With the crumble, and hopefully resurrection soon, of the financial markets, my blood can’t help but boil and my head can’t help but spin when I hear of another potential financial injustice. This week’s Odd File case will return tomorrow; meanwhile, check this out.
Here’s the scenario:
Billionaire founder of the Galleon Group Raj Rajaratnam was charged last week by federal prosecutors for utilizing insider trading schemes to net Galleon more than $20 million worth in illegal profits. Danielle Chiesi from New Castle Funds was also charged with supplying Rajaratnam and New Castle with insider information. However, reports are surfacing that if Rajaratnam was using insider information to drive which shares Galleon would purchase for profits, then Rajaratnam was a lousy at insider trading. According to the criminal complaint, Chiesi coaxed Rajaratnam to purchase 16 million shares and New Castle to purchase 2.5 million shares of A.M.D., a computer chip maker. Galleon spent $85 million to $90 million on the 16 million share purchase, but, when the global financial markets began to fall, so did A.M.D.’s shares. The shares that Galleon purchased were then only worth $68 million, and the group suffered a near 30% loss.
Nevertheless, federal prosecutors arrested Rajaratnam, Chiesi, and other defendants on only a complaint, which means they haven’t been formally indicted. A federal indictment requires a vote by the grand jury, and the fact that they were arrested without indictment shows evidence that prosecutors were rushed to file the charges. Given that Rajartnam’s defense will more than likely argue that he wasn’t involved in insider trading because he actually did cause the Galleon Group to lose nearly $30 million, the prosecutors may refine their charges moving forward and drop the A.M.D. example from their complaint.
Our thoughts*:
Although the case against Rajaratnam is still unfolding, talks of profiting from insider trading will always be a popular water-cooler conversation topic. We all witnessed Martha Stewart’s fall from grace and trip to jail after being found guilty of insider trading back in 2004. Insider information is defined as information that is material to investors, which could benefit a company’s investment in stock(s). For instance, it may be public knowledge that a fast food chain will open new stores, but learning before the public knows of a company’s private acquisition, is considered insider information. Essentially, investment decisions made with information that isn’t public knowledge can be considered insider trading.
Yet, how can we tell the difference between insider trading and aggressive research?
Securities regulations were created after the Wall Street Crash in 1929 to require the sales of public securities to be registered with the SEC and legal. But, in the world of a hedge fund manager, its information, and access to that information, gives one more of an edge over the other. When aggressively searching for reasons why or why not to invest millions into a stock, one would go to great lengths – including tapping into an extended professional network – to learn what would make a good decision.  Raj Rajaratnam is a graduate of U Penn’s Wharton School of Business, which I’m sure not only nurtured and strengthened his business and financial analytical skills, but allowed him to expand his professional network. Now, we can’t go as far as to make the correlation that Rajaratnam’s former Wharton classmates are the ones that fed him insider information time and time again, but as the wealthier get wealthier, and as the elite continue to attend more elite schools, some fascinating questions arise.
If the general public doesn’t go to these elite schools to establish these powerful networks where undoubtedly information will be shared, then will the market ever be fair? And, if folks like Rajaratnam are privileged enough to have friends that exercise free speech and decide to openly share information with him, that will in turn allow him to draw a valid conclusion about which stock(s) to invest in, then is he at fault for being exposed to such information?
What do you think?
Posted by Adrienne on October 21, 2009 at 12:39 pm.
* Our in house attorneys helped us formulate this opinion. Although this is advice from lawyer(s), this is not legal advice. Always consult a lawyer for legal matters.
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