how they might be able to prove insider trading?

It is painstaking work.

What they do is, first they get a list of all the trades.

The identify all those traits that occur approximately in time to the announcements by acumen -- all those trades that occur approximately in time to the announcements by ackman.

They look at trading patterns and ultimately they will conduct investigative depositions of all of the people responsible for trading decisions to find out what communications and context they had with anyone involved with him.

So you have in this particular case you have allegedly one guy telling his roommate he is going to short a stock.

If you know in advance there is going to be a press statement and you trade in advance of that, that constitutes improper use of ackman's own strategies, even though it may have come from ackman's company -- someone profiting on the news that was coming.

Because they knew it was going to have an effect when he came out with a big reason tatian?

-- resin tatian?

-- presentation?

Yes, we are so supposed -- we're supposed to be surprised.

And if we are not, the government may investigate you.

How do they investigate this?

They look at communications.

These days it is almost impossible for people to communicate face-to-face.

They communicate by telephone.

They communicate by e-mail.

All of those records will be pulled by the sec people who are quite adept at looking at this information and showing patterns of conversations that took place right before certain trading activity.

The sec has been looking at hls for a while.

They do not seem to have found anything yet.

Does that surprise you?

They have been looking at hlf , in part, based on ackman's allegations.

These are two ackman's this advantage because it is -- these are to ackman's disadvantage because it is about the lack of trading principles at -- what you mean by that?

Every hedge fund like ackman 's is supposed to have effective policies to prevent the disclosure of material nonpublic information.

If ackman's employees are diebold ching information, that would he a violation both of -- divulging information, that would be a violation both of his policies and -- could ackman be held responsible for this?

He could be.

If you look at sac capital, they are charging steve cohen.

If someone were tipping information -- and we do not know that that is the case -- but if somebody were doing that, how were they able to and what protections did ackman put in place to prevent it?

How much do you think someone was working on something and just in passing leaked something and then the ball starts rolling from there?

Unfortunately, i might have said before all of this hoopla evolved that it happened infrequently, but it is very clear, ackman's holster adage he has not been about imparting news to the public.

-- whole strategy has not been about imparting news to the public.

It has been about -- the sec is making sure that there is no insider information.

It is in his interest to let other people in these -- on the street know he is about to short something so they all short together and they all come out ahead?

Exactly, and to encourage other funds to sell stock as well, even if not before the event, to try to put more pressure on herbal life -- herbalife's stock price.

What about carl icahn?

Carl icahn has been very critical of mr.

Ackman's strategies here.

He says he is not shorting herbalife.

You have two activist investors going to dub different directions.

It makes for quite the saga and we are adding to its here.

Harvey pitt.

Thank you so much.

This text has been automatically generated. It may not be 100% accurate.

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