Tom Hardin: Confessions of an Insider Trader

When then-financial analyst Tom Hardin left his Manhattan apartment building one summer’s morning in July 2008, he knew the game was up.

“I stepped onto the sidewalk and this guy behind me says, ‘Are you Thomas Cody Hardin?’ Anytime someone calls you by your full name, you are probably in trouble,” he laughs. “I knew I was trouble as a child when my mother did it.”

The voice came from one of two FBI agents who quickly informed him that they knew that he had made four trades on the stock market using insider information. The 29-year-old Hardin’s head was spinning. His first concern was what his parents would think and if his new bride, who had known nothing about his illegal activity, would leave him.

Then it struck him that his career would soon be in ruins and that a prison sentence was likely. The FBI offered him the opportunity to help them catch the true ring leaders. After a few sleepless nights, Hardin called the FBI and confessed that he knew about others involved in illicit trading and volunteered to wear a wire. That was the start of Hardin’s journey as one of the most prolific informants in securities fraud history. Code-named “Tipper X,” Hardin helped build more than 20 criminal cases in what became known as “Operation Perfect Hedge,” the largest insider trading investigation in a generation.

ACFE’s Chief Training Officer John Gill, J.D., CFE, interviewed Hardin during the last session of the 33rd Annual ACFE Global Fraud Conference about his experiences and what makes him tick.

The self-deprecating Hardin hardly fits the stereotype of a fraudster — he has none of the cocky exterior that you might expect from Wall Street insider and hedge fund analyst. But perhaps that is what makes his story so interesting, and underscores how easily anyone can be tempted to commit fraud.

A Good Start

When Hardin first joined the hedge fund industry after graduating from the prestigious Wharton business school, it was all going swimmingly. Some stock bets went well and others poorly, but Hardin felt his fund could ride the ups and downs of the market as its investors had given them a five-year time horizon. He knew of people who were using inside knowledge to outperform their competitors and profit handsomely from illegal activity, but he felt no need to do the same.

That is until his boss told him that they would need to change the fund’s long-term strategy after suffering monthly losses that were unsustainable and seek out short-term opportunities. What exactly that meant was unclear. But Hardin interpreted this as a green light to partake in illicit trading, given how difficult it would be to make positive returns in such a short timeframe — at least through any legal means of investing.

“The ambiguity in his message to me to do what it takes to meet the shorter-term goals definitely set the stage in some part for my future decision making,” Hardin said.

A few months later he received a call from Roomy Khan, the analyst who was later caught in the infamous insider trading case at Galleon Group, the hedge fund founded by Raj Rajaratnam. She tipped him off about a private equity firm that was about to acquire a publicly listed software company called Kronos. Not only that, but she gave him the exact date of the public announcement, the price of the acquisition and name of the private equity firm. “That was pretty stark, specific information, and I was pretty sure that was inside information,” he said.

With that thought in mind, he initially made no trades on the information. He did, however, recount the “rumor” to another investor who immediately bought the stock. It was then that he started backtracking on his first instinct and justifying why he shouldn’t also skim some profits from the trade. “I rationalized it,” he said. “I thought all these other guys are doing it, making millions. Raj Rajaratnam wrote this book about making millions. If I trade very small, I will never get caught. And it’s not like a Ponzi scheme where I am taking money from [victims].”

Knowing he didn’t have to inform his boss of any investment less than 1% of the $100 million of assets the fund had under management, Hardin proceeded to buy $999,999 of Kronos stock. (A number that would be a clear red flag for any fraud examiner looking at the case.)

Crossing the Point of No Return

Hardin’s mental gymnastics helped him cross that point of no return. He told himself that this was only “flyer,” market jargon for a small position, and that he would only do this once. But, as we know, that once turned into to several trades of this kind.

On a Friday morning, March 23, 2007, trading in Kronos stock halted, confirming the acquisition news and the likelihood that holders would soon see the share price rise. “I hate to say it, but I had an adrenaline rush. Now I was part of this in-group, and I had a taste of what they were doing, and it happened three more times,” Hardin recalled.

Tone at the top also helped into Hardin’s self-deception. Surprisingly, Hardin’s boss never asked any questions about the Kronos trade or the three others that followed, even though he probably saw them in the fund’s small portfolio of stocks. “He was the closest thing I had to a mentor, and he is not asking me how I got this information,” said Hardin. “I kind of felt it was ok to do because he wasn’t calling me out.”

Looking back on his younger self, Hardin thinks that a good mentor outside of the firm would have made all the difference and perhaps prevented him from taking that fateful trade. “The right person would have stopped me,” he said. “I still thought I was a great guy. I had a moral scale. I volunteered at church. But if you are telling me as my mentor ‘why would you ever do that,’ it would be very hard for me to override that because I would be disappointing you.”

If he had not made his decision in isolation and sought outside opinion, Hardin may very well have not taken Khan’s call. Hardin was lucky as he avoided a prison sentence, unlike some others who cooperated with the FBI. Even so, at the end of the day, he had committed professional suicide and had taken the risks that were hardly worth the returns. Hardin would later learn that he had only made a personal profit of just $46,000 on the four trades. “I had thrown away my career for $46,000,” he said.